**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, 2005**      |
| ** **     | **or**                                                     |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)** |
| ** **     | **OF THE SECURITIES EXCHANGE ACT OF 1934**                 |

**For the transition period from        to        .**

**Commission File Number: 000-30700**

**Crown Media Holdings, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

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

**12700 Ventura Boulevard,**

**Suite 200,**

**StudioCity, California  91604**

(Addressof Principal Executive Offices and Zip Code)

**(818)755-2400**

(Registrant’sTelephone Number, Including Area Code)

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

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

**Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes **o   No x

**Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes **o   No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|--------------------------------|--------|--------------------------|--------|------------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12 b-2 of the ExchangeAct). Yes o   No x

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas last sold as of June 30, 2005, the last business day of the registrant’smost recently completed second fiscal quarter, was $142,295,833.

As of February 28, 2006, the number of shares of Class ACommon Stock, $.01 par value outstanding was 74,117,654, and thenumber of shares of Class B Common Stock, $.01 par value, outstanding was30,670,422.

**DOCUMENTSINCORPORATED BY REFERENCE**

NONE.

 

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**TABLE OF CONTENTS**

** **

|                   | ** ** | ** **                                                                                           | ** ** | **Page** |
|-------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I**   |       |                                                                                                 | 1          |     |
| Item 1            |       | Business                                                                                             |       |     | 1 |   |
| Item 1A           |       | Risk Factors                                                                                         |       |     | 18 |   |
| Item 1 B          |       | Unresolved Staff Comments                                                                            |       |     | 19 |   |
| Item 2            |       | Properties                                                                                           |       |     | 19 |   |
| Item 3            |       | Legal Proceedings                                                                                    |       |     | 19 |   |
| Item 4            |       | Submission of  Matters to a Vote of Security Holders                                                 |       |     | 19 |   |
| **Part II**  |       |                                                                                                 | 20         |     |
| Item 5            |       | Market for Our Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities |       |     | 20 |   |
| Item 6            |       | Selected Financial  Data                                                                             |       |     | 21 |   |
| Item 7            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations     |       |     | 23 |   |
| Item 7A           |       | Quantitative  and Qualitative Disclosures About Market Risk                                          |       |     | 43 |   |
| Item 8            |       | Consolidated  Financial Statements and Supplementary Data                                            |       |     | 44 |   |
| Item 9            |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                |       |     | 44 |   |
| Item 9A           |       | Controls and  Procedures                                                                             |       |     | 44 |   |
| Item 9B           |       | Other Information                                                                                    |       |     | 46 |   |
| **Part III** |       |                                                                                                 | 46         |     |
| Item 10           |       | Directors and  Executive Officers of the Company                                                     |       |     | 46 |   |
| Item 11           |       | Executive  Compensation                                                                              |       |     | 51 |   |
| Item 12           |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters      |       |     | 56 |   |
| Item 13           |       | Certain  Relationships and Related Transactions                                                      |       |     | 59 |   |
| Item 14           |       | Principal  Accountant Fees and Services                                                              |       |     | 72 |   |
| **Part IV**  |       |                                                                                                 | 74         |     |
| Item 15           |       | Exhibits and  Financial Statement Schedules                                                          |       |     | 74 |   |
| Signatures        |       |                                                                                                 | 83         |     |

 

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

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

**PART I**

**ITEM 1.**                Description of Business

***Company Overview***

We own and operate a paytelevision channel, known as the Hallmark Channel (the “channel”), dedicated tohigh-quality, entertainment programming for adults and families. In addition,we own and operate the Hallmark Movie Channel, which airs programmingpredominately from our film library (the “Hallmark Channel” and the “HallmarkMovie Channel” are collectively referred to herein as the “Channels”.)  Also, we own a film library with nearly 600titles of movies, mini series and series. Our Channels are distributed in theUnited States of America and its territories and possessions, including PuertoRico.

The Channels offer compellingstories, masterfully written, directed and produced with talented actors. Webelieve that with the programming we own (the “Crown Media Library,” the “Library”or the “film assets”), together with the programming we license from RHI EntertainmentDistribution, LLC (“RHI Entertainment Distribution”) and third parties, we haveestablished these Channels as destinations for viewers seeking high-quality,entertainment for adults and families, and as attractive outlets foradvertisers seeking to target these viewers. We have distribution agreementswith leading pay television distributors. The following table shows for theHallmark Channel: our programming sources, selected pay television distributorsand the total number of our subscribers as of December 31, 2005.

 

| Programming        |   | • Crown Media Library                                                                              |
|--------------------|--------|---------------------------------------------------------------------------------------------------------|
| Sources            |   | • RHI Entertainment  Distribution                                                                  |
|               |   | • Third-party sources                                                                              |
|               |   | • NICC                                                                                             |
|               |   |                                                                                                    |
| Selected  Pay      |   | • Adelphia                                                                                         |
| Television         |   | • Cablevision                                                                                      |
| Distributors       |   | • Charter                                                                                          |
|               |   | • Comcast                                                                                          |
|               |   | • Cox                                                                                              |
|               |   | • DirecTV                                                                                          |
|               |   | • EchoStar                                                                                         |
|               |   | • Time Warner                                                                                      |
|               |   |                                                                                                    |
| Total  Subscribers |   |                70.7  million |

 

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As of February 28, 2006,the Hallmark Channel had approximately 71.4 million subscribers. At the end of2005, the Hallmark Movie Channel had approximately 500,000 subscribers. Weview a “subscriber” as a household that receives, on a full or part-time basis,the Hallmark Channel or the Hallmark Movie Channel on a program tier of adistributor. We determine our subscribers from subscriber numbers reported byNielsen Media Research. Subscribers include both viewers who pay a monthly feefor the tier programming and so-called “promotional” subscribers who are givenfree access to the tier by the distributor for a limited time.

Programming acquired from thirdparties is an important component of our Channels as we continually develop andrefine our programming strategy. Our Channels have also benefited from thevolume and availability of programming in our Film Library. Our Channelsfurther have enjoyed the benefits of long-term program agreements with RHIEntertainment Distribution (formerly Hallmark Entertainment Distribution, LLC),which generally provide access to the RHI Entertainment Distribution librarytitles and to new production and first-run presentations controlled by RHIEntertainment Distribution. Our Film Library and the programming that we haveaccess to through our program license agreements with RHI EntertainmentDistribution consist of some of the most highly rated made-for-televisionmovies, based on A.C. Nielson ratings. These programs have also won numerousEmmy Awards, Golden Globe Awards and Peabody Awards.

Hallmark EntertainmentDistribution was owned indirectly by Hallmark Cards; in January 2006Hallmark Cards sold its ownership interests in Hallmark Entertainment LLC, andthus also Hallmark Entertainment Distribution, to its President and certain newinvestors. Hallmark Entertainment Distribution changed its name to RHIEntertainment Distribution, and Hallmark Entertainment LLC changed its name toRHI Entertainment, LLC (“RHI Entertainment”). As a result, the programmingagreements with RHI Entertainment Distribution are with a non-affiliated thirdparty. At the same time, notes and accounts payable by us to HallmarkEntertainment Distribution were transferred to Hallmark Entertainment Holdings, Inc.,a subsidiary of Hallmark Cards.

We currently distribute theHallmark Channel through approximately 5,200 cable systems andcommunities and satellite providers. By theend of 2005, we had agreements with Adelphia, Cablevision, Charter, Comcast,Cox, DirecTV, EchoStar, Insight, Mediacom, the National Cable TelevisionCooperative, Time Warner and many other pay television distributors, for thedistribution of the Hallmark Channel. In addition, we have entered intoagreements with several telephone companies that have started to furnish videoprogramming to consumers, including SBC (now AT&T), the National RuralTelecommunications Cooperative, and Verizon. Five of our distributors accountedeach for more than 10% of our consolidated subscriber revenue for the yearended December 31, 2005 and accounted together for a total of 87% ofconsolidated subscriber revenue at that date. Three of our distributorsaccounted each for more than 15% of our consolidated subscribers for the yearended December 31, 2005 and accounted together for 58% of our subscriberson that date.

Through Crown Media Distribution, we exploit the FilmLibrary to the extent not used by our Channels. We license the use of Libraryfilms and programming to third parties in the United States includingterrestrial broadcasters in return for license fees.

We license the trademark “Hallmark” for use on ourChannels pursuant to certain trademark license agreements with Hallmark Cards,Incorporated (“Hallmark Cards”). We believe that the use of this trademark isextremely important for our Channels due to the substantial name recognitionand favorable characteristics associated with the name in the United States.For further information concerning these trademark license agreements, see Part III—Item13. Certain Relationships and Related Transactions—Hallmark Trademark LicenseAgreements.

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***Information concerning revenue, operating losses andidentifiable assets attributable to our pay television programming services andour distribution of films may be found in Note 22 of Notes to ConsolidatedFinancial Statements in this Report.***

***Strategic Alternatives for theCompany***

The Company announced on August 18,2005, that its Board of Directors has authorized the Company to explorestrategic alternatives for the Company, including a potential sale of theCompany to a third party. In support of this initiative, a Special Committee ofindependent directors of the Board of Directors has been formed to oversee theprocess. Hallmark Cards, Incorporated has advised the Company’s Board ofDirectors that it fully supports the Board’s determination. Hallmark has alsoadvised the Board that it would consider entering into a license agreement withrespect to the Hallmark Channel name in connection with the sale of the Companyif requested by a potential acquirer. As a result, the Company is currentlyengaged in a process that may result in strategic transactions concerning theoperation or ownership of the Company.****There can beno assurance that the Company will enter into or consummate any transaction, oras to the terms or timing thereof.

***Development of Business***

Crown Media Holdings, Inc.,which was incorporated in the state of Delaware in December 1999, throughits subsidiaries, owns and operates pay television Channels dedicated to highquality, entertainment programming for adults and families, in the UnitedStates. Significant investors in Crown Media Holdings include HallmarkEntertainment Investments Co., a subsidiary of Hallmark Cards, the NationalInterfaith Cable Coalition, Inc. (“NICC”), and, indirectly through theirinvestments in Hallmark Entertainment Investments, Liberty Media Corporation (“LibertyMedia”) and J.P. Morgan Partners (BHCA), L. P. (“J.P. Morgan”). The HallmarkChannel is operated and distributed by Crown Media United States. Crown MediaInternational acquired an interest in Crown Media United States in 1998, and asa result of several transactions, Crown Media Holdings owned 100% of the commoninterests of Crown Media United States by March 2001. Prior to April 2005,when the Company sold its international operations, through the sale of CrownMedia International, the Company operated its Channels in approximately 150countries throughout the world.

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

***Industry Overview***

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

We are also a pay televisionchannel provider. Pay television channel providers include all channelproviders (except over-the-air broadcasters) and major U.S. cable and satellitenetworks. Pay television channel providers often produce programming andacquire or license programming from program 

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suppliersand generally package the programming according to an overriding theme andbrand strategy. Pay television providers and distributors generally restrictviewership through security encryption devices that limit viewership to payingsubscribers. Pay television channel providers compete with each other fordistribution and to attract viewers and advertisers. Pay television providersgenerally target audiences with a certain demographic composition, so that theycan then sell advertising to advertisers seeking to reach the providers’demographic audiences.

Pay television distributors ownand operate the platforms used to deliver channels to subscribers. Thesedistributors use several different technologies to reach their subscribers asdescribed below. Distributors attempt to create a mix of channels that will beattractive to their subscriber population in an attempt to gain new subscribersand to reduce subscriber turnover. Distributors have different levels ofservice for subscribers, with each service level containing some differentchannels. Recently, pay television distributors have created a “tier” of familyprogramming; we are on two such tiers as of the date of this Report.Distributors have begun to offer additional broadband services such as Internetaccess, telephony and video-on-demand over their systems.

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

***Distribution Platforms***

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

***Sources of Revenue***

*Subscriber Fees*

Pay television customerssubscribe to basic services by paying monthly fees for basic channels to paytelevision distributors. The customers can also subscribe to additional packagesof premium or pay-per-view services upon payment of additional fees. See Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

Generally,we charge our pay television distributors a monthly subscriber fee for theright to broadcast our Channels. Generally, these distribution agreements lastfrom three to ten years, and sometimes include annual increases of subscriberfees. A distribution agreement may also involve a payment by us for theestablishment of the relationship or, together with or in lieu of any payment,waived subscriber fees for our Channels to distributors for a period of timeand discounts or no fees if certain subscriber levels are achieved. Please seeItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, for information regarding subscriber fees. For the years ended December 31,2003, 2004, and 

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2005 revenue derived from subscriber fees for theChannels were approximately $4.3 million, $9.9 million and $18.7 million,respectively.

*Advertising Revenue*

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

The ability of a televisionchannel to generate advertising revenue largely depends on estimated or actualviewing levels, primarily based on ratings, and on advertising rates. In theUnited States, independent ratings systems on which advertising sales can bebased are well established and widely accepted within the industry. Inaddition, pay television channel providers and distributors may also provideestimated or actual subscriber information. Currently, our Channel sells theapproximately 50% of its advertising in the “up-front” season, generally in June andJuly, for the last quarter of the same year and the first three quarters of thefollowing year. We hold back a small percentage of our inventory for audiencedeficiency units, “ADUs,” and sell the remainder in the spot or scatter market.ADUs are units of inventory that are made available to advertisers ascompensation for advertising purchased in programs which did not deliver theratings which the advertisers had been guaranteed.

Historically, advertisers havespent more on advertising through traditional broadcast television than throughpay television. We believe that as pay television continues to gain viewershiprelative to broadcast television, it should attract a larger percentage of thetotal available dollars spent on television advertising. Also, as paytelevision draws audience share from broadcast television, audiencedemographics (i.e. viewers categorized by characteristics such as age, sex andincome) become fragmented. As a result, advertisers are able to target thespecific groups of viewers who are most likely to purchase their products, bybuying advertising on channels which attract the desired viewer demographic.

We have advertising salesoffices in New York, Los Angeles, Chicago, Atlanta and Detroit. In addition, wehave made significant investments in programming, research, marketing andpromotions, all specifically designed to support the sale of advertising timeon our Channels. For the years ended December 31, 2003, 2004, and 2005revenues from the sale of advertising time on our Channels were approximately$77.6 million, $106.3 million and $146.1 million, respectively.

*Ratings*

Among the 60 ad-supportedcable channels in the United States market in 2005, the Hallmark Channel ranked9th in total day with an average 0.707 householdrating for the year and 11th for prime time with an average 1.033 householdrating for the year, according to Nielsen Media Research. In 2004, among the 54ad-supported cable channels in the United States market, the Hallmark Channelranked 10th in total day with an average 0.6 householdrating and 14th for prime time with an average 0.871 householdrating, according to Nielsen Media Research. Total day means the time periodmeasured from the time each day the broadcast of commercially-sponsoredprogramming commences to the time such commercially-sponsored programming ends.We believe that the key demographics for the Hallmark Channel are the viewersin the groups Adults 25-54 and Women 25-54.

*Licensing Revenue*

We license our film assetsto broadcasters and video distributors (pay television channel providers) whopay a license fee for the right to exhibit or distribute the programming over acertain period of time. 

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Ourlicensing of film assets is an important contributor to our revenues and,because the amortization of our film assets is a non-cash expense, also to ourcash flow.

***Programming***

Our Channels offer a range of high quality,entertainment programming for adults and families including movies, miniseries,epics, historical dramas, romances, literary classics, and contemporarystories. Sources for programming on our Channels include the Crown MediaLibrary, programming licensed from RHI Entertainment Distribution, andprogramming licensed from other third parties. Prior to the purchase of theCrown Media Library in 2001, we licensed substantially all of the titles inthat Library from Hallmark Entertainment Distribution, which is now RHI EntertainmentDistribution.

Examples of programmingfrom our Library and the RHI EntertainmentDistribution library include, Larry McMurtry’s*LonesomeDove*, *The Outsider*, *Talking to Heaven, Frederick Forsyth’s Icon, Supernova* andLarry McMurtry’s*Dead Man’s Walk* as well asprogramming previously shown as Hallmark Hall of Fame such as John Grisham’s*Painted House*, *Fallen Angel*, *Sarah, Plain and Tall*and*What the Deaf Man Heard*. We benefit fromthese original RHI EntertainmentDistribution productions, which are sometimes premiered and often airedon our Channel. Examples of other third party programming shown on our Channelinclude the popular drama series *M*A*S*H, Little House onthe Prairie, Diagnosis Murder, Matlock, Walker Texas Ranger and The Waltons*.Other examples of our third party programming include acquired movies andminiseries such as *The Parent Trap*,*City Slickers*and *A Fistful ofDollars*. Our license agreements with third parties typically providefor a license fee paid out over the term of the license for the right toexhibit a program in the United States within a specified period of time.

***Distribution***

The Hallmark Channel ended 2005 with 70.7 million subscribers, anincrease of 9% from 64.6 million at the 2004 year-end. We currently distributethe Hallmark Channel to approximately 76% of all United States pay televisionsubscribers. The following table shows the approximate number of pay televisionhouseholds and the Hallmark Channel subscribers for each of the eight largestpay television distributors, and all other pay television distributors as agroup, in the United States as of December 31, 2005.

| ** **                               | ** ** | ** **                                            | ** ** | ** **           | ** ** | **HALLMARK**                   | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | ** **                                            | ** ** | **HALLMARK**         | ** ** | **CHANNEL—U.S.**          | ** ** |
| ** **                               | ** ** | **TOTAL US PAY TV**                    | ** ** | **CHANNEL—U.S** | ** ** | **% OF PAY TV** | ** ** |
| **PAY TELEVISION DISTRIBUTOR** | ** ** | ** **                                            | ** ** | **HOUSEHOLDS(1)**    | ** ** | **SUBSCRIBERS(1)**             | ** ** | **HOUSEHOLDS** | ** ** |
| ** **                               | ** ** | **(In thousands, except percentages)** | ** ** |
| Comcast                                  |       |                                                  | 22,701     |                 |       |                           | 16,504     |   |   |   | 72.7 | % |   |
| DirecTV                                  |       |                                                  | 14,933     |                 |       |                           | 13,054     |   |   |   | 87.4 | % |   |
| Time Warner                              |       |                                                  | 13,215     |                 |       |                           | 11,005     |   |   |   | 83.3 | % |   |
| Cox                                      |       |                                                  | 6,335      |                 |       |                           | 5,233      |   |   |   | 82.6 | % |   |
| Charter                                  |       |                                                  | 6,319      |                 |       |                           | 4,913      |   |   |   | 77.8 | % |   |
| Adelphia                                 |       |                                                  | 5,487      |                 |       |                           | 4,387      |   |   |   | 79.9 | % |   |
| Echostar                                 |       |                                                  | 11,710     |                 |       |                           | 4,645      |   |   |   | 39.7 | % |   |
| Cablevision                              |       |                                                  | 3,052      |                 |       |                           | 2,580      |   |   |   | 84.6 | % |   |
| All others                               |       |                                                  | 9,831      |                 |       |                           | 8,345      |   |   |   | 84.9 | % |   |
| Total                                    |       |                                                  | 93,583     |                 |       |                           | 70,666     |   |   |   | 75.5 | % |   |
|                                          |            |                                                       |            |                      |            |                                |            |  |  |  |  |  |  |  |  |

 

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(1)          Source: Nielsen Code andThe Nielsen Public U.E. December 2005.

Our subscribers in the United States have grown from approximately 16.0million full time subscribers at January 1, 2001 to approximately 71.0million full time subscribers at December 31, 2005.

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Although the Hallmark Channel’sdistribution agreement with Adelphia expired on December 31, 2005,Adelphia has continued to carry the channel pursuant to the terms of theexpired agreement. Adelphia is the subject of a purchase agreement with Comcastand Time Warner. Once this purchase is completed, we expect that the Adelphiasystems will then be covered by the terms of the existing Hallmark Channelagreements with Comcast and Time Warner. Our other major distributionagreements expire from December 2006 through December, 2010. Of thesedistribution agreements, agreements accounting for approximately 77.8% of oursubscriber base at December 31, 2005 will terminate and be the subject ofrenewal negotiations prior to or on December 31, 2007. In October, 2005,we entered into a renewal of our distribution agreement with one of the majordistributors for a period of 3.3 years.

***Sales and Marketing***

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

For over fifty years Hallmark has been a leader inhigh-quality original television production. The Hallmark Channel and theHallmark Movie Channel are the only home on cable television for the moviespreviously shown as Hallmark Hall of Fame, a selection of movies from anaward-winning entertainment series.

The power of theHallmark brand and the quality of RHIEntertainment Distribution combine to:

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

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

·       provide a competitiveadvantage in negotiating long-term distribution agreements with pay televisiondistributors.

***Hallmark Movie Channel***

After operating on alimited basis throughout 2004, we fully launched our second 24-hourlinear channel, the Hallmark Movie Channel, during the first quarter of 2005. TheHallmark Movie Channel focuses on movies and mini-series and utilizes contentfrom our film library for programming. The launch of the Hallmark Movie Channelprovides an opportunity for the Company to build a second programming asset,use this programming asset as a value added enhancement to increasedistribution of the Hallmark Channel, and realize further value from thecontent in our film library.

***Channel Operations***

The programming department hasbeen responsible for ensuring the consistent quality of the programming weoffer. The programming, scheduling and acquisitions departments work inconjunction with the traffic department and creative services to create thedistinctive appearance of our Channel. Some of these functions are outsourcedon an as-needed basis.

The creation of our Channelbegins with the acquisition of programming. We have approximately 600 titles inthe Crown Media Library. In addition, we license programming from RHIEntertainment Distribution and other program suppliers. Our staff or thirdparties review and summarize all potential programming to ensure compliancewith our quality and content standards.

The creation of on-airpromotional segments “interstitials”, which are broadcast between the featuremovies, miniseries and series, are typically outsourced to external vendors.These interstitials are intended 

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toinvite viewership, guide viewers to specific programming, and promote “brandawareness” for the Hallmark Channel and the Hallmark Movie Channel.

The scheduling departmentcreates the play list, which contains a list of daily programming. Thescheduling department works with advertising sales and marketing personnel tocontinuously monitor the programming mix. The play list is then forwarded tothe traffic department.

Thetraffic department inserts promotional segments and advertising into the playlist and creates the daily log, which contains a detailed schedule of thestream of programming, commercials and promotional materials that willultimately be viewed by the subscribers of the Hallmark Channel.

***Channel Delivery***

We deliver the daily log anddigital tapes of the Channels’ programming, commercials and promotionalmessages to a third party “Network Operations Center” in Denver, where theprogramming, advertising and promotional elements are combined and compressedinto a single signal, and transported to a Denver uplink facility. The uplinkfacility then transmits the signal to a satellite transponder that covers theUnited States and the transponder transmits the signal back to cable head-endfacilities and direct-to-home satellite services operated by pay televisiondistributors who receive and decode our signal and transmit our Channels totheir subscribers.

The following chart summarizes for the primarydistribution platforms through which we deliver our Channels, our primary paytelevision distributors, and the uplink and satellites we currently use to deliverour Channels.

|               | ** ** | **Primary**      | ** ** | **Primary**      | ** ** | **Playback**       | ** ** | **Uplink**      | ** ** | ** **         |
|---------------|------------|------------------|------------|------------------|------------|--------------------|------------|-----------------|------------|--------------------|
| ** **    | ** ** | **Distribution** | ** ** | **Pay TV**       | ** ** | **Providers/**     | ** ** | **Providers/**  | ** ** | ** **         |
| **Market**    | ** ** | **Platforms**    | ** ** | **Distributors** | ** ** | **Locations**      | ** ** | **Locations**   | ** ** | **Satellites**     |
| United States |       | Cable            |       | Time Warner      |       | Sparrowhawk        |       | Comcast Digital |       | SES Americom— |
|          |       | Satellite        |       | DirecTV          |       | Broadcast Services |       | Media Center    |       | AMC 11             |
|          |       | Direct-to-home   |       | Charter          |       | Denver, CO         |       | Littleton, CO   |       |               |
|          |       |             |       | Adelphia         |       |               |       |            |       |               |
|          |       |             |       | Echostar         |       |               |       |            |       |               |
|          |       |             |       | Cox              |       |               |       |            |       |               |
|          |       |             |       | Cablevision      |       |               |       |            |       |               |
|          |       |             |       | Comcast          |       |               |       |            |       |               |

 

The contracts with theparties providing uplink, satellite and other services for the delivery of ourChannel in the United States expire from 2012 through 2019. Such contracts maybe terminated by the vendors prior to the expiration of the contracts underconditions that are customary to contracts of this type. Amounts payable underthese contracts, as well as international contracts, are reflected in “Operatingand Capital Leases” in the schedule of contractual commitments as of December 31,2005, as shown in Item 7 below.

**Film Distribution**

Crown Media Distribution ownsthe Crown Media Library, consisting currently of United States rights toapproximately 600 titles, and generates revenue from the film assets in thelibrary by granting licenses to use the films to third parties. We are also using the films as programming forour television Channels and various interactive uses including pay per view andvideo on demand.

Crown Media Distributionoversees sales and distribution of the Crown Media Library to third-party licensees.Third-party licensees purchase rights on an exclusive or non-exclusive basis toexhibit titles from the Library in various television media including homevideo. Crown Media Distribution has a service 

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agreementwith RHI Entertainment, providing for services relating to the administration,distribution and other exploitation of the Crown Media Library, and directs theRHI Entertainment sales force in all sales matters pertaining to the CrownMedia Library.

**Competition**

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

There are several sources ofcompetition within our industry, each of which affects our business strategy.The Hallmark Channel competes with other general entertainment programming fromTNT, USA Network, A&E, the Discovery Channel, Lifetime, Oxygen, ABC Familyand other similarly targeted channels. We compete with these channels forviewers and advertising dollars based upon quality of programming, number ofsubscribers, ratings and subscriber demographics. We compete with all channelsfor carriage on cable, satellite and telephone systems that may have limitedcapacity.

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

**Competitive Strengths**

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

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

Our Channel is brandedwith the Hallmark name. We believe that viewers and distributors associate theHallmark brand with family values and high quality content. Our associationwith this brand facilitates our efforts to achieve increased distribution andto attract additional viewers, which in turn leads to higher ratings andadvertising revenue.

***Distribution Contracts that Call for IncreasingSubscriber Counts and Fees***

At December 31, 2005,we had distribution agreements with Adelphia, Cablevision, Charter, Comcast,Cox, DirecTV, EchoStar, and Time Warner in the United States, as well as anumber of other distributors. The terms of our major distribution agreementsgenerally provide for subscriber fee increases over time, although some providefor lower or no subscriber fees if certain levels of subscribers are achieved.We expect to be able to renew these deals prior to their expiration. See “RiskFactors Relating to Our Business” below.

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

Our Library gives us controlover a significant amount of popular and award-winning programming that we caneither air on our Channel or license in the United States to third parties.These titles provide us with a portion of our core programming, and by owningthese titles, we have the flexibility to use them 

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asneeded to create the most effective program schedules. Owning these titles alsoeliminates the license fees we otherwise would have to pay for these titles andprovides a revenue stream for us from licensing the titles to third parties.

Wehave a three-year program agreement with RHI Entertainment Distribution ending December 31,2008, that provides us with access to new movies and mini-series producedespecially for the Hallmark Channel, as well as to titles in the RHIEntertainment Distribution library which have been produced for other majornetworks over the past five years. This agreement is described in more detail inPart III, Item 13. CertainRelationships and Related Transactions—Agreements Concerning Film Assets below.

***Experienced Management***

Members of our seniormanagement team have experience launching, promoting and operating channels.They have held senior positions at such companies as The Discovery Channel,ABC, CBS Sports, Turner Network Television and USA Networks.

**Competitive Risks**

***One Primary Channel Distributed Domestically***

We operate one primaryChannel in the United States. Many competitors have more than one channel andare also diversified entertainment companies, giving them an advantage indealing with distributors and advertisers. These companies are also able toleverage costs across multiple channels. Until the Hallmark Movie Channel ismore widely distributed, it will not provide significant leverage innegotiations with distributors and advertisers.

***Entertainment Programming***

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

***Ratings Which Affect Advertising***

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

**Research**

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

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

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

Our Channel’s performanceis tracked through an internal tracking study established in July 2001,which is a monthly telephone surveyconducted among a national probability sample of approximately 

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1,000 adults. The research department also subscribes toa number of other services, which are useful in obtaining informationabout viewers of our Channel.

**Employees**

Wehad 186 employees at December 31, 2005, and 187 employees in April 2005.Neither we nor any of our subsidiaries are parties to collective bargaining agreements.We believe that our relations with our employees are good. Substantially all ofour domestic Channels’ employees work at our offices in Studio City, Californiaand New York, New York.

**FinancialInformation about Geographic Areas**

Information concerningrevenue and long-lived assets attributable to external customers may be foundin Note 22 of our Notes to Consolidated Financial Statements in this Report.

**RiskFactors and Forward-Looking Statements**

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

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

**Risks Relating to Our Business**

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

Both our channels have a historyof net losses and we expect to continue to report net losses for theforeseeable future. As of December 31, 2005, we had an accumulated deficitof approximately $1.5 billion, total stockholders’ deficit of approximately$123.2 million, goodwill of approximately $314.0 million, and film assets of$380.3 million.

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

Inaddition, in order to accomplish these goals, the management of Crown MediaHoldings continues to believe that it is necessary to increase subscribers andenhance our programming, which may result in increased subscriber acquisitionfees and will result in increased costs for programming. Over the last fouryears, these actions have contributed to increased net losses for Crown MediaHoldings.

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

We have a substantial amount ofindebtedness. As of December 31, 2005, our total debt was $972.4 millionand we had $15.9 million of cash and cash equivalents and $10.0 millionavailable under our bank credit facility subject to the approval of HallmarkCards to cover the negative cash flow resulting from our current operations. Inaddition, in March 2006, we signed a waiver and standby purchaseagreement, which converted $70.0 million of payables to a Hallmark Cardsaffiliate into a note payable. This amount currently is not included in ourcalculation of total debt. Subject to restrictions under our debt agreements,we may also seek equity or debt financing from time to time to cover ouroperating losses, to finance acquisitions or capital expenditures or for otherpurposes.

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

·       our vulnerability to adverse general economic conditions is heightened;

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

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

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

·       we are sensitive to fluctuations in interest rates; and

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

Our ability to meet our debt andother obligations and to reduce our total debt depends on our future operatingperformances and on economic, financial, competitive and other factors. Therecan be no assurance that our leverage and such restrictions will not materiallyand adversely affect our ability to finance our future operations or capitalneeds or to engage in other business activities.

Information concerning ourliquidity may be found in Note 1 of our Notes to Consolidated FinancialStatements in this Report.

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

High levels of interest expense could have negativeeffects on our future operations. Interest expense, which is net of interestincome and includes amortization of debt issuance costs and interest expense onborrowings under our senior and demand notes and bank credit facility,increased substantially over the past year. The increase in interest expense inthe past twelve months resulted from an increase in the average borrowingsoutstanding, due to cash generated from operations being insufficient to coveroperating expenses and capital expenditures. A substantial portion of our cashflow from operations must be used to pay our interest expense and will not beavailable for other business purposes. In addition, we may need to incuradditional indebtedness in the future. We cannot assure you that our businesswill generate sufficient cash flow or that future financings will be availableto provide sufficient proceeds to meet our obligations or to service our totaldebt.

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

Because we currently operate ata loss, we may have a negative cash flow and any unanticipated significantexpense or any development that hampers our growth in revenue or decreases anyof our revenue, would result in the need for additional external funds in orderto continue operations. Further, as discussed in this report under “Liquidityand Capital Resources” below, we need to extend, refinance or replace our bankline of credit on or prior to May 31, 2006, or to extend or replaceborrowings from Hallmark Cards by May 31, 2007, that would result from thebanks drawing upon the irrevocable letter of credit supporting the bank creditfacility or from Hallmark Cards’ purchasing the loans under that facility (seenote 12 to our Consolidated Financial Statements), and extend or refinanceoutstanding notes payables to Hallmark Cards and its subsidiaries on or priorto May 31, 2007.

Upon maturity of thecredit facility on May 31, 2006, the lending group led by JP Morgan Chasehas the right to elect to forego the receipt of cash to pay the principalamount of the credit facility in full, which is provided for under the terms ofan irrevocable letter of credit provided by Hallmark Cards described in note12, but instead can elect to initiate a process to foreclose on the Company’sassets. Such foreclosure proceedings, which we view as a remote possibility,would affect our ability to continue our operations. Prior to any such possibleforeclosure proceedings, however, the Company would consider variousalternatives as indicated above. In the alternative, the Company would causeHallmark Cards, pursuant to the terms of the waiver and standby purchaseagreement, to exercise its option to purchase the banks interest in the creditfacility and the credit facility would then be subject to Hallmark Cardsagreement not to demand payment prior to May 31, 2007.

***We need to renew distribution agreements covering more than a majority ofour subscribers prior to December 31, 2007.***

**Our distributionagreements with eight of the major distributors in the United States,accounting for approximately 83% of our subscriber base as of December 31,2005, will terminate on or prior to December 31, 2007 pursuant to theterms of the agreements. If we are unable to renew these distributionagreements, we could lose substantial numbers of subscribers. Although webelieve we will be able to negotiate new agreements on favorable terms, it isdifficult to predict what the level of subscriber fees will be or whether thedistributors will request marketing or “launch” support payments as a conditionfor renewal. Any significant loss of subscribers, reduction in subscriber feesor obligation to pay launch support or marketing payments could materiallyaffect our subscriber and advertising revenues and affect materially our cashflow and ability to achieve profitability.**

***RHI Entertainment Distribution may not deliver to usas many programs as it has historically delivered.***

We currently acquirelibrary programming, new productions and first-run presentations under aprogram license agreement with RHI Entertainment Distribution, which agreementwas revised on October 11, 2005. The revised agreement expires December 31,2008. Under the revised agreement, RHI Entertainment Distribution is requiredto produce and deliver to us, and we are required to order and license and payfor, a minimum of 12 original television movies and three original mini-seriesin each of 2006 and 2007 (subject to our right to cancel these productions in2007). There are also other programming obligations. If RHI EntertainmentDistribution is not able to produce all the movies and mini-series which werequire in 2006 and 2007 or we are not able to negotiate a new productionagreement with RHI Entertainment Distribution for 2008 and subsequent years, wecould be forced to acquire the needed programming from alternative sources orto produce it ourselves at a greater cost and our ability to effectivelyprogram our Channels could be negatively affected.

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

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

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

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

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

Oursuccess depends partly upon unpredictable and volatile factors beyond ourcontrol, such as viewer preferences, competing programming and the availabilityof other entertainment activities. We may not be able to anticipate and reacteffectively to shifts in tastes and interests in our markets. In particular,our ability to react effectively may be limited by our obligation to licenseprogramming from RHI Entertainment Distribution, which may be unable orunwilling to produce programming in genres other than general entertainment,television movies and mini series. Our competitors may have more flexibleprogramming arrangements, as well as greater amounts of production, betterdistribution, and greater capital resources, and may be able to react morequickly to shifts in tastes and interests. As a result, we may be unable tomaintain the commercial success of any of our current programming, or togenerate sufficient demand and market acceptance for our new programming. Ashift in viewer preferences in programming or alternative entertainmentactivities could also reduce the amount of revenue we anticipate receiving fromlicensing of our film assets and cause a decline in both advertising andsubscriber fees revenue. The decline in revenue could hinder or prevent us fromachieving profitability and could adversely affect the market price of our Class Acommon stock.

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

Currently, we are dependent onRHI Entertainment to distribute and license our film assets to third partiesfor us under a services agreement, which will expire on December 31, 2006.This arrangement reduces our control over the sales and distribution of thefilm assets and might delay our realization of the full revenue stream from thefilm assets. We and RHI Entertainment each have the right to terminate theservice agreement on sixty days notice. If RHI Entertainment elects toterminate the agreement before we have established our own distributionnetwork, we may not be able to establish our own or obtain alternativedistribution services of equivalent quality or on terms as favorable to us.Termination of this services agreement could hinder our ability, at least inthe short-term, to achieve the amount of additional revenue anticipated fromthese activities and could adversely affect the market price of our Class Acommon stock.

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

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

Although it is expectedover time that our advertising revenue will increase, if we fail to increasesignificantly our advertising revenue, we may be unable to achieve or sustainprofitability or to expand our business. A failure to increase advertisingrevenue may be a result of any or all of the following: (i) we have a limited history of marketing and sellingadvertising time; (ii) we may be unable to identify, attract and retainexperienced sales and marketing personnel with relevant experience for our U.S.channel; (iii) our sales and marketing organization may be unable tosuccessfully compete against the significantly more extensive and well-fundedsales and marketing operations of our current or potential competitors; (iv) theadvancement of technologies such as Digital Video Recording which may causeadvertisers to shift their expenditures to media in which their commercialmessages are not circumvented by the technology; and/or (v) we willnot be able to increase our advertising sales rate-card or may be required torun additional advertising spots which affect the availability of advertisinginventory for future sales. Success inincreasing our advertising revenue also depends upon the number and coverage ofthe distributors who carry our channels, our number of subscribers, and theviewership ratings for our programming.

***Hallmark Entertainment Investmentscontrols us and this control could create conflicts of interest or inhibitpotential changes of control.***

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

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

Welicense the name “Hallmark” from Hallmark Licensing, Inc., a subsidiary ofHallmark Cards, for use in the names of our channels. This license will expireon September 1, 2006. If Hallmark Cards determines not to renew thetrademark license agreements for any reason, including failure to comply withHallmark Cards’ programming standards, we would be forced to significantlyrevise our business plan and operations, and could experience a significanterosion of our subscriber base and advertising revenue, particularly in theUnited States.

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

Wecurrently rely on third parties to supply key network infrastructure services,including uplink, playback, transmission and satellite services to our market,which are available only from limited sources. 

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We have occasionally experienced delays and otherproblems in receiving communications equipment, services and facilities andmay, in the future, be unable to obtain such services, equipment or facilitieson the scale and within the time frames required by us on terms we findacceptable, or at all. If we are unable to obtain, or if we experience a delayin the delivery of, such services, we may be forced to incur significantunanticipated expenses to secure alternative third party suppliers or adjust ouroperations, which could hinder our growth and reduce our revenue and potentialprofitability.

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

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

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

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

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

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

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

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

·       material announcements by us or our competitors;

·       governmental regulatory action;

·       technological innovations by competitors or competing technologies;

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

·       changes in general market conditions or economic trends.

Additionally, of theapproximately 74.1 million shares of the Company’s outstanding Class Acommon stock, only 15.3 million shares (approximately 21%) are not held byaffiliates of the Company. This stock ownership structure may also be a causeof volatility in the market price of the Company’s Class A common stock.

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**Risks Relating to Our Industry**

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

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

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

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

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

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

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

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

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

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

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

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

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

Moreover,the increased capacity of digital distribution platforms, including theintroduction of digital terrestrial television, may reduce the competition forthe right to carry channels and allow development of extra services at lowincremental cost. These lower incremental costs could lower barriers to entryfor competing channels, and place pressure on our operating margins and marketposition.

***Changes in laws or regulationscould adversely affect our distribution and thus our revenues.***

The FederalCommunications Commission or Congress may enact requirements that cable programservices be offered to subscribers on an “a la carte” basis, i.e. be madeavailable for purchase separately and not as part of a package of services orthat the services be offered in specific packages such as a so-called “familytier.” Such requirements could result in a reduction in the total number ofsubscribers to our domestic program services and adversely affect advertisingrevenue.

***If we fail to comply with applicablegovernment regulations, our business could be harmed.***

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

Moreover,broadcasting regulations are generally subject to periodic and on-goinggovernmental review and legislative initiatives, which may, in the future,affect the nature of programming we are able to offer and the means by which itis distributed. The timing, scope or outcome of these reviews could beunfavorable to us, and any changes to current broadcasting legislation orregulations could require adjustments to our operations.

**Available Information**

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

**Additionally, we will makeavailable, free of charge upon request, a copy of our Code of Business Conductand Ethics, which is applicable to all of our employees, including our seniorfinancial officers. Requests for a copy of this code should be addressed to theGeneral Counsel at 12700 Ventura Boulevard, Studio City, California  91604.**

**ITEM 1A.**        Risk Factors

See “RisksRelated to Our Business” and “Risks Related to Our Industry” in Item 1 above,which sections are incorporated herein by reference.

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**ITEM 1B.**       UnresolvedStaff Comments

Notapplicable.

**ITEM 2.**                Properties

The following table provides certain summary informationwith respect to the principal real properties leased by the Company. We do notown any real property. The leases for these United States offices andfacilities expire between 2006 and 2010. The Company believes the facilities,office space and other real properties leased are adequate for its currentoperations.

| Location                    | ** ** | **Use**                                       | ** ** | **Approximate  Area in  Square Feet** |
|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------|
| 12700 Ventura Blvd.         |       | Executive and administrative  office and post |       | 49,637                                |
| Studio City, California     |       | production and editing  facilities            |       |                                  |
| 1325 Avenue of the Americas |       | Sales and administrative  office and          |       | 13,145                                |
| New York, New York          |       | advertising traffic                           |       |                                  |
| 205 N. Michigan Ave.        |       |                                          |       |                                  |
| Chicago, Illinois           |       | Sales office                                  |       | 3,048                                 |
| 200 East Beaver Road        |       |                                          |       |                                  |
| Troy, Michigan              |       | Sales office                                  |       | 200                                   |
| 1170 Peachtree Street       |       |                                          |       |                                  |
| Atlanta, Georgia            |       | Sales office                                  |       | 180                                   |

 

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

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

**ITEM 3.**                Legal Proceedings

We are subject to incidental litigation risks in theordinary course of our business. We are not currently the subject of anymaterial, pending legal proceeding.

**On December 1,2005, the Company settled a dispute with the National Interfaith CableCoalition over alleged breaches of a 2001 programming agreement and enteredinto a new agreement. See Item 13 “Certain Relationships and RelatedTransactions” for information on this new agreement.**

**ITEM 4.**                Submission of Matters to a Vote of SecurityHolders

Notapplicable.

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**PART II**

**ITEM 5.**                Market for Our Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities

***Market Information***

Our Class A common stock is listed on the NasdaqNational Market System under the ticker symbol “CRWN.” Set forth below are thehigh and low sales prices for our Class A common stock for each quarterlyperiod in 2004 and 2005, as reported on the Nasdaq National Market System.

| ** **            | ** ** | **Price Range** | ** ** |
|-----------------------|------------|----------------------|------------|
| **Common Stock** | ** ** | ** **           | ** ** | **High** | ** ** | **Low** | ** ** |
| **2004**              |       |                 |       |   |   |   |   |
| First Quarter         |       |                 | $          | 9.230 |   |   | $ | 7.060 |   |
| Second Quarter        |       |                 | $          | 9.780 |   |   | $ | 7.960 |   |
| Third Quarter         |       |                 | $          | 8.750 |   |   | $ | 6.250 |   |
| Fourth Quarter        |       |                 | $          | 9.500 |   |   | $ | 8.170 |   |
| **2005**              |       |                 |       |   |   |   |   |
| First Quarter         |       |                 | $          | 9.600 |   |   | $ | 8.000 |   |
| Second Quarter        |       |                 | $          | 10.110 |   |   | $ | 7.970 |   |
| Third Quarter         |       |                 | $          | 11.500 |   |   | $ | 8.600 |   |
| Fourth  Quarter       |       |                 | $          | 10.970 |   |   | $ | 8.470 |   |
|                       |            |                      |            |  |  |  |  |  |  |  |  |

 

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

***Holders***

Asof February 8, 2006, there were 65 record holders of our Class Acommon stock and one record holder of our Class B common stock.

***Dividends***

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

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

The following tableprovides as of December 31, 2005, information for our only equitycompensation plan, which is the Amended and Restated 2000 Long Term IncentivePlan.

**Equity Compensation Plan Information**

 

| **Plan Category**                                       | ** ** | ** **         | ** ** | **Number of Securities  to be Issued  Upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column (a))** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** | ** **                                                                                          | ** ** | **(In thousands)**                                                                 | ** ** |
| Equity compensation  plans approved by security holders |       | 867                |       | $10.42                                                                                              |       | 9,133                                                                              |       |

*** ***

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***Stock Purchases***

Wedid not make any repurchases of our outstanding shares during the fourthquarter of 2005. None of our executive officers purchased shares in open markettransactions during the fourth quarter of 2005.

**ITEM 6.**                Selected Financial Data

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

In the table below, we provideyou with selected historical consolidated financial and other data of CrownMedia Holdings and its subsidiaries. The following selected consolidatedstatement of operations data for the years ended December 31, 2001, 2002,2003, 2004 and 2005, and the consolidated balance sheet data as of December 31,2001, 2002, 2003, 2004 and 2005, are derived from the audited financialstatements of Crown Media Holdings and its subsidiaries. This data should beread together with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements andrelated notes included elsewhere in this Annual Report on Form 10-K.

21

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In February 2005, the Company signed a definitiveagreement to complete the sale of its international business and, accordingly,classified the operating results of the international business as discontinuedoperations in the accompanying statements of operations for all periodspresented. This sale closed in April 2005. The Company’s discontinuedoperations consisted of the international channel operations and theinternational rights to the film library assets.

| ** **                                                                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2001**                                    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue:                                                                                                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Subscriber fees                                                                                                                 |       | $                                           | 13,905     |   | $ | 8,463 |   | $ | 4,329 |   | $ | 9,874 |   | $ | 18,746 |   |
| Advertising                                                                                                                     |       | 20,372                                      |       | 40,991 |   | 76,153 |   | 104,481 |   | 143,780 |   |
| Advertising by Hallmark Cards                                                                                                   |       | 5,020                                       |       | 5,021 |   | 1,397 |   | 1,846 |   | 2,335 |   |
| Film asset license fees                                                                                                         |       | 795                                         |       | 15,603 |   | 17,548 |   | 22,035 |   | 21,693 |   |
| Sublicense fees and other  revenue                                                                                              |       | 251                                         |       | 1 |   | 6 |   | — |   | 10,830 |   |
| Total revenue, net                                                                                                              |       | 40,343                                      |       | 70,079 |   | 99,433 |   | 138,236 |   | 197,384 |   |
| Cost  of Services:                                                                                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| Programming costs                                                                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Affiliates                                                                                                                      |       | 27,550                                      |       | 56,551 |   | 27,697 |   | 35,066 |   | 46,028 |   |
| Non-affiliates                                                                                                                  |       | 44,798                                      |       | 43,632 |   | 40,578 |   | 54,812 |   | 74,549 |   |
| Amortization of film assets                                                                                                     |       | 1,438                                       |       | 13,131 |   | 12,965 |   | 28,905 |   | 51,619 |   |
| Impairment of film assets                                                                                                       |       | —                                      |       | — |   | — |   | 22,003 |   | 25,542 |   |
| Subscriber acquisition fee  amortization expense                                                                                |       | 6,415                                       |       | 39,133 |   | 22,961 |   | 26,020 |   | 35,928 |   |
| Amortization of capital leases                                                                                                  |       | —                                      |       | — |   | — |   | 96 |   | 1,158 |   |
| Other costs of services                                                                                                         |       | 14,801                                      |       | 15,956 |   | 13,351 |   | 10,939 |   | 20,448 |   |
| Total cost of services                                                                                                          |       | 95,002                                      |       | 168,403 |   | 117,552 |   | 177,841 |   | 255,272 |   |
| Selling, general and  administrative expense                                                                                    |       | 46,503                                      |       | 39,394 |   | 41,811 |   | 52,209 |   | 55,162 |   |
| Marketing expense                                                                                                               |       | 18,600                                      |       | 34,004 |   | 16,619 |   | 16,477 |   | 24,160 |   |
| Reorganization expense                                                                                                          |       | 4,613                                       |       | 6,798 |   | 993 |   | — |   | — |   |
| Amortization of goodwill                                                                                                        |       | 20,032                                      |       | — |   | — |   | — |   | — |   |
| Depreciation and amortization  expense                                                                                          |       | 5,920                                       |       | 5,230 |   | 6,245 |   | 6,306 |   | 4,471 |   |
| Loss from operations before  interest expense and income tax provision                                                     |       | (150,327                                    | )          | (183,750 | ) | (83,787 | ) | (114,597 | ) | (141,681 | ) |
| Loss on early extinguishment of  debt                                                                                           |       | —                                      |       | — |   | (39,812 | ) | — |   | — |   |
| Guaranteed preferred beneficial  interest accretion                                                                             |       | (1,428                                      | )          | (25,508 | ) | (23,218 | ) | — |   | — |   |
| Interest expense                                                                                                                |       | (5,189                                      | )          | (17,124 | ) | (39,758 | ) | (60,179 | ) | (73,856 | ) |
| Loss from continuing operations  before income tax benefit                                                                 |       | (156,944                                    | )          | (226,382 | ) | (186,575 | ) | (174,776 | ) | (215,537 | ) |
| Income tax benefit                                                                                                              |       | 5,320                                       |       | — |   | — |   | — |   | — |   |
| Loss before discontinued  operations and cumulative effect of change in accounting principle                                    |       | (151,624                                    | )          | (226,382 | ) | (186,575 | ) | (174,776 | ) | (215,537 | ) |
| Loss from discontinued  operations, net of tax                                                                                  |       | (78,208                                     | )          | (86,647 | ) | (35,574 | ) | (142,030 | ) | (10,683 | ) |
| Loss from sale of discontinued  operations, net of tax                                                                          |       | —                                      |       | — |   | — |   | — |   | (6,538 | ) |
| Loss before cumulative effect  of change in accounting principle                                                                |       | (229,832                                    | )          | (313,029 | ) | (222,149 | ) | (316,806 | ) | (232,758 | ) |
| Cumulative effect of change in  accounting principle                                                                            |       | —                                      |       | — |   | 17,000 |   | — |   | — |   |
| Net loss                                                                                                                        |       | $                                           | (229,832   | ) | $ | (313,029 | ) | $ | (205,149 | ) | $ | (316,806 | ) | $ | (232,758 | ) |
| Other  comprehensive income (loss):                                                                                             |       |                                        |       |   |   |   |   |   |   |   |   |
| (Loss) gain on fair value of  derivative asset                                                                                  |       | (204                                        | )          | 204 |   | — |   | — |   | — |   |
| Foreign currency translation  adjustment                                                                                        |       | (404                                        | )          | 1,063 |   | 1,366 |   | 1,421 |   | (3,434 | ) |
| Comprehensive loss                                                                                                              |       | $                                           | (230,440   | ) | $ | (311,762 | ) | $ | (203,783 | ) | $ | (315,385 | ) | $ | (236,192 | ) |
| Weighted average number of  Class A and Class B shares outstanding,  basic and diluted                           |       | 74,691                                      |       | 104,306 |   | 104,484 |   | 104,533 |   | 104,619 |   |
| Loss per share before  discontinued operations and cumulative effect of change  in accounting principle, basic and diluted |       | $                                           | (2.03      | ) | $ | (2.17 | ) | $ | (1.78 | ) | $ | (1.67 | ) | $ | (2.06 | ) |
| Loss per share from  discontinued operations, basic and  diluted                                                           |       | (1.05                                       | )          | (0.83 | ) | (0.34 | ) | (1.36 | ) | (0.16 | ) |
| Cumulative effect of change in  accounting principle,  basic and diluted                                                        |       | —                                      |       | — |   | 0.16 |   | — |   | — |   |
| Net loss per share, basic and diluted                                                                                           |       | $                                           | (3.08      | ) | $ | (3.00 | ) | $ | (1.96 | ) | $ | (3.03 | ) | $ | (2.22 | ) |

 

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| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2001**                              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**               | ** ** |
| **Balance  Sheet Data:**                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                   |       | $                                     | 13,859     |   | $ | 335 |   | $ | 4,306 |   | $ | 12,102 |   | $ | 15,926 |   |
| Goodwill                                                    |       | 314,033                               |       | 314,033 |   | 314,033 |   | 314,033 |   | 314,033 |   |
| Total assets                                                |       | 1,627,008                             |       | 1,497,930 |   | 1,565,747 |   | 1,512,768 |   | 1,273,826 |   |
| Total long-term debt, excluding current  Maturities(1) |       | 205,894                               |       | 382,206 |   | 808,892 |   | 886,302 |   | 971,589 |   |
| Stockholders’ equity (deficit)                         |       | 776,866                               |       | 467,595 |   | 313,451 |   | 54,636 |   | (123,189 | ) |
| **Other  Data:**                                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                        |       | $                                     | 2,611      |   | $ | 3,627 |   | $ | 2,544 |   | $ | 878 |   | $ | 504 |   |
| Total  subscribers at year end                              |       | 43,532                                |       | 48,815 |   | 56,010 |   | 64,565 |   | 70,666 |   |

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(1)          In March 2006, the Company signed a waiver and standby purchaseagreement, which converts $70.0 million of payables to a Hallmark Cardsaffiliate into a note payable. This amount is not included in the long-termdebt calculation.

**ITEM 7.**                Management’s Discussion and Analysis of FinancialCondition and Results of Operations

**Overview**

*Current Business*

Crown Media Holdings, Inc.(“Crown Media Holdings,” “Crown Media” or the “Company”), through itssubsidiaries, owns and operates pay television channels dedicated to highquality, entertainment programming for adults and families, in the UnitedStates. In addition, the Company owns a film library with approximately 600titles. The library product is used on the Hallmark Channel, the Hallmark MovieChannel and sold to third parties.

With 70.7 million subscribers in the United States atthe end of 2005, Crown Media Holdings is the 39th most widely distributedadvertising-supported cable channel in the United States. In 2005, the HallmarkChannel also increased its overall ratings as to viewers. We finished the yearthe 9th highest rated advertising-supported cable channel for total day ratingsand the 11th highest rated advertising-supported cable channel in prime time asmeasured by Nielsen Research. The growth in ratings during 2005 began with ourHoliday campaign at the end of 2004. This campaign focused on Holiday-themedmovies and linked together promotions with the Hallmark Gold Crown Stores. Theresult of this campaign was an increase in new viewers to the Hallmark Channel.To build upon the success of the Holiday campaign, during the first quarter of2005, a new programming concept, Hallmark Channel Mystery Movies, wasintroduced. This new programming concept premiered on Friday nights during thefirst quarter of 2005 and each of the movies averaged a household coveragerating of 1.3, which was a nearly 60% increase from the same period in theprior year. During the second quarter, additional Mystery Movies were aired. Inaddition, the Hallmark Channel premiered a number of other original movies thatalso resulted in strong ratings.  Programming successes continued in the thirdquarter which was the highest rated quarter in the Channel’s history. Similarto 2004, and in an effort to build upon our year to date ratings performance,the Channel launched a Holiday campaign in the fourth quarter of 2005. Thiscampaign was also successful. The fourth quarter became the highest ratedfourth quarter in the Channel’s history. Two of our movies in December recorded3.0 or higher household ratings, as measured by Nielson, and all of our Holidaymovies delivered strong audience demographic performance.

We formally launched our second 24-hour linearchannel, the Hallmark Movie Channel, during the first quarter of 2005. TheHallmark Movie Channel focuses on movies and mini-series and utilizes content 

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from our film library forprogramming. At year end 2005, we had approximately 500,000 subscribers to theHallmark Movie Channel.

As mentioned above, the Company owns a film librarycomprised of approximately 600 titles. Through our subsidiary, Crown MediaDistribution, we license rights in the United States to titles in the libraryto a variety of customers. In addition, the Company utilizes the film libraryfor programming content on the Hallmark Channel and Hallmark Movie Channel. Wehave increased the internal use of the film assets as a result of the launch ofthe Hallmark Movie Channel and a decision to air more movies on the HallmarkChannel.

As the Hallmark Channel and the Hallmark Movie Channelcontinue to develop, the core focus for the business remains unchanged. First,distribution must continue to expand. While the ratings performance of theHallmark Channel ranks in the top ten of cable networks according to Nielsen,in terms of distribution, the Hallmark Channel is only in the top 40 cablenetworks. Increased distribution can have a positive impact on our subscriberrevenue (depending on any subscriber acquisition fees incurred) and shouldincrease our advertising revenue as advertisers pay higher rates to cablenetworks that are more broadly distributed. However, combining growingdistribution with increasing ratings is more powerful in terms of advertisingrevenue. As a result, the Hallmark Channel will continue to focus on enhancingits programming schedule through the acquisition of new series, additionaloriginal movies such as the recent Mystery Movies, and through uniquescheduling concepts.

We plan to develop the Hallmark Movie Channel as anadditional revenue source. It can play a role in terms of contract renewalswith the various distributors. It will generate revenue in 2006 and asdistribution continues to expand, the financial contribution of the HallmarkMovie Channel may continue to grow.

In addition, we plan to focus on library sales. Ourfilm library is a large collection of award winning movies and mini-series,which is unique in that it is such a large collection of family oriented films.

All of the above needs tobe accomplished in a cost efficient fashion. Cost management will continue tobe a focus for the management of Crown Media Holdings.

*Current Challenges*

The Hallmark Channel faces challenges on thedistribution front. The distribution agreements are important because theyaffect our number of subscribers, which in turn has a major impact on oursubscriber fees, the number of persons viewing our programming, and thus ratescharged for advertising. We have an ongoing focus on growing our subscriberbase. The current and long-term distribution challenges will be renewing our distributionarrangements with the multiple system operators as they expire. See “RiskFactors Relating to Our Business” and “Channels-Distribution” in Item 1Business above. While the economics of the renewals and potential cashincentive payments are unknown and could have a significant impact on ourbusiness, we believe that the success of the Hallmark Channel in terms ofratings and the environment we have created with our programming schedule willenhance our renewal discussions. We also believe that our ability to offer tomultiple systems operators a second channel, the Hallmark Movie Channel, aswell as programming for their other distribution platforms such as VOD, arevalue added components of the renewal equation. In October 2005, werenewed our distribution agreement with one of the major distributors in theUnited States.

Domestic telephone companies are entering into thebusiness of distributing television channels to households through theirwire-lines. We have reached agreement with several telephone companies whichpermit the carriage of the Hallmark Channel and Movie Channel and arenegotiating with others. We expect that subscribers to these telephone serviceswill in large part be customers previously served by existing cable televisioncompanies and satellite television companies. To date, subscribers and revenuesthrough telephone companies has been insignificant.

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Three factors have contributed to the ratingsimprovements of the Channel: acquired series and movies, original productionsand marketing. Acquired series ranging from *Perry Mason* to *Walker, Texas Ranger* and *M*A*S*H* haveconsistently delivered strong ratings across all day-parts. Originalproductions are our most high profile programs and generate the Channel’shighest ratings. Original productions are significant in helping ourdistribution and advertising sales teams sell the channel. Substantially all ofour original programming is provided by RHI Entertainment Distribution.

To continue the ratings growth and enhance the demographicsof our viewers, the Hallmark Channel must continue to invest in programming andmarketing. For the Hallmark Channel to continue to increase its attractivenessto distributors and advertisers, it has to increase its ratings and draw ayounger more upscale audience, which is generally more attractive toadvertisers.

Delivering strong ratingsgrowth to larger audiences has made it possible for our advertising sales togrow rapidly over the last few years. To advertisers, the Hallmark Channeloffers a strong brand, positive environment and family friendly programmingwith a successful growth pattern. These characteristics have enabled thechannel to sell to advertisers in the packaged goods and pharmaceuticalindustries. The next step for the Hallmark Channel will be to deliver theyounger more upscale audience needed to gain advertisers from the morelucrative financial services and automotive industries.

*Strategic Alternatives for the Company*

See “StrategicAlternatives for the Company” in Item 1 above *.*

*InternationalBusiness*

In April 2005, the Company completed the saleof  its international business to a group of investors comprised of EquityPartners, 3i and U.K. executive David Elstein (collectively, “Sparrowhawk,” the“buyer” or the “buyer of  international business”). The sale included theinternational versions of the Hallmark Channel distributed outside the UnitedStates, the international rights to over 580 titles in the Crown Media filmlibrary, and the Network Operations Center based in Denver, Colorado. TheCompany received cash proceeds of $209.3 million, net of the prepaymentdescribed below, and recognized an accounting loss of $6.5 million from thesale. Approximately $4.7 million of transaction costs were incurred by theCompany in connection with the sale.

In accordance with the conditions of the sale andsubsequent settlement, the Company has accrued $26.8 million at December 31,2005, which represents the estimated present value of the cash expected to bepaid by the Company to or on behalf of the buyer at various times through December 31,2015. Included in this amount was $16.7 million at the sale date, of estimatedpayments, which were determined using the contractual payments due on certainlease arrangements that were assumed by the buyer. The Company is obligated toreimburse the buyer for these lease payments at or about the same time thebuyer is obligated to pay the lessor. Also, the Company estimated a liabilityof approximately $4.5 million to pay the estimated residual and participationcosts that the buyer would otherwise be obligated to pay to third partiesthrough April 2015 in connection with film library sales. The amount ofthis liability could fluctuate based upon the actual internal usage or sales ofthese films by the buyer. Any revisions to these estimated liabilities will bereflected as gain (loss) from the sale of discontinued operations in futureperiods.

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In the fourth quarter of 2005, the Company recordedcharges of $4.6 million to recognize additional costs for the settlement ofcertain disputed items and claims of the buyer. These charges included $3.4 millionrelated to the interpretation of working capital representations used indetermining the original sales price and $0.9 million related to disputedoperating costs incurred at the time of the closing date of the sale. Thesepost closing adjustments are covered by the accrual described in the precedingparagraph.

The Company will continue to use the NetworkOperations Center sold to Sparrowhawk for the distribution of the domesticchannel pursuant to a $25.3 million, seven year technical services agreementwith the buyer. The Company made a prepayment under the technical servicesagreement to the buyer in the amount of $12.7 million upon closing of the saletransaction and the balance is payable monthly in equal installments throughthe expiration of the agreement. The unused portion of the prepayment isclassified as Prepaid and Other Assets in the accompanying condensedconsolidated balance sheet and will be amortized to operating expense over thelife of the contract. A deferred credit of $7.6 million was recorded to reflectthe amount by which the $25.3 million contract exceeded the estimated fairvalue of the related services. The deferred credit will be amortized over thelife of the contract, resulting in a reduction of operating expenses in futureperiods.

Subsequent to the sale,the Company has no continuing economic involvement with the operations of theinternational business.

*Impairment ofAssets*

*Pleasesee Note 3 of Notes to the Consolidated Financial Statements in this Report forinformation on impairment charges for 2005.*

**Revenue**

Our revenue consistsprimarily of subscriber fees, advertising and film asset license fees.

*Subscriber Fees*

Subscriber fees are generally payable to us on a persubscriber basis by distributors for the right to carry our channels. We havepaid certain distributors up-front subscriber acquisition fees to carry ourchannels. Subscriber acquisition fees that we pay are capitalized and amortizedover the contractual term of the applicable distribution agreement as areduction in subscriber fee revenue. If the amortization expense on acumulative basis exceeds the revenue recognized on a per distributor basis, theexcess amortization is included as a component of cost of services.

Rates we receiveper subscriber vary according to:

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

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

·       thepackaging arrangements for the channel; and

·       othercommercial terms and length of the contract term.

We are in continuous negotiations with our existingdistributors to increase our subscriber base in order to enhance ouradvertising results. We are often subject to requests by distributors to paysubscriber acquisition fees for additional carriage or to waive or accept lowersubscriber fees if certain numbers of additional subscribers are provided. Wealso may help fund the distributors’ efforts to market our channels or we maypermit distributors to offer limited promotional periods without payment ofsubscriber fees. As we continue our efforts to add subscribers, our subscriberrevenue will continue to be negatively affected 

26

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by subscriber acquisitionfee amortization, waiver of subscriber fees and bulk discounts resulting fromthe attainment of certain subscriber levels; however, we believe that as aresult of these measures, our subscriber levels will increase which in turnwill allow us to attract additional advertisers and command higher advertisingrates.

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

Our subscriber countdepends on the number of distributors carrying the Hallmark Channel and thesize of such distributors as well as the program tiers on which our channel iscarried by these distributors. From time to time, we experience decreases inthe number of subscribers as promotional periods end, or as a distributorarrangement is amended or terminated by us or the distributor. Any decreases insubscribers due to these changes to distribution arrangements in the thirdquarter of 2005 have not been significant. Management analyzes the estimatedeffect each new or amended distribution agreement will have on revenues andcosts. Based upon these analyses, management endeavors to achieve a faircombination of subscriber commitments and subscriber acquisition fees with eachof our domestic distributors.

*Advertising*

Advertising sales generally are made on the basis of aprice per advertising spot or per unit of audience measurement (for example, aratings point). Thus, our advertising revenues are heavily dependent on numberof people viewing our channel. Rates vary based on audience demographics, timeperiod and ratings.

Our advertising rates aregenerally an agreed upon price per unit of audience measurement in return for aguaranteed commitment by the advertiser. We commit to provide advertiserscertain rating levels and the resulting levels of viewers watching theiradvertising material. Thus, our advertising revenue is a function of the ratingsgarnered by the channel and the number of subscribers receiving the channel.Revenue is recorded net of estimated delivery shortfalls, which are usuallysettled by providing the advertiser additional advertising time. Advertisingrates also vary by time of year due to seasonal changes in televisionviewership.

*Film Asset LicenseFees*

The Company generatesrevenue from the film assets by granting licenses to exhibit the films to thirdparties in the United States. We are also using the films as programming forthe Hallmark Channel and the Hallmark Movie Channel. Customers for our filmassets consist of other television channels, syndicators, home videodistributors and brokers who resell rights to our film assets. License fees forour film assets are generally negotiated based upon the perceived quality ofthe films, the size of the potential audience who will be viewing theprogramming, the means of distribution or exhibition and the length of theairing window. The market for our film library is typically seasonal, with overhalf of the annual sales occurring in the fourth quarter. This seasonality isdue to the timing of our customers’ program scheduling activities.

**Cost of Services**

Our cost of servicesconsists primarily of program license fees, amortization of our film assets;subscriber acquisition fee expense; the cost of signal distribution;administration, distribution and other exploitation of our film assets; and thecost of promotional segments that are aired between programs. We 

27

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expectcost of services to continue to increase in the future as we expand ourexisting distribution universe and third party programming to support ouradvertising strategy.

**CriticalAccounting Policies, Judgments and Estimates**

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

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

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

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

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

On a quarterly basis, the Company assesses whetherevents or circumstances have changed indicating that the fair value of a filmis lower than its unamortized cost or carrying value. If the carrying value ofany individual film asset exceeds its fair value, the film asset iswritten-down to its estimated fair value. A discounted cash flow model, basedon management’s anticipated ultimate future revenue of the film, is used toestimate the fair value of the individual films. The Company considers thefollowing factors, among others, in estimating ultimate future revenue for eachfilm:  (a) the operating environmentexpected for the next several years, (b) the size of the library as awhole, (c) historical license fee revenue per film, (d) each title’sage, quality, and marketability, (e) existing sales plans including theamount of product desired to be sold each year, (f) future performanceestimates, (g) assumptions and estimates underlying past and futureestimates, and (h) risk factors that could effect future operations of theLibrary. In estimating a film’s fair value, the Company considers those cashoutflows necessary to generate the film’s cash inflows such as exploitation,residual and participation costs and taxes. The discount rate used in theCompany’s discounted cash flow model is based upon management’s estimate of therate a lender would require related to the risks and uncertainties surroundingthe timing and probability of the cash flow estimates.

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

For use of the film assetson the Hallmark Channel and the Hallmark Movie Channel, the Company estimatesthe fair value of the internal usage based upon the portion of the film’sultimate revenues attributable to the term of the license window. The Companyfirst calculates the amount of cost attributable to the internal use using theindividual-film-forecast-computation method described above and then expensessuch amounts ratably over the term of the license window.

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***Allowance for Doubtful Accounts***

Theallowance for doubtful accounts is based upon the Company’s assessment ofprobable loss related to uncollectible accounts receivable. The Company uses anumber of factors in determining the allowance, including, among other things,collection trends.

***Program License Fees***

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

Estimatesof net realizable value for program license fees are determined using futureestimated advertising revenues and anticipated patterns of programming usage ona day part basis as it pertains to programming licensed to the Channel. Theseestimates of expected annual future estimated revenues are compared to net bookvalue of the program license fee assets to determine if the programming assetsare expected to be recovered. Where the analysis indicates the costs are inexcess of the estimated net realizable value, impairment is recognized.

***Subscriber Acquisition Fees***

Subscriber acquisition fees aregenerally required to be paid to obtain carriage on domestic pay distributorssystems. Under certain of these agreements with pay distributors, Crown MediaUnited States is obligated to pay subscriber acquisition fees if definedsubscriber levels are met or in order to obtain additional carriage of theHallmark Channel by those pay distributors. Such costs are accrued whenCrown Media United States receives notice from the distributors that they havemet the contractual penetration percentage or subscriber count.

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

***Long-Lived Assets***

The Company reviews long-lived assets, other than goodwilland other intangible assets with indefinite lives, for impairment wheneverfacts and circumstances indicate that the carrying amounts of the assets maynot be recoverable. An impairment loss is recognized if the carrying amount ofthe asset is not recoverable and exceeds its fair value. Recoverability ofassets to be held and used is measured by comparing the carrying amount of anasset to the estimated undiscounted future net cash flows expected to begenerated by the asset. If the asset’s carrying value is not recoverable, animpairment charge is recognized for the amount by which the carrying amount ofthe asset exceeds its fair value. The Company determines fair values by using acombination of comparable market values and discounted cash flows, as appropriate.

Goodwill is reviewed forimpairment annually on November 30 or whenever an event occurs or there isa change in circumstances that indicates fair value might be below carryingvalue. Goodwill is carried at historical cost if the estimated fair value isgreater than the carrying amounts. However, if estimated fair 

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value isless than the carrying amount, goodwill is reduced to estimated fair valuethrough an impairment charge to the Company’s consolidated statements ofoperations.

***Revenue Recognition***

Subscriber revenue from paytelevision distributors is recognized as revenue when an agreement is executed,programming is provided, the price is determinable, and collectibility isreasonably assured. Subscriber fees from pay television distributors arerecorded net of amortization of subscriber acquisition costs in accordance withEmerging Issues Task Force No. 01-9 (“EITF No. 01-9”), *Accounting for Consideration Given by a Vendor to a Customer (Includinga Reseller of the Vendor’s Products)*. If the amortization expenseexceeds the revenue recognized on a per distributor basis, the excessamortization is included as a component of cost of services. In 2005,$2.3 million and $920,000, which previously were reported as subscriberacquisition fee amortization expense, have been reclassified as reductions ofsubscriber fees revenue for the years ended December 31, 2003 and 2004,respectively.

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

Revenuefrom film asset licensing agreements is recognized in accordance with Statementof Position (“SOP”) 00-02,*Accountingby Producers or Distributors of Films*. Revenues are recognized whenall of the following have occurred:  anagreement is executed, the film is available for exhibition by the licensee,the license fee is fixed or determinable, collectibility is reasonably assuredand the cost of each film is known or reasonably determinable. Revenue fromfilm asset licensing agreements containing multiple film titles is allocatedamong the various film titles based on their relative estimated fair values.Payments received from licensees prior to the availability of a film arerecorded as deferred revenue. Fees payable with terms in excess of one year arediscounted for revenue recognition purposes at the customer’s estimatedincremental borrowing rate in accordance with Accounting Principles Board (“APB”)Opinion No. 21, *Interest on Receivablesand Payables.*

**Restatementof Nine Months Consolidated Statement of Cash Flows**

See Note 2 of ConsolidatedFinancial Statements for information on a restatement of our unauditedconsolidated statement of cash flows for the nine months ended September 30,2005.

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

***Hallmark Transactions***

In 2006 and in prioryears, we entered into a number of significant transactions with Hallmark Cardsand its subsidiaries. These transactions include, among other things,programming, trademark licenses, administrative services, a line of credit, aTax Sharing Agreement, the issuance of a $400.0 million senior unsecurednote, a note payable and a waiver agreement.

*Bank CreditFacility*

As part of an amendment toour bank credit facility in March 2005, Hallmark Cards has provided aletter of credit to the lenders for an amount equal to the maximum amount whichmay be borrowed under the bank credit facility. Hallmark has also provided tous a waiver and standby purchase agreement stating 

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thatHallmark Cards and its subsidiaries will not demand payments of variousobligations owed by us to subsidiaries of Hallmark Cards, including draws underthe above mentioned letter of credit until May 31, 2007, and providing usthe right to cause Hallmark Cards to purchase all of the bank lenders’ interestin loans to us pursuant to Amendment No. 9 to the bank credit facility. TheCompany entered into Amendment No. 9 with the bank credit facility in March 2006.See “Bank Credit Facility” below.

*Tax SharingAgreement*

In March 2003, theCompany became a member of Hallmark Cards consolidated federal tax group andentered into a Tax Sharing Agreement with Hallmark Cards, which was amended atthe time the Company issued the senior unsecured note to HC Crown. We accountfor income taxes as if Crown Media Holdings were a separate taxpayer.Accordingly, Hallmark Cards’ ability to use our tax losses does not impact ourassessment of the need for a valuation allowance on deferred tax assets,including future tax losses. Any payments received from Hallmark Cards underthe Tax Sharing Agreement are recorded as an increase in paid-in capital. Forinformation regarding the Tax Sharing Agreement, please see Notes 13 and16 to the Notes to Consolidated Financial Statements contained in this Report.

*Senior UnsecuredNote*

On August 5, 2003,Crown Media Holdings repurchased all of the outstanding trust preferredsecurities of Crown Media Trust and related contingent appreciationcertificates issued by the Company. The securities were repurchased for approximately$329.1 million. Funds for this repurchase were obtained from the proceeds fromthe issuance of a senior unsecured note issued to HC Crown in the amount of$400.0 million. For information regardingour senior unsecured note, please see Note 12 to the Notes to ConsolidatedFinancial Statements contained in this Report.

*NICC LicenseAgreement*

For information regarding the amendment to our licenseagreement with NICC, please see Item 13 “Certain Relationships and RelatedTransactions” contained in this Report.

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

In the table below, we provide selected historicalconsolidated financial and other data of Crown Media Holdings and itssubsidiaries. The following selected consolidated statement of operations datafor the years ended December 31, 2003, 2004 and 2005, are derived from theaudited financial statements of Crown Media Holdings and its subsidiaries. Thisdata should be read together with the consolidated financial statements andrelated notes included elsewhere in this Annual Report on Form 10-K.

| ** **                                               | ** ** | ** **                                  | ** ** | **Percent Change** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------|------------|
| ** **                                               | ** ** | **Years ended December 31,** | ** ** | **2004 vs.**       | ** ** | **2005 vs.** | ** ** |
| ** **                                               | ** ** | **2003**                                    | ** ** | **2004**                | ** ** | **2005** | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenues:                                                |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Subscriber fees                                          |       | $                                           | 4,329      |                    | $          | 9,874 |   | $ | 18,746 |   |   | 128 | % |   |   | 90 | % |   |
| Advertising                                              |       | 77,550                                      |       | 106,327                 |       | 146,115 |   |   | 37 | % |   |   | 37 | % |   |
| Film asset license fees                                  |       | 17,548                                      |       | 22,035                  |       | 21,693 |   |   | 26 | % |   |   | -2 | % |   |
| Sublicense fees and other revenue                        |       | 6                                           |       | —                  |       | 10,830 |   |   | -100 | % |   |   | 100 | % |   |
| Total revenues                                           |       | 99,433                                      |       | 138,236                 |       | 197,384 |   |   | 39 | % |   |   | 43 | % |   |
| Cost of Services:                                        |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Programming costs                                        |       | 68,275                                      |       | 89,878                  |       | 120,577 |   |   | 32 | % |   |   | 34 | % |   |
| Amortization of film assets                              |       | 12,965                                      |       | 28,905                  |       | 51,619 |   |   | 123 | % |   |   | 79 | % |   |
| Impairment of film assets                                |       | —                                      |       | 22,003                  |       | 25,542 |   |   | 100 | % |   |   | 16 | % |   |
| Subscriber acquisition fee amortization                  |       | 22,961                                      |       | 26,020                  |       | 35,928 |   |   | 13 | % |   |   | 38 | % |   |
| Operating costs                                          |       | 13,351                                      |       | 11,035                  |       | 21,606 |   |   | -17 | % |   |   | 96 | % |   |
| Total cost of services                                   |       | 117,552                                     |       | 177,841                 |       | 255,272 |   |   | 51 | % |   |   | 44 | % |   |
| Selling, general and administrative expense              |       | 48,060                                      |       | 58,515                  |       | 59,633 |   |   | 22 | % |   |   | 2 | % |   |
| Marketing expense                                        |       | 16,619                                      |       | 16,477                  |       | 24,160 |   |   | -1 | % |   |   | 47 | % |   |
| Reorganization expense (recovery)                        |       | 993                                         |       | —                  |       | — |   |   | -100 | % |   |   |   |   |   |
| Loss from continuing operations before interest  expense |       | (83,791                                     | )          | (114,597                | )          | (141,681 | ) |   | 37 | % |   |   | 24 | % |   |
| Loss on early extinguishment of debt                     |       | (39,812                                     | )          | —                  |       | — |   |   | -100 | % |   |   |   |   |   |
| Guaranteed preferred beneficial interest accretion       |       | (23,218                                     | )          | —                  |       | — |   |   | -100 | % |   |   |   |   |   |
| Interest expense                                         |       | (39,758                                     | )          | (60,179                 | )          | (73,856 | ) |   | 51 | % |   |   | 23 | % |   |
| Loss from continuing operations                          |       | (186,579                                    | )          | (174,776                | )          | (215,537 | ) |   | -6 | % |   |   | 23 | % |   |
| Loss from discontinued operations                        |       | (35,574                                     | )          | (142,030                | )          | (10,683 | ) |   | 299 | % |   |   | -92 | % |   |
| Loss on sale of discontinued operations                  |       | —                                      |       | —                  |       | (6,538 | ) |   |   |   |   |   | 100 | % |   |
| Cumulative effect of change in accounting principal      |       | 17,000                                      |       | —                  |       | — |   |   | -100 | % |   |   |   |   |   |
| Net loss                                                 |       | $                                           | (205,153   | )                       | $          | (316,806 | ) | $ | (232,758 | ) |   | 54 | % |   |   | -27 | % |   |
| **Other Data:**                                          |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Net cash used in operating activities                    |       | $                                           | (126,437   | )                       | $          | (15,198 | ) | $ | (121,943 | ) |   | -88 | % |   |   | 702 | % |   |
| Capital expenditures                                     |       | $                                           | (2,544     | )                       | $          | (878 | ) | $ | (504 | ) |   | -65 | % |   |   | -43 | % |   |
| Proceeds from disposition of international business      |       | $                                           | —     |                    | $          | — |   | $ | 221,979 |   |   |   |   |   |   | 100 | % |   |
| Net cash provided by (used in) financing activities      |       | $                                           | 165,270    |                    | $          | 66,565 |   | $ | (72,329 | ) |   | -60 | % |   |   | -209 | % |   |
| Net cash used in discontinued operations                 |       | $                                           | (33,698    | )                       | $          | (44,127 | ) | $ | (14,758 | ) |   | 31 | % |   |   | -67 | % |   |
| Total domestic day household ratings(1)(3)               |       | 0.503                                       |       | 0.600                   |       | 0.707 |   |   | 19 | % |   |   | 18 | % |   |
| Total domestic primetime household ratings(2)(3)         |       | 0.718                                       |       | 0.871                   |       | 1.033 |   |   | 21 | % |   |   | 19 | % |   |
| Subscribers at  year end                                 |       | 56,010                                      |       | 64,565                  |       | 70,666 |   |   | 15 | % |   |   | 9 | % |   |

 

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(1)             Total day is the time period measured from the timeeach day the broadcast of commercially sponsored programming commences to thetime such commercially sponsored programming ends.

(2)             Primetime is defined as 8:00—11:00 P.M. in theUnited States.

(3)             These Nielsen ratings are for the timeperiod January 1 through December 31.

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***Results of Operations***

*YearEnded December 31, 2004 Compared to Year Ended December 31, 2005*

*Revenue.*

Ourrevenue increased 43% for the year ended December 31, 2005. Our 90% increase in subscriber fee revenue forthe year ended December 31, 2005, was the result of the expiration ofwaived subscriber fees for certain of our domestic distributors and an increasein subscribers. Subscriber acquisition fee amortization recorded as a reductionof revenue was $12.1 million for theyear ended December 31, 2005, and $12.2 million for the comparableperiod in 2004, as a result of fees required under distribution agreementsnegotiated in prior years and a renewal of a major distribution agreement negotiatedin 2005. Subscriber counts have increased as a result of previously amendeddistribution agreements in the United States, which provide for financialincentives for distribution growth, as well as the ratings success of theHallmark Channel. The ability to increase our subscriber base is important bothin terms of growing our subscriber and advertising revenues.

The 37% increase in advertisingrevenue reflects the following during 2005: the 9% growth in subscribers;higher household ratings; and higher advertising rates resulting from theincrease in distribution and viewership. Additionally, the number ofadvertisers on our channel rose from 403 at December 31, 2004, to 414 at December 31,2005.

Revenue from the sale of our film assets totaled $21.7million for theyear ended December 31, 2005, compared with $22.0 million for thecomparable period in 2004. Sublicense fees and other revenue for the year endedDecember 31, 2005, was $10.8 million primarily due to the sub-licensing of*Little House on the Prairie* to a thirdparty.

*Costof services.  **Cost of services as a percent of revenue increased to130% for the year ended December 31, 2005, as compared to 129% in theprior year’s period. This increase was related to the 43% increase in revenueexplained above.*

Total programming costs for the year ended December 31, 2005, increased34% due to our focus on higher qualityseries programming such as *M*A*S*H*, *JudgingAmy,*and *J.A.G*.and the related amortization. Inaddition, the Hallmark Channel introduced the Mystery Movies in the firstquarter of 2005, which also involve higher costs and related amortization.

Non-cash impairment charges in a total amount of $22.0million and $25.5 million related to our film assets for the years ended December 31,2004 and 2005, respectively. The impairment charges for the film assets wererecognized in the third and fourth quarters of 2005 and the third and fourthquarters of 2004 based upon then current projections for the sales and internaluse of the film assets.

Amortization of film assets increased 79% for the year ended December 31,2005, compared to the same periods in 2004 primarily as a result of theimpairment of our film assets and related recalculation of amortization and theuse of the film assets by our Movie Channel. We anticipate an increase in theamortization of our film assets during 2006 because of the use of the filmassets by our Movie Channel. The recalculation of amortization results fromrevisions of the estimates of ultimate revenue on certain film products.

Generally, our distribution agreements have requiredthe Company to pay subscriber acquisition fees to distributors for additionalsubscribers. Our subscribers increased from 64.6 million at December 31,2004, to 70.7 million at December 31, 2005, and the Company incurredadditional subscriber acquisition fees for this increase in subscribers. TheCompany amortizes these costs over the remaining life of the distributionagreement, which has resulted in a 38% increase in our subscriber acquisition feeamortization expense for the year ended December 31, 2005, as compared tothe prior year.

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Operating costs for the year ended December 31, 2005, increased $10.6 millionprimarily due to a $8.8 million increase in bad debt expense, a $565,000increase in equipment expense, $536,000 increase in playback, transponder anduplink expense, and a $1.1 million increase in amortization expense related toour capital lease placed into service during fourth quarter 2004.

*Selling,general and administrative expense.*   Our selling,general and administrative expense increased for the year ended December 31, 2005, due to an increase inconsulting expense and audit fees associated with our regulatory requirementsunder the Sarbanes-Oxley Act and offset by a decrease in compensation expenseassociated with our restricted stock units.

*Marketingexpense.*   For the year ended December 31,2005, our marketing expense increased 47% primarily due to the 2005 MysteryMovie marketing campaign for the Hallmark Channel. In order to build upon thesuccess of our 2004 Holiday promotion and to assist with the sale of ouradvertising inventory in the upfront market, the Company commenced the MysteryMovie franchise in the first quarter of 2005. The prior year’s marketingactivity was significantly less as there were not as many special programmingevents in the first half of 2004.

*Interestexpense.*   Interest expense increased 23% for theyear ended December 31, 2005, due to interest on our $400.0 million seniorunsecured note payable, which increased by $4.6 million for the year ended December 31,2005, as compared to the prior year, and interest on our $75.0 millionpromissory note, which increased by $1.8 million for the year ended December 31,2005, as compared to the prior year. Interest on our senior unsecured notepayable increased as accrued interest was added to the principal. Interestincreased related to our promissory note due to a higher interest rate.Interest expense also increased $1.5 million related to our interest expense onour capital lease for a transponder. Additionally, a portion of interestexpense, which was formerly payable to our bank syndicate and is now payable toHC Crown as a result of Amendment No. 8 of our credit facility. was $3.2million. In October 2005, we converted $132.8 million of license feespayable into a note payable to Hallmark Entertainment Distribution and therelated interest expense was $2.4 million for the year ended December 31,2005.

*Lossfrom Continuing Operations.**  *Loss from continuing operations for the year ended December 31,2004 and 2005, was $174.8 million and $215.5 million, respectively. Ourloss from continuing operations increased primarily due to (1) a $7.7million increase in marketing expense to continue to drive ratings; (2) increasein loss generated from library sales and the internal use of the libraryproduct on the Channel; (3) increase in selling, general andadministrative expense described above; and (4) an increase in interestexpense of $13.7 million as explained above due to relatively higher borrowingsduring 2005 as compared to the prior year period. These increases are partiallyoffset by subscriber and advertising revenue increases, which were greater thanthe increases in programming costs.

*Loss from DiscontinuedOperations.**  *Lossfrom discontinued operations for the years ended December 31, 2004 and2005, was $142.0 million and $10.7 million, respectively. Loss fromdiscontinued operations was less for the year ended December 31, 2005, ascompared to the comparable period for 2004, because the Company sold theinternational business on April 26, 2005.

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

*Revenue.*

Ourrevenue increased 39% for the year ended December 31, 2004. Our 128% increase in subscriber fee revenue forthe year ended December 31, 2004, was the result of the expiration ofwaived subscriber fees for certain of our domestic distributors and an increasein subscribers. Subscriber acquisition fee amortization recorded as a reductionof revenue was $12.2 million for theyear ended December 31, 2004, and $9.4 million for the comparableperiod in 2003, as a result of fees required under distribution agreementsnegotiated in previous years.

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The 37% increase in advertisingrevenue reflects the following during 2004: the 15% growth in domestic; higherhousehold ratings; and higher advertising rates resulting from the increase indistribution and viewership. Additionally, the number of advertisers on ourdomestic channel rose from 326 at December 31, 2003, to 403 at December 31,2004.

Revenue from the sale of our film assets totaled $22.0million for theyear ended December 31, 2004, compared with $17.5 million for thecomparable period in 2003.

*Costof services.**  *Cost ofservices as a percent of revenue decreased to 8% for the year ended December 31, 2004, as compared to 13% in theprior year’s period. These decreases were related to the 39% increase inrevenue explained above.

Non-cash impairment charges in a total amount of $22.0million related to our film assets as explained above.

Amortization of film assets increased 123% for the year ended December 31,2004, compared to the same periods in 2003 primarily as a result of theimpairment of our film assets and related recalculation of amortization. Totalprogramming costs for the year ended December 31, 2004, increased 32% due to the increased costs associated with theamortization of certain programming such as *M*A*S*H*and *J.A.G.* for our domestic channel.

Operating costs for the year ended December 31, 2004, decreased $2.3 millionprimarily due to a $929,000 decrease in bad debt expense and a $909,000decrease in sales commission expense.

*Selling,general and administrative expense.**  *Our selling, general and administrative expenseincreased for the year ended December 31,2004, primarily because of $7.7 million of retention program expenserelated to the proposed sale of the international business. Additionally, werecorded $11.5 million of restricted stock unit expense for the year ended December 31,2004, as compared to $5.9 million in the prior year period.

*Lossfrom Continuing Operations.**  *Loss from continuing operations for the year ended December 31, 2003 and2004, was $186.6 million and $174.8 million, respectively. Our loss fromcontinuing operations decreased primarily due to subscriber and advertisingrevenue increasing greater than programming costs. These decreases arepartially offset by an increase in selling, general and administrative expensedescribed above, and an increase in interest expense of $20.4 million ascompared to the prior year period. Guaranteed preferred beneficial interestaccretion in 2003 related to future obligations on our debentures issued on December 17,2001, in connection with the trust preferred securities of Crown Media Trust.The 2003 expense only included guaranteed preferred beneficial interestaccretion for a partial year due to the repurchase of our preferred securitieson August 5, 2003. Interest expense increased due to interest on our $400.0 million senior unsecured notepayable commencing August 5, 2003, which amounted to $43.8 millionfor the year ended December 31,2004 compared to $17.1 million in the prior year period. The terms ofour senior unsecured note payable do not require any cash payment for interestor principal until August 2007.

*Loss from DiscontinuedOperations.**  *Lossfrom discontinued operations for the years ended December 31, 2003 and2004, was $35.6 and $142.0 million, respectively. Loss from discontinuedoperations was higher for the year ended December 31, 2004, as compared tothe comparable period for 2003, because of the impairment of film assets andtechnical equipment related to the sale of the international business.

***Liquidity and Capital Resources***

Cash used in operatingactivities from continuing operations was $15.2 million and $121.9 million forthe years ended December 31, 2004 and 2005, respectively. Cash was usedprimarily to fund operating 

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expendituresrelated to losses from continuing operations of $174.8 million and $215.6million for the years ended December 31, 2004 and 2005, respectively. Theincrease in cash flow used in operations was primarily due to an increase ofpayments to Hallmark Entertainment Distribution for programming of $88.4million ($26.6 million of which is included in the increase of prepaid andother assets) and an increase of $12.8 million in subscriber acquisition feepayments.

Cash used in investingactivities was $878,000 for the year ended December 31, 2004. Cashprovided by investing activities was $213.1 million for the year ended December 31,2005. This increase is primarily due to proceeds from the sale of ourinternational business of $222.0 million.

Cash provided by financing activitieswas $66.6 million for the year ended December 31, 2004. Cash used infinancing activities was $72.3 million for the year ended December 31,2005. During the year ended December 31, 2005, we repaid $195.0 millionunder our bank credit facility. Additionally, we borrowed $95.0 million underour bank credit facility to repay certain programming obligations to HallmarkCards affiliates, pay severance and RSU settlements for certain employees ofthe international business and to meet our operating demands during the yearended December 31, 2005. We received $56.6 million and $56.1million (including the $30.0 million offset to intercompany debt during thethird quarter of 2005) under the Tax Sharing Agreement during 2004 and 2005,respectively.

Cash used in discontinuedoperations was $44.1 million and $14.8 million for the years ended December 31,2004 and 2005, respectively. Cash used in discontinued operations decreased asthe international sale was completed in April 2005.

Cash used in operating activitieswas $126.4 million and $15.2 million for the years ended December 31, 2003and 2004, respectively. Cash was used primarily to fund operating expendituresrelated to losses from continuing operations of $186.6 million and $174.8million for the years ended December 31, 2003 and 2004, respectively. Thedecrease in cash flow used in operations was primarily due to higher domesticadvertising revenue.

Cash used in investingactivities was $2.5 million and $878,000 for the years ended December 31,2003 and 2004, respectively. Cash used in investing activities decreasedprimarily due to expenditures for our new domestic channel website being placedinto service during 2003.

Cash provided by financingactivities was $165.3 million and $66.6 million for the years ended December 31,2003 and 2004, respectively. During the years ended December 31, 2003 and2004, we received proceeds of $49.4 million and $56.6 million, respectively,from our Tax Sharing Agreement with Hallmark Cards. We borrowed $70.0 millionunder our line of credit with HC Crown to meet our operating demands during theyear ended December 31, 2003. Primarily from the proceeds of the $400.0 millionsenior unsecured note, on August 5, 2003, we redeemed the trust preferredsecurities and paid the private placement holders $326.7 million of principal,call premium and minimum return and we repaid $76.3 million on our bank creditfacility.

Cash used in discontinuedoperations was $33.7 million and $44.2 million for the years ended December 31,2003 and 2004, respectively. Cash used in discontinued operations primarilyincreased due to higher payments for program license fees to third parties anddecreased cash receipts due to the announcement of the sale of theinternational business.

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The following table aggregates all of our contractualcommitments as of December 31, 2005.

| ** **                                                                           | ** ** | **Scheduled Payments by Period** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Contractual Obligations**                                                     | ** ** | ** **                                      | ** ** | **Total** | ** ** | **Less than 1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
| Credit facility and interest payable                                                 |       | $                                               | 210.2      |   |   | $ | 0.2 |   |   |   | $ | 210.0 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Company obligated mandatorily redeemable preferred  interest, including accretion(1) |       | 25.0                                            |       |   | — |   |   |   | 5.0 |   |   |   | 20.0 |   |   |   | — |   |   |
| HC Crown line of credit and interest payable                                         |       | 86.3                                            |       |   | — |   |   |   | 86.3 |   |   |   | — |   |   |   | — |   |   |
| Senior unsecured note to HC Crown, including  accretion(2)                           |       | 596.6                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 596.6 |   |   |
| Note payable to Hallmark Cards affiliate                                             |       | 135.2                                           |       |   | — |   |   |   | 135.2 |   |   |   | — |   |   |   | — |   |   |
| Capital lease obligations                                                            |       | 16.8                                            |       |   | 0.6 |   |   |   | 1.4 |   |   |   | 1.7 |   |   |   | 13.1 |   |   |
| Operating leases(3)                                                                  |       | 14.1                                            |       |   | 4.3 |   |   |   | 6.3 |   |   |   | 3.0 |   |   |   | 0.5 |   |   |
| Other obligations                                                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Program license fees payable to non-affiliates                                       |       | 214.1                                           |       |   | 27.8 |   |   |   | 107.4 |   |   |   | 64.2 |   |   |   | 14.7 |   |   |
| Program license fees payable to affiliates                                           |       | 26.1                                            |       |   | 25.4 |   |   |   | 0.7 |   |   |   | — |   |   |   | — |   |   |
| Program license fees payable for non-affiliate future  windows(3)                    |       | 70.7                                            |       |   | 16.3 |   |   |   | 51.3 |   |   |   | 2.6 |   |   |   | 0.5 |   |   |
| Program license fees payable for affiliate future  windows(3)(4)                     |       | 193.0                                           |       |   | 73.2 |   |   |   | 70.8 |   |   |   | 35.6 |   |   |   | 13.4 |   |   |
| Subscriber acquisition fees                                                          |       | 12.2                                            |       |   | 12.2 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Deferred compensation and interest                                                   |       | 3.0                                             |       |   | — |   |   |   | 3.0 |   |   |   | — |   |   |   | — |   |   |
| Payable to buyer of international business                                           |       | 18.4                                            |       |   | 10.0 |   |   |   | 7.5 |   |   |   | 0.9 |   |   |   | — |   |   |
| Other payables to buyer of international business                                    |       | 7.1                                             |       |   | 1.0 |   |   |   | 2.1 |   |   |   | 1.6 |   |   |   | 2.4 |   |   |
| Payable to Hallmark Cards affiliates                                                 |       | 70.0                                            |       |   | — |   |   |   | 70.0 |   |   |   | — |   |   |   | — |   |   |
| Total Contractual  Cash Obligations                                                  |       | $                                               | 1,698.8    |   |   | $ | 171.0 |   |   |   | $ | 757.0 |   |   |   | $ | 129.6 |   |   |   | $ | 641.2 |   |   |
|                                                                                      |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Timing of payments are estimated as certain payments aredue within 60 days of the end of each fiscal year in which Crown Media UnitedStates reports pretax profits exceeding $10.0 million. If Crown Media UnitedStates does not earn pretax profits, the company obligated mandatorilyredeemable preferred interest is to be wholly redeemed within 60 days of fiscalyear ending December 31, 2010.

(2)             Cash interest on the $596.6 million will accrue at arate of 10.25% per annum from and including August 5, 2007, and will bepaid semiannually in arrears on February 5 and August 5, commencing February 5,2008.

(3)             Represents off-balance sheet commitments.

(4)             The amounts and timing forcertain of these commitments are contingent upon the future delivery date andtype of programming produced, and, as such, the estimated amount and timing maychange.

*Cash Flows*

As of December 31, 2005, the Company had $15.9million in cash and cash equivalents on hand and $10.0 million available underits bank credit facility. The $10.0 million of the availability under the bankcredit facility is subject to the approval of Hallmark Cards prior to theCompany being able to draw such funds. As of December 31, 2005, theCompany had borrowed $210.0 million under its bank credit facility, whichmatures May 31, 2006. In March 2006, the Company drew down the remaining$10.0 million available under the credit facility, which increased the balancedue under the credit facility to $220.0 million. The proceeds will be used forgeneral working capital purposes.

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The Company’s principal sources of funds are currentlyavailable cash on hand, cash generated by operations, and tax sharing paymentsfrom Hallmark Cards. Payments under the tax sharing agreement are affected byHallmark Cards’ tax position and its ability to utilize the Company’s taxlosses. The Company has received $5.0 million in tax sharing payments in January 2006and does not currently expect to receive any additional cash payments during2006.

The ability of the existing sources of liquidity to besufficient to fund the Company’s operations, depend upon the Company’s abilityto achieve forecasts. In particular, continued growth in subscriber revenue andadvertising revenue, as well as maintaining the cash flow from library sales,are required. As a result, any decline in the popularity of the HallmarkChannel, any significant future modifications to the Company’s distributionagreements, an economic decline in the advertising market, an increase inprogram acquisition costs, an increase in competition or other adverseoperating conditions would impact the Company’s liquidity and its ability tofund the current level of operations. To the extent that the Company requiresadditional capital and additional drawings on the bank credit facility areeither not available or insufficient, the Company would be forced to seekadditional funding from the issuance of debt or equity securities, a sale ofcertain assets or from strategic transactions which provide capital. There canbe no assurance that the Company would be able to secure additional financingor complete any such transactions.

The Company expects to continue making investments inprogramming, marketing and distribution during the next twelve months ending December 31,2006. However, the Company’s liquidity position has demanded that all areas ofexpenses, including programming, marketing and distribution be closelymonitored and controlled. The Company reduced expenses in certain areas duringthe fourth quarter of 2005 and expects that further expense reductions willoccur in 2006, including, among other things, a decrease in marketing andthird-party programming acquisitions.

The Company’s principal uses of funds for 2006 areexpected to include the payment of 2005 and 2006 operating expenses, accounts payableand accrued expenses, licensing of programming, and interest under its bankcredit facility.

The Company currently believes that cash on hand, cashgenerated by operations, and tax sharing payments from Hallmark Cards, will besufficient to fund the Company’s operations and meet its liquidity needsthrough December 31, 2006.

The Company’s bank credit facility will expire on May 31,2006.  If the Company is not able toarrange for the extension, refinancing or replacement of the bank creditfacility prior to its maturity and the bank draws down on the irrevocableletter of credit or alternatively Hallmark Cards purchases the interests of thelending banks, Hallmark Cards would have all obligations and the rights of thelending banks under the bank credit facility. In that event, Hallmark Cardscould demand payment of outstanding amounts at any time. However, HallmarkCards has also agreed with the Company under a waiver and standby purchaseagreement explained below that it will not request any reimbursement of amountsdrawn on such letter of credit or the payment of amounts due under the creditfacility prior to May 31, 2007 (see below and note 12). This waiverand standby purchase agreement is subject to prepayments and termination eventsas described below.

Uponmaturity of the credit facility on May 31, 2006, the lending group led byJP Morgan Chase has the right to elect to forego the receipt of cash to pay theprincipal amount of the credit facility in full, which is provided for underthe terms of an irrevocable letter of credit provided by Hallmark Cards describedin note 12, butinstead can elect to initiate a process to foreclose on the Company’s assets.Such foreclosure proceedings, which we view as a remote possibility, wouldaffect our ability to continue our operations. Prior to any such possibleforeclosure proceedings, however, the Company would consider variousalternatives as indicated above. The Company would also cause Hallmark Cards,pursuant to the terms of the waiver and standby purchase agreement, to exerciseits option to purchase the banks interest in the 

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credit facility and thecredit facility would then be subject to Hallmark Cards agreement not to demandpayment prior to May 31, 2007.

Due to the Company’sliquidity issues and its inability to meet its obligations when they come duein May 2007 under the waiver and standby purchase agreement describedbelow, the Company anticipates that prior to May 31, 2007, it will benecessary to either extend or refinance (i) the bank credit facility and (ii) $678.0million covered by notes described below payable to affiliates of HallmarkCards. As part of a combination of actions and in order to obtain additionalfunding, the Company may consider various alternatives as indicated above, includingrefinancing the bank credit facility, raising additional capital through theissuance of equity or debt securities, a sale of certain assets or enteringinto strategic alternatives.

***Bank Credit Facility andHallmark Notes***

*Bank CreditFacility*

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

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

By an Amendment No. 9 dated as of March 21,2006, to the agreement for the bank credit facility, Hallmark Cards has beenprovided the right, by giving five business days written notice, to purchaseall of the bank lenders’ interest in the loans under the bank credit facilityfor an amount equal to the principal plus accrued, unpaid interest and otheramounts owing to any of the lending banks. Under the waiver and standbypurchase agreement described below, we can cause Hallmark Cards to completesuch a purchase. We view this purchase right as an alternative to the lendingbanks drawing down on the letter of credit described below.

As of March 1, 2005, we entered into Amendment No. 8to the agreement for our bank credit facility. This amendment extended thematurity date to May 31, 2006. The Amendment removed a limitation on alloutstanding amounts under the bank credit facility which was in general 50% ofthe most recent valuation of our film library. Also Amendment No. 8 made anumber of other significant changes to the bank credit facility includingdeletion of certain financial covenants, changes to other financial covenants,waivers of many covenants concerning the Company’s 2004 operations and results,a reduction in the interest rates 

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charged for loans underthe credit facility, and a reduction in the commitment fee. The agreements forthe bank credit facility, including Amendment No. 8, are attached asexhibits to this Report and are incorporated herein by reference. The amountsresulting from the 2% reduction in the interest rate and the 0.3% reduction inthe commitment fee under Amendment No. 8 to the bank credit facility arepaid by the Company to Hallmark Cards as compensation for providing the supportletter of credit to the bank lenders as described below. The support letter ofcredit made possible those reductions. In effect, the interest rate andcommitment fee relating to the bank credit facility remain unchanged for theCompany.

Pursuant to Amendment No. 8, Hallmark Cards hasprovided an irrevocable letter of credit issued to JP Morgan Chase Bank byCitibank, N.A. in the amount of $320.0 million, as credit support for ourobligations under our credit facility. The support letter of credit was reducedto $220.0 million upon the consummation of the sale of our internationalbusiness and the reduction of the aggregate outstanding credit exposure of ourlenders to $220.0 million. Draw-downs under the letter of credit may be madefor amounts due and payable under the credit facility and upon the occurrenceof certain other events. Any proceeds received by JP Morgan Chase Bank fromdrawing under this support letter of credit will not be applied to repay ourobligations, but will be used to purchase on the part of Hallmark Cards fromthe bank lenders subordinated participations in our obligations under our bankcredit facility, junior in payment to the bank lenders under the bank creditfacility. The support letter of credit automatically expires on June 10,2006.

The credit facility, as amended, contains a number ofaffirmative and negative covenants. Negative covenants include, among otherthings: Limitations on indebtedness, liens, investments, “Restricted Payments,”capital expenditures, changes in our business activities, cash payments totelevision distributors for subscribers; not amending the promissory note withHC Crown, a related letter of credit issued for our benefit or certain of ourother material agreements; and a requirement that EBITDA (as defined in thecredit agreement) not be less than specified amounts per quarter. RestrictedPayments include any distribution on our equity, any redemption or otheracquisition of our equity including redemption of the company obligatedmandatorily redeemable preferred interest, any payment on debt of Crown MediaHoldings which is subordinated to the bank loans, any reduction of the HC Crownline of credit for Crown Media Holdings, any payment on certain obligationsassumed by Crown Media Holdings under the purchase agreement for the filmassets and any other payment to Hallmark Cards or any of its affiliates. Thecredit agreement, however, permits Crown Media Holdings to make payments toHallmark Cards or an affiliate in payment of a valid outstanding obligation(subject to any applicable subordination agreement) or in an aggregate amountequal to the financial benefits received by us as a result of the reduction ofinterest charges under the bank credit facility in Amendment No. 8 plusany fees and costs incurred by Hallmark Cards in connection with the supportletter of credit provided in accordance with Amendment No. 8.

Events of default under the amended credit agreementinclude:  The failure to pay principal orinterest, with the default continuing unremedied for five days after receipt ofa remittance advice; a failure to observe covenants; a change in control; or atermination by Hallmark Cards or any of its affiliates of the right of CrownMedia Holdings or its subsidiaries to use the names “Hallmark” or “Crown” intheir television services or any Channels owned or operated by them. Forpurposes of the credit facility, a change in control means that (a) HallmarkCards ceases to own directly or indirectly at least 80% of the equity interestof Hallmark Entertainment Investment Co. (b) Hallmark EntertainmentHoldings ceases to have sufficient voting power to elect a majority of CrownMedia Holdings’ board of directors or beneficial ownership of over a majorityof the outstanding equity interest of Crown Media Holdings having voting power (c) themajority of the Board is not comprised of individuals who were either in officeor who were nominated by a two-third’s vote of individuals in office or sonominated as at December 17, 2001, or (d) the consummation by theCompany of a Rule 13e-3 transaction (or a “going-private”transaction) as defined in the Securities Exchange Act.

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Several changes tofinancial covenants in the Amendment No. 7 to our bank credit facilitywere not effective until the Foreign Asset Sale Effective Date. The ForeignAsset Sale Effective Date did not occur in 2004, which was one of the reasonsthat we needed waivers of our compliance with certain financial covenants inour bank credit facility. A Foreign Asset Sale Effective Date is generally thedate on which the Company sold its international operations and internationalrights to its film library. The closing of the sale of our internationalbusiness under the February, 2005 agreements resulted in a Foreign Asset SaleEffective Date. Amendment No. 8 waived our compliance with the followingfinancial covenants:  (1) capitalexpenditures in 2004; (2) cash program acquisition guarantees in 2004; (3) EBITDAfor the quarter ended December 31, 2004; (4) cash payments totelevision distributors for subscribers in 2004; (5) net worth at December 31,2004; (6) leverage ratio for the quarter ended December 31, 2004; and(7) interest coverage ratio for the 2004 year. Amendment No. 8 alsodeleted the net worth covenant; amended the limit on our cash programguarantees in 2005; amended the quarterly EBITDA requirements for the remainderof the loan term; revised the definition of EBITDA to add all non-cash expensesto consolidated net income or loss; and amended the limit of cash payments totelevision distributors for subscribers, the minimum number of subscribers andthe minimum gross subscriber revenue. Further, pursuant to Amendment No. 8,the limitation on Restricted Payments was amended to allow us to make paymentsto Hallmark Cards or its affiliates as described above.

*Waiver and StandbyPurchase Agreement*

Under a waiver andstandby purchase agreement dated March 21, 2006, Hallmark Cards agreed todefer all payments due on any of the following obligations and, except wherenoted, payment of interest thereon until May 31, 2007 or an earlier dateas described below as the waiver termination date, whereupon all of theseamounts become immediately due and payable (the “Waiver Period”):

·       Note,dated December 14, 2001, in the original principal amount of $75.0million, payable to HC Crown. The interest accrued on this note through December 31,2005, was $11.3 million.

·       10.25% senior unsecured discount note, dated August 5,2003, in the initial accreted value of $400.0 million, payable to HCCrown. Accreted interest through December 31, 2005, was $109.4 million.

·       $70.0 million account payable to HallmarkEntertainment Holdings arising out of the saleto Crown of the Hallmark Entertainment film library.

·       Note, dated as of October 1, 2005, in theprincipal amount of $132.8 million, payable to Hallmark EntertainmentHoldings. The interest accrued on this note through December 31, 2005, was$2.4 million.

·       Allobligations of the Company under the bank credit facility to Hallmark Cards,Incorporated by virtue of Hallmark Cards’ deemed purchase of participations inall of the obligations under a letter of credit which Hallmark Cards has givenin support of the facility or the purchase by Hallmark Cards of all theseobligations pursuant to Amendment No. 9 to the bank credit facility.

Hallmark Cards has agreed that it will not acceleratethe maturity of any of the foregoing obligations or initiate collectionproceedings during the Waiver Period. Interest will continue to accrue on theseobligations during the Waiver Period. The Company will continue to pay thebanks and/or Hallmark Cards interest on the credit facility during the WaiverPeriod.

The waiver termination date is May 31, 2007 orany of the following if they occur earlier: The Company fails to pay any principal or interest, regardless ofamount, due on any indebtedness with an aggregate principal amount in excess of$5.0 million or any other event or condition occurs that results in any suchindebtedness becoming due prior to its scheduled maturity, provided that thewaiver will not terminate if the Company reduces the principal amount of suchindebtedness to $5.0 million or less within 

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five business days of awritten notice of termination from Hallmark Cards; certain bankruptcy eventsoccur; the Company defaults in its payment of licensing fees under the SecondAmended and Restated Program License Agreement with RHI EntertainmentDistribution; a representation and warranty of the Company in the waiveragreement is false or misleading in any material respect; or the Company failsto pay interest on the deferred obligations listed above or to perform anycovenants in the waiver agreement.

Under the waiver agreement, if the bank’s lendersunder the bank credit facility accelerate any of the indebtedness under thebank credit facility or seek to collect any indebtedness under it, then theCompany may elect to exercise its right to require that Hallmark Cards or itsdesignated subsidiary exercise an option to purchase all the outstandingindebtedness under the bank credit facility as provided in Amendment No. 9to the bank credit facility. All expenses and fees in connection with thispurchase would be added to the principal amount of the credit facilityobligations.

This agreement does not limit any existing rights ofHallmark Cards or its affiliates to offset amounts owed to us under theHallmark Tax Sharing Agreement and Hallmark Cards’ share of the amounts payableunder the December 1, 2005, agreement with NICC described in Item 13 belowagainst these obligations. Pursuant to the agreement, the Company must makeprepayments on the outstanding debt from 100% of any “Excess Cash Flow” duringthe Waiver Period.  “Excess Cash Flow” isdefined as 1) the net proceeds of any debt or equity financings or sale ofassets; 2) the net cash proceeds from the incurrence by the Company ofindebtedness; 3) the net cash proceeds from the sale, transfer or release bythe Company of assets outside the ordinary course of business; and 4) ifpositive, the consolidated net cash flow fromoperations of Crown Holdings for any calendar quarter as shown in an SECreport, less cash funds used to pay current operating expenses and to pay orestablish reasonable reserves for future expenses, indebtedness payments, andcapital improvements and replacements as determined by the Board of Directorsof the Company.

As considerationfor the waiver agreement, we agreed to convert the $70.0 millionaccount payable to Hallmark Entertainment Holdings arising outof  our purchase of the  Hallmark Entertainment film library toa promissory note bearing interest at LIBOR plus 3% per annum. This note willbe payable in full on May 31, 2007.  We  also agreed to :

·       amendthe 2001 and 2005 notes described above to add the accrued but unpaid interest,currently and annually, to the outstanding principal amounts;

·       use  our commercially reasonable efforts to refinance all of  our obligations to Hallmark Cards and affiliates noted above; and

·       complywith  our  covenants and obligations under the bank creditfacility .

In addition,we provided  a release to Hallmark Cards and related parties forany matters prior to the date of the waiver agreement and relating to thecapacity of the released parties as beneficiariesof  our obligations under the waiver agreement or the deferredobligations listed above.

*HC Crown Line ofCredit*

In 2001, HC Crown issued a$75.0 million line of credit to Crown Media Holdings. The line of credit has afinal maturity date no later than December 21, 2007. The line of credit issubordinate to the bank facility, and its availability may be reduced dollarfor dollar in an amount equal to additional capital raised by Crown MediaHoldings. Crown Media Holdings will pay interest on any borrowings under theline of credit at a rate equal to LIBOR plus three percent, payable quarterly.

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*Senior Unsecured Obligation*

On August 5, 2003,Crown Media Holdings repurchased all of the trust preferred securities of CrownMedia Trust and related contingent appreciation certificates issued by theCompany. The securities were repurchased for approximately $329.1 million,including approximately $2.4 million of cash distributions on the trustpreferred securities during the quarter. Funds for this repurchase wereobtained from the proceeds of a $400.0 million 10.25% senior unsecured noteissued to HC Crown. Since interest is not payable in cash on the HC Crownsenior unsecured note until August 5, 2007, the Company will avoidapproximately $72.0 million in cash interest payments that would have been dueunder the trust preferred securities over the next four years. See Note 12 ofNotes to Consolidated Financial Statements for additional information about thesenior unsecured note.

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

***Tax SharingAgreement***

On March 11, 2003,Crown Media Holdings became a member of Hallmark Cards consolidated federal taxgroup and entered into the Tax Sharing Agreement with Hallmark Cards. HallmarkCards will include Crown Media Holdings in its consolidated federal income taxreturn. Accordingly, Hallmark Cards will benefit from future tax losses, whichmay be generated by Crown Media Holdings. Based on the Tax Sharing Agreement,Hallmark Cards will pay Crown Media Holdings all of the benefits realized byHallmark Cards as a result of consolidation, 75% in cash on a quarterly basisand the balance when Crown Media Holdings becomes a taxpayer. Under the TaxSharing Agreement, at Hallmark Cards’ option, this 25% balance may also beapplied as an offset against any amounts owed by Crown Media Holdings to anymember of the Hallmark Cards consolidation group under any loan, line of creditor other payable, subject to any limitations under any loan indentures orcontracts restricting such offsets. For further information regarding the TaxSharing Agreement, see Part III—Item 13. Certain Relationships and RelatedTransactions—Tax Sharing Agreement.

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

Weonly invest in instruments that meet high credit and quality standards, asspecified in our investment policy guidelines. These instruments, like allfixed income instruments, are subject to interest rate risk. The fixed incomeportfolio will decline in value if there is an increase in interest rates. Ifmarket interest rates were to increase immediately and uniformly by 10% fromlevels as of December 31, 2005, the decline of the fair value of the fixedincome portfolio would not be material.

Asof December 31, 2005, our cash, cash equivalents and short-terminvestments had a fair value of $15.9 million, which was invested in cash andshort-term commercial paper. The primary purpose of these investing activitieshas been to preserve principal until the cash is required to fund operations.Consequently, the size of this portfolio fluctuates significantly as cash isprovided by and used in our business.

Thevalue of certain investments in this portfolio can be impacted by the risk ofadverse changes in securities and economic markets and interest ratefluctuations. At December 31, 2005, all of our investments in thiscategory were in fixed rate instruments or money market type accounts. Adecrease in interest rates has the effect of reducing our future annualinterest income from this portfolio, since funds would be reinvested at lowerrates as the instruments mature. Over time, any net percentage decrease in ourinterest rates could be reflected in a corresponding net percentage decrease inour interest income. For the year ended December 31, 2005, the impact ofinterest rate fluctuations, changed business prospects and all other factorsdid not have a material impact on the fair value of this portfolio, or on ourincome derived from this portfolio.

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Wehave not used derivative financial instruments for speculative purposes. As ofDecember 31, 2005, we are not hedged or otherwise protected against risksassociated 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 theseexposures, we may enter into various derivative investment transactions in thenear term pursuant to our investment and risk management policies and proceduresin areas such as hedging and counterparty exposure practices. We have not andwill not use derivatives for speculative purposes.

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

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

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

Ourmaterial interest bearing assets consisted of cash equivalents and short-terminvestments. The balance of our interest bearing assets was $15.9 million, orapproximately 1% of total assets, as of December 31, 2005. Our materialliabilities subject to interest rate risk consisted of capital leaseobligations, our bank credit facility, our line of credit with HC Crown and ourother notes payable to HC Crown. The balance of those liabilities was $957.8million, or 69% of total liabilities, as of December 31, 2005. Netinterest expense for the year ended December 31, 2005, was $73.9 million,37%, of our total revenue. Our net interest expense of these liabilities issensitive to changes in the general level of interest rates, primarily U.S. andLIBOR interest rates. In this regard, changes in U.S. and LIBOR interest ratesaffect the fair value of interest bearing liabilities.

**ITEM 8.**                Consolidated Financial Statements andSupplementary Data

OurConsolidated Financial Statements begin at page F-1 of this AnnualReport on Form 10-K.

**ITEM 9.**                Changes in and Disagreements with Accountants onAccounting and Financial Disclosure

None.

**ITEM 9A.**        Controlsand Procedures

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

The Company, under thesupervision and with the participation of the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, carried out anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of December 31,2005. Based upon this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were not effective, because of the material weaknesses describedbelow, as of that date for purposes of recording, processing, summarizing andtimely reporting material information required to be disclosed in reports thatthe Company files under the Securities Exchange Act of 1934.

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***b. Management’s Report on Internal Control OverFinancial Reporting***

Management is responsible for establishing andmaintaining adequate internal control over financial reporting. A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

A material weaknessis a control deficiency, or combination of control deficiencies, that resultsin more than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. Management hasidentified the following material weaknesses in the Company’s internal controlover financial reporting as of December 31, 2005:

·       TheCompany does not have sufficient policies and procedures related to the reviewof the Company’s annual and interim consolidated financial statements.Specifically, the following deficiencies were identified: (a) ineffectivereview of the consolidated statement of cash flows; (b) inadequatedetailed and comprehensive review of the underlying information supporting theamounts included in the Company’s annual and interim consolidated financialstatements and disclosures; and (c) inadequate review of informationavailable subsequent to the financial reporting close process for appropriaterecognition and disclosure in the Company’s annual and interim consolidatedfinancial statements. These deficiencies resulted in a material error in thepresentation of a non-cash item in the consolidated statements of cash flowsfor the nine-month period ended September 30, 2005 and the year ended December 31,2005; errors in the classification of short- and long-term balance sheetaccounts in the December 31, 2005 consolidated financial statements; anderrors in the amounts of commitments and contingencies disclosed in the December 31,2005 consolidated financial statements. These errors were corrected prior tothe issuance of the Company’s consolidated financial statements as of and forthe year ended December 31, 2005. These deficiencies result in more than aremote likelihood that a material misstatement of the annual or interimconsolidated financial statements would not be prevented or detected on atimely basis.

·       TheCompany’s controls over access to the general ledger and certain accountingapplication systems were not designed effectively to provide adequatesegregation of duties. Specifically, the following design deficiencies wereidentified: (a) certain members of accounting management had the abilityto both initiate and approve journal entries; (b) certain members ofaccounting management had the ability to initiate and approve the payment ofinvoices and sign checks; and (c) a member of accounting management hadaccess to an accounting application system and the ability to changeinformation included therein without review and approval. These deficienciesresult in more than a remote likelihood that a material misstatement of theannual or interim consolidated financial statements would not be prevented ordetected on a timely basis.

In performing its assessment of the Company’s internalcontrol over financial reporting, management used the criteria set forth in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Because ofthe material weaknesses described above, management concluded that, as of December 31,2005, the Company’s internal control over financial reporting was not effectivebased on those criteria.

The Company’s independentregistered public accounting firm, KPMG LLP, has issued an audit report onmanagement’s assessment of the Company’s internal control over financialreporting. This report is included herein.

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

There were no changes inthe Company’s internal control over financial reporting that occurred duringthe quarter ended December 31, 2005 that materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

***d. Remediation Steps***

The Company continued to implement changes to itsinternal control over financial reporting during the year ended December 31,2005 in order to address material weaknesses that were identified as of December 31,2004. In the first quarter of 2005, the Company retained consultants to serveas technical resources to contemporaneously review, evaluate and provideguidance on the most appropriate accounting treatment for complex,non-recurring transactions and to review calculations, including those embeddedin  spreadsheets. In the third quarter of2005, the Company adopted more stringentprocedures for the review of the computational and mathematical accuracy ofvaluation spreadsheets.

The Company is in theprocess of identifying additional procedures and controls intended to remediatethe material weaknesses identified as of December 31, 2005, described inItem 9A.b. above.

**ITEM 9B.**       Other Information

Notapplicable.

**PART III**

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

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

Our Board currently has 14 directors and one vacancy. Alldirectors serve until the next annual meeting of stockholders or until theirsuccessors are duly elected and qualified.

Pursuant to our Second Amended and RestatedStockholders Agreement, dated August 30, 2001, as amended (“StockholdersAgreement”), our Board consists of 15 individuals nominated as follows:  twelve nominated by Hallmark EntertainmentInvestments Co. (“HEIC”); one nominated by VISN Management Corp. (“VISN”), asubsidiary of National Interfaith Cable Coalition, Inc. (“NICC”); and twoindependent directors nominated by the Board who are not officers or employeesof any of the parties (or their affiliates) to the Stockholders Agreement. Inaddition, pursuant to a separate stockholders agreement which concerns HEIC andto which Crown Media Holdings is not a party, HEIC granted Liberty MediaCorporation (“Liberty”) and J.P. Morgan Partners (BHCA) L.P. (“J.P. MorganPartners”) each the right to designate one of our directors as part of HEIC’stwelve nominees. The right of any party to nominate a director pursuant to theStockholders Agreement will terminate on the later of (1) the party owningless than 5% of our common stock then outstanding, or (2) the partyceasing to own at least 75% of the amount of our common stock that the party(or predecessor holder) owned immediately following completion of our initialpublic offering on May 9, 2000. See “Item 13. Certain Relationships andRelated Transactions.”

Of the directors on the Board, David J. Evans, RobertJ. Druten, Brian E. Gardner, David E. Hall, Donald J. Hall, Jr., Irvine O.Hockaday, Jr., Anil Jagtiani, John P. Mascotte and Deanne R. Stedem havebeen nominated by HEIC; Glenn Curtis has been nominated by Liberty; Wilford V.Bane, Jr. has been nominated by VISN; and Arnold L. Chavkin has beennominated by J.P. Morgan Partners. In addition, the Board has nominated PeterA. Lund and Herbert Granath as independent directors. Because HEIC holds Class ACommon Stock and all of the Class B Common Stock, representingapproximately 95.8% of the voting power of the Company, its vote for directorpositions will be sufficient to elect these nominees regardless of the vote ofany other stockholders.

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*DavidJ. Evans,* age 65, hasbeen the President and Chief Executive Officer of Crown Media Holdings and aDirector of Crown Media Holdings since May 2000. Prior to that, he servedas President and Chief Executive Officer of Hallmark Entertainment Networks(n/k/a Crown Media International) from March 1999 to May 2000 and aDirector of Crown Media International from July 1999 until May 2000.He has served on British Sky Broadcasting PLC’s board of directors since November 2001and, more recently via appointment, on its Remuneration Committee. Mr. Evansalso serves on John Fairfax Holdings Limited’s board of directors.

*WilfordV. Bane, Jr.,* age 68, has been a director ofCrown Media Holdings since May 2000. He was the Associate GeneralSecretary of United Methodist Communications, the communications agency for theUnited Methodist Church, from October 1990 to February 2001. Hehelped found and launch the Vision Interfaith Satellite Network, thepredecessor of Odyssey Network (which was subsequently acquired by us andrenamed the Hallmark Channel), and served as the interim Chief ExecutiveOfficer for its first two years.

*ArnoldL. Chavkin,* age 54, has been a director of Crown MediaHoldings since May 2000. From 1998 until May 2000, Mr. Chavkinwas a director of Crown Media International. Mr. Chavkin is the ChiefInvestment Officer at J.P. Morgan Partners, LLC, an indirect non-banksubsidiary of JPMorgan Chase & Co. From April 1991 to January 2001,he was a general partner, and since January 2001 has been a limitedpartner of JPMP Master Fund Manager, L.P., the sole general partner of J.P.Morgan Partners, which invests in private equity opportunities with asignificant concentration on the media and telecommunications industries. Priorto that, Mr. Chavkin was a member of Chemical Bank’s merchant bankinggroup and a generalist in its corporate finance group specializing in mergersand acquisitions and private placements for the energy industry. Mr. Chavkin’sexperience prior to joining Chemical Bank included corporate development forFreeport McMoRan as well as positions with Gulf and Western Industries andArthur Young & Company. Mr. Chavkin is a director of BrandServices, Inc., Encore Acquisition Company, Latigo Petroleum, Inc.,Nobel Environmental Power, LLC and Vetco International Limited. Mr. Chavkinis also a director of Triton PCS Holdings, Inc. and a member of its auditcommittee and its compensation committee.

*GlennCurtis,* age 46, has been a director of Crown MediaHoldings since January 2005. He has been Vice President of Liberty MediaCorporation (a holding company with interests in electronic retailing, media,communications, and entertainment industries) since 2003. Prior to that, he wasExecutive Vice President and Chief Financial Officer of Starz EntertainmentGroup (a subsidiary of Liberty Media Corporation providing premium movienetworks on television) from 1995 to 2002.

*RobertJ. Druten,* age 58, has been a director of Crown MediaHoldings since May 2000 and was a director of Crown Media Internationalfrom April 1996 to May 2000. He has also been an Executive VicePresident and the Chief Financial Officer of Hallmark Cards, Incorporated, theindirect parent of Crown Media Holdings, since April 1996. Mr. Drutenis a Trustee of Entertainment Properties Trust and a director of Kansas City Southern.

*BrianE. Gardner,* age 53, has been a director of Crown MediaHoldings since January 2004. He has been Executive Vice President andGeneral Counsel of Hallmark Cards since January 2004. From 1996 to 2003, Mr. Gardnerwas a Managing Partner of Stinson Morrison Hecker, LLP (formerly known asMorrison & Hecker, LLP).

*HerbertA. Granath,* age 77, has been a director of Crown MediaHoldings since December 2004. He has been a consultant for Telenet andCable Partners Inc. since 2000 and a consultant for Veronis, Suhler, Stevensonsince 2002. He has also been a director of Central European Media since 2001.Mr. Granath was the Chairman of Disney/ABC International Television from1995 to 2000.

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*DavidE. Hall,* age 43, has been a director of Crown MediaHoldings since March 2003. He is the President—Personal Expression Groupof Hallmark Cards since January 1, 2005, and a member of the board ofdirectors of Hallmark Cards since 1996. Mr. Hall was Senior VicePresident-Human Resources of Hallmark Cards from June 2002 to January 2005and has served in a variety of positions for Hallmark Cards since 1981.Mr. Hall was Vice President—U.S. Sales and Marketing for Binney &Smith Inc. (a wholly-owned subsidiary of Hallmark Cards) from 1999 to June 2002.

*DonaldJ. Hall, Jr.,* age 50, has been a director ofCrown Media Holdings since May 2000. Mr. Hall has been the Presidentand Chief Executive Officer of Hallmark Cards since January 2002 and amember of the board of directors of Hallmark Cards since 1996. Mr. Hallhas served in a variety of positions for Hallmark Cards since 1971. Mr. Hallwas the Executive Vice President, Strategy and Development from September 1999until December 2001.

*IrvineO. Hockaday, Jr.,* age 69, has been a director ofCrown Media Holdings since May 2000 and was a director of Crown MediaInternational from April 1996 until May 2000. He is a member of theboard of directors of Dow Jones & Company, Inc., SprintCorporation, and Aquila Inc. He is also a member of the board of directors andaudit committee of Ford Motor Company and Estee Lauder Companies, Inc. Mr. Hockadayis a trustee of the Hall Family Foundations and the Aspen Institute. He was thePresident and Chief Executive Officer of Hallmark Cards from January 1986to December 2001.

*AnilJagtiani,* age 45, has been a director of Crown MediaHoldings since March 2003. He has been Executive Vice President, CorporateStrategy and Development, for Hallmark Cards since February 2003. Heserved as Senior Vice President, Corporate Strategy, from January 2001until February 2003. From October 1997 until December 2000, heserved as the Director of Strategic Planning for Brunswick Corporation.

*PeterA. Lund,* age 65, has been a director of Crown MediaHoldings since May 2000. He is a former Chief Executive Officer of CBS, Inc.and currently a member of the board of directors of DirecTV Group, Inc.and Emmis Communications Corporation. He is also a Trustee of the University ofSt. Thomas in St. Paul, Minnesota.

*JohnP. Mascotte,* age 66, has been a director of CrownMedia Holdings since May 2000. Mr. Mascotte is a member of the boardof directors of Hallmark Cards and is the Chairman of the Audit Committee ofHallmark Cards. Mr. Mascotte is also a member of the board of directors ofWyeth Inc., Generali Life Reassurance U.S.A. and Labone Inc. He was thePresident and Chief Executive Officer of Blue Cross and Blue Shield of KansasCity, Inc. from July 1997 to June 2001.

*DeanneR. Stedem,* age 43, has been a director of Crown MediaHoldings since March 2003. She has been Assistant General Counsel forHallmark Cards since 1998. She served as Senior Attorney for Hallmark Cardsfrom 1989 until 1998.

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

***Executive Officers of the Registrant***

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

*DavidJ. Evans,***65, has been the President and Chief ExecutiveOfficer of Crown Media Holdings and a Director of Crown Media Holdings since May 2000.Prior to that, he served as President and Chief Executive Officer of HallmarkEntertainment Networks (n/k/a Crown Media International) from March 1999to May 2000 and a Director of Crown Media International from July 1999until May 2000. He 

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alsohas served on BSkyB’s board of directors since November 2001 and, morerecently via appointment, on its remuneration committee.

*WilliamJ. Abbott,* 43, hasbeen Executive Vice President, National Advertising Sales, of Crown MediaHoldings since January 2000. Prior to that, he was Senior Vice President,Advertising Sales, of Crown Media United States, LLC from January 2000 throughJuly 2003. Prior to that, he was Senior Vice President, Advertising Sales,of Fox Family Worldwide and Fox Kids Network.

*WilliamJ. Aliber,***44*,* has been theExecutive Vice President and Chief Financial Officer of Crown Media Holdingssince May 2000. Prior to that, he was Executive Vice President and ChiefFinancial Officer of Crown Media International from March 1997 through May 2000and a Director of Crown Media International from May 1998 through May 2000.He also served as the Vice President and Chief Financial Officer of HallmarkEntertainment, Inc. from June 1996 through May 2000.

*PaulA. FitzPatrick,* 59,has been Executive Vice President and Chief Operating Officer of Crown MediaHoldings since October 2002. Prior to that, he was Chief Operating Officerof Crown Media United States from September 2000 through October 2002.Prior to joining Crown Media United States, Mr. FitzPatrick served asChief Operating Officer of the Golf Channel from April 1997 through April 2000.Prior to his career in cable, Mr. FitzPatrick was, for 7 years, apublishing executive.

*DavidKenin,* 64, hasbeen Executive Vice President, Programming Crown Media United States, LLC sinceJanuary 2002. Prior to joining Crown Media United States, he headed KeninPartners, where he represented clients in various media industries, includingcable television, business development, international programming,international sports rights and new technology.

*ChrisR. Moseley,* 55,has been Executive Vice President, Chief Marketing Officer of Crown MediaHoldings, Inc. since April 2004. Prior to that, she was ExecutiveVice President, Worldwide Marketing and Brand Strategy of Crown Media Holdingsfrom July 2000 to April 2004. Prior to joining Crown Media Holdings, Ms. Moseleyworked as Executive Vice President, Network Marketing of Disney/ABC from October 1999to July 2000 and Senior Vice President of Marketing for DiscoveryCommunications, Inc. from 1989 to October 1999. Ms. Moseleyserves as a board of directors of Promax/BDA, WICT Foundation, CTAM, CablePositive and The Cable Center.

*Charles L. Stanford,* 60*,* has beenExecutive Vice President, Legal and Business Affairs and General Counsel ofCrown Media Holdings since May 2001. Prior to that, he was Senior VicePresident, Business Affairs and General Counsel of Crown Media Holdings from October 2000to May 2001. He also served as Senior Vice President, Legal and BusinessAffairs of Crown Media International from November 1999 through October 2000.

***Structure***

Directors are electedannually. Our Board has an Audit Committee, a Compensation Committee, aNominating Committee and a Finance Committee.

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*Audit Committee*

The members of theAudit Committee are Messrs. Mascotte, Chairman, Chavkin, Granath and Lund,each of whom are believed by the Board to be independent directors as definedin Rule 4200(a)(15) of the National Association of Securities Dealers’listing standards for the Nasdaq National Market (“Nasdaq Listing Standards”).The Board has determined that each of the members of the Audit Committee isfinancially literate in accordance with the Nasdaq Listing Standards. The Boardhas also determined that Mr. Mascotte qualifies as an audit committeefinancial expert, as defined under Securities and Exchange Commission (the“Commission”) rules. Under the Audit Committee Charter, the primary authorityand responsibilities of the Audit Committee are to:

·        overseethe Company’s financial reporting processes;

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

·        reviewand approve related party transactions;

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

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

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

·        establishand oversee the Company’s whistleblower policy regarding submission of reportsof questionable accounting practices, internal accounting controls or auditingmatters and the investigation, disposition and retention of such reports.

***Nominating Committee***

The members of the Nominating Committee are Messrs. Lund,Chairman, Bane, Gardner and Mr. Lund is an independent director as definedin Rule 4200(a)(15) of the Nasdaq Listing Standards. The NominatingCommittee’s functions are to consider candidates to serve as members of theBoard of Directors and to nominate qualified persons for election at the annualmeeting of stockholders.

Subject to the Second Amended and RestatedStockholders Agreement, dated August 20, 2001, the Nominating Committeeidentifies director candidates primarily by considering recommendations made bydirectors and management. The Nominating Committee may also retain thirdparties to identify and evaluate director candidates. When evaluating directorcandidates, the Nominating Committee considers a number of factors, such as thecandidate’s background, skills, judgment, diversity and experience withcompanies of comparable business and size. The Nominating Committee alsoconsiders the candidate’s experience in relation to the experience of otherBoard members, the candidate’s independence or lack of independence, and thecandidate’s qualifications for committee membership. The Nominating Committeedoes not assign any particular weight or priority to any of these factors andconsiders each director candidate in the context of the current needs of theBoard as a whole.

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

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*Section 16(a) BeneficialOwnership Reporting Compliance*

Based on a review ofreports filed by our directors, executive officers and beneficial holders of10% or more of our shares, and upon representations from those persons, twoSecurities and Exchange Commission stock ownership reports required to be filedby those reporting persons during 2005 were not made timely. Arnold Chavkinfailed to file a timely Form 4 to report one transaction and JP MorganPartners BHCA LP failed to file a timely Form 4 to report one transaction.

*Code of BusinessConduct and Ethics*

The Company has a Code ofBusiness Conduct and Ethics that reflects long-standing positions of theCompany and contains additional provisions. The Code applies to all employees,including executive officers, and to directors. A shareholder can request afree copy of the Code of BusinessConduct and Ethics by writing to the General Counsel at 12700 Ventura Boulevard,Studio City, California 91604.

**ITEM 11.**         Executive Compensation

*Compensation ofDirectors and Executive Officers*

Thefollowing table summarizes the compensation paid by us, and any of oursubsidiaries, for services performed for us, to our Chief Executive Officer andour four other most highly compensated executive officers (based on salariesand bonuses) serving at the end of 2005 (each, a “Named Executive Officer,collectively, the “Named Executive Officers”).

|                                            | ** ** | **Annual Compensation** | ** ** | **Long-Term Compensation Awards** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|
| **Name and Principal  Position** | ** ** | ** **                   | ** ** | **Year**                                    | ** ** | **Salary($)** | ** ** | **Bonus($)(1)** | ** ** | **Restricted Stock  Awards($)(2)** | ** ** | **Securities  Underlying  Options/  SAR  (#)(3)** | ** ** | **All Other  Compensation  ($)(4)** | ** ** | **Payout of  Restricted Stock  ($)** | ** ** |
| David J. Evans                             |       | 2005                         |       | 1,312,500                                   |       |   | 377,568 | (5) |   |   | 1,020,050 | (6) |   |   | 0 |   |   |   | 42,529 |   |   |   | 4,297,154 | (7) |   |
| President and                              |       | 2004                         |       | 1,265,625                                   |       |   | 845,741 |   |   |   | 1,040,750 | (8) |   |   | 0 |   |   |   | 30,595 |   |   |   | 4,094,485 | (9) |   |
| Chief Executive                            |       | 2003                         |       | 1,117,500                                   |       |   | 952,625 |   |   |   | 4,506,833 | (10) |   |   | 0 |   |   |   | 31,283 |   |   |   | 0 |   |   |
| Officer                                    |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| David Kenin                                |       | 2005                         |       | 714,142                                     |       |   | 178,750 |   |   |   | 709,600 | (11) |   |   | 0 |   |   |   | 18,578 |   |   |   | 172,573 | (12) |   |
| Executive Vice                             |       | 2004                         |       | 523,077                                     |       |   | 150,000 |   |   |   | 724,000 | (13) |   |   | 0 |   |   |   | 17,300 |   |   |   | 0 |   |   |
| President,                                 |       | 2003                         |       | 430,833                                     |       |   | 200,000 |   |   |   | 0 |   |   |   | 0 |   |   |   | 17,646 |   |   |   | 0 |   |   |
| Programming                                |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Chris R. Moseley                           |       | 2005                         |       | 707,660                                     |       |   | 150,000 |   |   |   | 532,200 | (14) |   |   | 0 |   |   |   | 18,553 |   |   |   | 394,453 | (12) |   |
| Executive Vice                             |       | 2004                         |       | 674,089                                     |       |   | 150,000 |   |   |   | 543,000 | (15) |   |   | 0 |   |   |   | 11,400 |   |   |   | 260,723 | (16) |   |
| President,                                 |       | 2003                         |       | 614,539                                     |       |   | 180,000 |   |   |   | 465,260 | (17) |   |   | 0 |   |   |   | 16,141 |   |   |   | 0 |   |   |
| Chief Marketing                            |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Officer                                    |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paul A. FitzPatrick                   |       | 2005                         |       | 626,648                                     |       |   | 147,557 |   |   |   | 532,200 | (14) |   |   | 0 |   |   |   | 1,781 |   |   |   | 419,107 | (12) |   |
| Executive Vice                             |       | 2004                         |       | 596,808                                     |       |   | 150,000 |   |   |   | 543,000 | (15) |   |   | 0 |   |   |   | 0 |   |   |   | 284,927 | (16) |   |
| President and                              |       | 2003                         |       | 549,116                                     |       |   | 165,000 |   |   |   | 508,540 | (18) |   |   | 0 |   |   |   | 774 |   |   |   | 0 |   |   |
| Chief  Operating                           |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Officer                                    |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| William J. Abbott                          |       | 2005                         |       | 495,461                                     |       |   | 248,139 |   |   |   | 582,420 | (19) |   |   | 0 |   |   |   | 18,781 |   |   |   | 254,114 | (12) |   |
| Executive Vice                             |       | 2004                         |       | 464,242                                     |       |   | 130,000 |   |   |   | 543,000 | (15) |   |   | 0 |   |   |   | 0 |   |   |   | 122,661 | (16) |   |
| President,                                 |       | 2003                         |       | 396,705                                     |       |   | 140,000 |   |   |   | 218,887 | (20) |   |   | 0 |   |   |   | 11,180 |   |   |   | 0 |   |   |
| Advertising Sales                          |       |                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |            |                              |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Represents performance bonus under the terms ofemployment agreements with the Company. See “Executive Employment Arrangements”.

(2)             On April 30, 2003, the Company filed with theCommission a Tender Offer Statement on Schedule TO, which was amended, andmade an offer to its eligible employees, including the Named ExecutiveOfficers, to exchange all eligible options granted under the Amended andRestated Crown Media Holdings 2000 Long Term Incentive Plan (the “Plan”) forrestricted stock units (“RSUs”) to be granted by the Company under the Plan. OnMay 29, 2003, the Company accepted for exchange stock 

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options to purchase5,126,732 shares of our Class A Common Stock, representing 94.8% of theoptions that were eligible to be tendered in the offer, and, in exchange,granted RSUs representing an aggregate of 2,050,693 shares of its Class ACommon Stock. The RSUs granted in 2003 will vest in equal one-thirdinstallments on each of the first, second and third anniversaries of the dateof grant. The RSUs granted in 2004 will vest as follows: 70% of the RSUs willvest in equal one-third installments on each of the first, second and thirdanniversaries of the date of grant and 30% of the RSUs will vest in itsentirety on the third anniversary of the date of grant only if the fair marketvalue of Company’s stock has reached a certain price. The RSUs granted in 2005will vest as follows: 50% of the RSUs will vest in equal one-third installmentson each of the first, second and third anniversaries of the date of grant and50% of the RSUs will vest in its entirety on the third anniversary of the dateof grant only if the fair market value of Company’s stock has reached a certainprice. All RSUs are subject to forfeiture until certain restrictions, includingcontinued employment, have lapsed. Each RSU represents the right to receive oneshare of the Company’s Class A Common Stock or, in the Company’sdiscretion, the cash equivalent to the value of one share of the Company’s Class ACommon Stock on the vesting date, if certain conditions are met. If anydividend is paid with respect to a share of Class A Common Stock while theRSUs are held, the Company shall pay to each holder at its discretion an amountin cash, Class A Common Stock or other property, in each case having avalue equal to the dividend. Such amounts shall vest and be paid at the sametime as the underlying RSUs are settled.

As of February 7, 2006, the number and value(based on the closing market price of the Company’s Class A Common Stockon February 7, 2005 (i.e., $8.76)) of the aggregated RSUs of each of theNamed Executive Officers are as follows: 115,000 RSUs ($1,007400) held by Mr. Evans;141,333 RSUs ($1,238,077) held by Mr. Kenin; 134,667 RSUs ($1,179,683)held by Ms. Moseley; 137,333 RSUs ($1,203,037) held by Mr. FitzPatrick;and 125,487 RSUs ($1,099,266) held by Mr. Abbott.

(3)             On May 29, 2003, each Named Executive Officer,except for Mr. Kenin, exchanged stock options granted in 2001 and 2002 andin any prior years for RSUs. Consequently, none of the Named ExecutiveOfficers, except for Mr. Kenin, hold any stock options.  See Note 2.

(4)             Represents car allowance, insurance premium paymentsand/or 401(k) matching contributions.

(5)             Pursuant to his Employment Agreement, Mr. Evans’sperformance bonus amount is $1,312,500 for the period September 18, 2005through September 17, 2006. This amount represents his pro rata bonusamount the period September 18, 2005 through December 31, 2005.

(6)             Mr. Evans was issued 115,000 RSUs in 2005. Thevalue of RSUs was determined by multiplying the closing market price of CrownMedia Holdings’ Class A Common Stock on the date of grant (i.e., $8.87) bythe number of RSUs issued.

(7)             In January 2006, the Company paid for in cash thesecond installment of vested RSUs (granted in 2003 and 2004) and this amountrepresents such cash payment.

(8)             Mr. Evans was issued 115,000 RSUs in 2004. Thevalue of RSUs was determined by multiplying the closing market price of CrownMedia Holdings’ Class A Common Stock on the date of grant (i.e., $9.05) bythe number of RSUs issued.

(9)             In January 2005, the Company paid for the firstinstallment of vested RSUs (granted in 2003 and 2004) in cash and this amountrepresents such cash payment.

(10)       Mr. Evans was issued 833,056 RSUs. The value ofRSUs was determined by multiplying the closing market price of Crown MediaHoldings’ Class A Common Stock on the date of grant (i.e., $5.41) by thenumber of RSUs issued.

(11)       Represents 80,000 RSUs issued in 2005. The value ofRSUs was determined by multiplying the closing market price of Crown MediaHoldings’ Class A Common Stock on the date of grant (i.e., $8.87) by thenumber of RSUs issued.

(12)       In June 2005, the Company paid for in cash thesecond installment of vested RSUs granted in 2003, if applicable, and the firstinstallment of vested RSUs granted in 2004. This amount represents such cashpayment.

(13)       Represents 80,000 RSUs issued in 2004. The value ofRSUs was determined by multiplying the closing market price of Crown MediaHoldings’ Class A Common Stock on the date of grant (i.e., $9.05) by thenumber of RSUs issued.

(14)       Represents 60,000 RSUs issued in 2005. The value ofRSUs was determined by multiplying the closing market price of Crown MediaHoldings’ Class A Common Stock on the date of grant (i.e., $8.87) by thenumber of RSUs issued.

(15)       Represents 60,000 RSUs issued in 2004. The value ofRSUs was determined by multiplying the closing market price of Crown MediaHoldings’ Class A Common Stock on the date of grant (i.e., $9.05) by thenumber of RSUs issued.

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

(17)       Ms. Moseley was issued 86,000 RSUs in 2003. Thevalue of RSUs was determined by multiplying the closing market price of CrownMedia Holdings’ Class A Common Stock on the date of grant (i.e., $5.41) bythe number of RSUs issued.

(18)       Mr. FitzPatrick was issued 94,000 RSUs in 2003. Thevalue of RSUs was determined by multiplying the closing market price of CrownMedia Holdings’ Class A Common Stock on the date of grant (i.e., $5.41) bythe number of RSUs issued.

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(19)       Mr. Abbott was issued 66,000 RSUs in 2005. Thevalue of RSUs was determined by multiplying the closing market price of CrownMedia Holdings’ Class A Common Stock on the date of grant (i.e., $8.87) bythe number of RSUs issued.

(20)       Mr. Abbott was issued 40,460 RSUs in2003. The value of RSUs was determined by multiplying the closing market priceof Crown Media Holdings’ Class A Common Stock on the date of grant (i.e., $5.41)by the number of RSUs issued.

**StockOptions Awarded By Crown Media Holdings During 2005**

The Company did not awardany stock options to the Named Executive Officers in 2005.

**OptionExercises and Option Values in 2005**

None of the NamedExecutive Officers, except Mr. Kenin, own any stock options, and Mr. Kenindid not exercise any stock options in 2005.

**Director Compensation**

We do not compensatedirectors who are employees of Hallmark Cards or its subsidiaries, or Mr. Evanswho is an employee of the Company, for services as members of our Board or anyof its committees. Effective fiscal year 2004, non-employee (of Hallmark Cardsor its subsidiaries) directors are compensated as follows: (i) an annualretainer of $28,000 and $1,000 per meeting; (ii) restricted stock unitsvalued at $40,000 are granted annually; (iii) the chairman of the AuditCommittee is paid $5,000 annually; and (iv) chairmen of each othercommittee is paid $3,000 annually. All directors receive reimbursement ofexpenses incurred in connection with participation in Board meetings.

**Executive Employment Arrangements**

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

On September 18, 2001, the Company entered intoan employment agreement with Mr. Evans that provides for his employment asits President and Chief Executive Officer. The agreement has been amendedtwice, on May 28, 2004 and in August, 2005. The term of this agreement wasoriginally three years, but has been extended through September 17, 2006.The agreement provides for an annual base salary of $1,000,000, $1,100,000,$1,250,000, $1,312,500 and $1,312,500, respectively, during each twelve-monthperiod of the term of the agreement, commencing September 18, 2001.Additionally, Mr. Evans is entitled to receive a performance bonus. Forthe first four years of the term, the bonus was based on the level at which theCompany achieved its revenue and EBITDA plan as adopted by the Board. In thefinal year of the agreement, the bonus is $1,312,500. If there is a change ofcontrol of the Company during the term of the agreement and Mr. Evans hasnot been terminated for cause, Mr. Evans will also receive a transactionbonus of $5 million.

The employment agreement provides that if Mr. Evans’employment is terminated other than for cause, disability, or a change ofcontrol, then he will be entitled to the amount of the base salary due throughthe end of the term of the agreement as if there had been no termination and,except for any annual bonus that is due to Mr. Evans under the agreement,we will have no further obligations under the agreement. Mr. Evans mayalso terminate the agreement on 30 days notice and, if he exercises thistermination right, will be entitled to a pro rata portion of his salary andbonus, calculated to the effective date of termination. In the event of achange in control, Mr. Evans will receive a pro rata portion of his salaryand bonus, calculated through the effective date of the change in control.

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

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***Employment Agreement with David Kenin***

On December 20, 2001, Crown Media United States,LLC entered into an employment agreement with David Kenin that provides for hisemployment as Executive Vice President—Programming.  The agreement has been amended twice, onOctober 12, 2003 and December 6, 2004. The term of this agreement wasoriginally three years, commencing on January 2, 2002, but was extendedthrough January 2, 2008. The initial agreement provides for an annual basesalary of $370,000, $425,000 and $475,650, respectively, during each successiveyear during the term of the agreement. Under the amendment datedOctober 12, 2003, Mr. Kenin’s salary increased to an annual rate of$475,000 for the period October 12, 2003 through January 2, 2004 andto $525,000 for the third year of the term (January 3, 2004 throughJanuary 2, 2005). The amendment dated December 6, 2004 provides foran increase of Mr. Kenin’s salary as follows: $715,000 during the fourthyear of the term (January 3, 2005 through January 2, 2006); $750,000during the fifth year of the term (January 3, 2006 through January 2,2007); and $790,000 during the sixth year of the term (January 3, 2007through January 2, 2008). Following the end of each calendar year duringthe term, Mr. Kenin may be paid a bonus based on his performance duringsuch calendar year if the Company so determines in its sole discretion.Mr. Kenin was also granted an option to purchase 200,000 shares of theCompany’s Class A Common Stock.

The employment agreement provides that ifMr. Kenin’s employment is terminated other than for cause, death ordisability, then he will be entitled to the remaining salary payable for thebalance of the term of the agreement.

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

***Employment Agreement with Chris R. Moseley***

On June 20, 2003, Crown Media Holdings enteredinto an employment agreement with Chris R. Moseley that provides for heremployment as Executive Vice President—Worldwide Marketing. This agreementreplaced the employment agreement dated July 5, 2000 betweenMs. Moseley and Crown Media Holdings. The term of this agreement is threeyears, commencing on July 16, 2003. The agreement provides for an annualbase salary of $660,000, $693,000 and $727,650, respectively, during eachsuccessive year during the term of the agreement. Ms. Moseley is entitledto receive at the end of each calendar year during the agreement a performancebonus of no less than 15% and no more than 50% of her then annual salary.

The employment agreement provides that ifMs. Moseley’s employment is terminated other than for cause, death ordisability, then she will be entitled, in a lump sum, to the remaining salarypayable for the balance of the term of the agreement, discounted at prime ratesto present value at the time of payment. In addition, Ms. Moseley is underno obligation to mitigate against any such amounts paid.

Ms. Moseley’s employment agreement containsidentical non-compete and non-solicitation provisions to those contained inMr. Evans’ employment agreement and which are described above.

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

***Employment Agreement with Paul A. FitzPatrick***

On September 15, 2003, Crown Media Holdingsentered into an employment agreement with Paul A. FitzPatrick that provides forhis employment as Executive Vice President and Chief Operating Officer. Thisagreement replaced the employment agreement dated September 19, 2000between Mr. FitzPatrick and Crown Media United States, LLC, a wholly-ownedsubsidiary of Crown Media Holdings. The term of his employment agreement isthree years, commencing on September 25, 2003. The agreement provides 

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for an annual base salaryof $590,000 for the first year of the term, increasing by 5% or the ConsumerPrice Index, whichever is greater, during each subsequent year of the term ofthe agreement. Mr. FitzPatrick is also entitled to receive a bonus at theend of each calendar year of the term of the agreement of up to 20% of his thensalary rate, 30% of which bonus is discretionary and 70% of which is subject toCrown Media Holdings reaching certain levels of revenue and EBITDA. Additionalbonus amounts may awarded in the discretion of the Company.

The employment agreement provides that ifMr. FitzPatrick’s employment is terminated other than for cause, death ordisability, then he will be entitled to the remaining salary amounts payableunder the agreement for the balance of the term of the agreement.

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

***Employment Agreement with William Abbott***

On June 23, 2003, Crown Media Holdings, Inc.entered into an employment agreement with William Abbott that provides for hisemployment as Executive Vice President, National Advertising Sales.  The term of this agreement commenced on July 1,2003 and ends on February 7, 2007, but may be extended by mutual consent. Theagreement provides for Mr. Abbott’s salary as follows: $405,075 per yearduring the period July 2, 2003 through February 7, 2004 (prorated),$475,000 per year during the period February 8, 2004 through February 7,2005, $498,750 per year during the period February 8, 2005 through February 7,2006, and $523,688 per year during the period February 8, 2006 through February 7,2007 . Mr. Abbott is also entitled to receive a bonus for fiscal 2003 ofat least $75,000 and up to $150,000 for achieving 100% of the annual target forsales achievement for the 2003 fiscal year based on the Company’s SalesIncentive Plan. For each subsequent fiscal year, Mr. Abbott is paid aminimum bonus equal to 25% and a maximum of 50% of his then-current salary. One-halfof the bonus in excess of the 25% minimum will be paid for achieving 100% ofthe Company’s Sales Incentive Plan. The other one-half of the bonus in excessof the 25% minimum is paid for achieving other sales objectives as determinedby the Company in its sole discretion. Additional bonuses may be payable to Mr. Abbott,in the sole discretion of the Company, for over-achievement of these goals.

The employment agreement provides that if Mr. Abbott’semployment is terminated other than for cause, death or disability, then hewill be entitled to the remaining salary payable for the balance of the term ofthe agreement.

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

***Severance and Employee Retention Plans***

In August 2005, the Board of Directors authorizedseveral contingent employee compensation benefits in contemplation of apossible change in control of the Company. A transaction bonus equal to 40% ofemployees’ base compensation will be paid employees at the level of director orbelow upon a change in control. At its discretion, the Company may pay anunspecified portion of the transaction bonus if a change in control has not yetoccurred. The Board also authorized a longevity-and title-based severancebenefit which provides for salary, wage and bonus payments, extended healthinsurance coverage, and outplacement services to employees who are terminatedas a result of the change in control. Most of the executive officers of theCompany are subject to employment contracts, some of which contain provisionsfor benefits in addition to those referred to above. Based on its personnelroster in October 2005, the Company estimates that the cost of thetransaction bonuses and severance benefits would be approximately $25.0 millionto $45.0 million.

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On March 24, 2006,the Compensation Committee of the Board of Directors, approved payment ofperformance bonuses for 2005. If there is a transaction, these bonuses will,for employees at the level of director and below, be deemed to have been thefirst installment of the transaction bonus and thus will be credited againstany transaction bonus amounts payable to them.

**CompensationCommittee Interlocks and Insider Participation**

During 2005, none of ourexecutive officers served on the board or compensation committee of anothercompany which had one of its executive officers serve as one of our directorsor a member of our Compensation Committee. Of our executive officers, only Mr. Evansand David Kenin serve as members of a compensation committee or other boardcommittee performing similar functions of any other entity. Mr. Evansserves on the compensation committee of British Sky Broadcasting PLC. Mr. Keninserves on the compensation committee of World Wrestling Entertainment.Mr. Chavkin, a member of our Compensation Committee, is the ChiefInvestment Officer of JP Morgan Partners, LLC which is a 100% owned subsidiaryof JP Morgan Chase & Co. JP Morgan Chase Bank, another wholly-ownedsubsidiary of JP Morgan Chase & Co., is a lead bank for the bankcredit facility of Crown Media Holdings and serves in certain other roles asdescribed in “Certain Relationships and Related Transactions” below.

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

**SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

The following table sets forth certain information, asof February 28, 2006, with respect to beneficial ownership of our Class ACommon Stock and Class B Common Stock, by each of the Named ExecutiveOfficer (defined below), each director, each holder of more than 5% of either Class Aor Class B Common Stock, and all current directors and executive officersas a group.

Except as indicated in thefootnotes to this table, the persons named each have sole voting and investmentpower over the shares shown as owned by them. The percentage of beneficialownership is based on 74,117,654 shares of our Class A Common Stock and30,670,422 shares of our Class B Common Stock outstanding as of February 28,2006.

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**Amountand Nature of Beneficial Ownership(1)**

| ** **                                                                                                     | ** ** | **Class A  Common Stock** | ** ** | **Percent of  Class** | ** ** | **Class B  Common  Stock** | ** ** | **% of  Class** | ** ** | **% Total  Voting  Power** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|---------------------------------|------------|----------------------|------------|---------------------------------|------------|
| **Name and  Address of Beneficial Owner 5% Stockholders:**                                                     | ** ** |                                | ** ** |                       |       |                            |       |                 |       |                            |       |   |   |   |   |   |   |   |   |
| Hallmark  Entertainment Investments Co.(2)(3) 2501 McGee Street,  Kansas City, MO 64108                   |       |                                | 58,077,970 |                       |       |                            | 78.3       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |
| Liberty Media  Corporation(3)(4)  9197 South Peoria Street,  Englewood, CO 80112                               |       |                                | 58,077,970 |                       |       |                            | 78.3       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |
| National  Interfaith Cable Coalition, Inc.(3)(13)  74 Trinity Place, Suite 1550,  New York, NY 10006 |       |                                | 58,077,970 |                       |       |                            | 78.3       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |
| J.P. Morgan  Partners (BHCA), L.P.(3)(5)(14)  390 Madison Avenue,  New York, NY 10017                     |       |                                | 58,077,970 |                       |       |                            | 78.3       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |
| Hughes Electronics  Corporation(6)  200 North Sepulveda Boulevard,  El Segundo, CA 90245                       |       |                                | 5,360,202  |                       |       |                            | 7.3        | %                    |       | —                          |       |   | — |   |   |   | 1.4 | % |   |
| **Directors  and Named Executive Officers:**                                                                   |       |                                |       |                       |       |                            |       |                 |       |                            |       |   |   |   |   |   |   |   |   |
| David J. Evans                                                                                                 |       |                                | 84,700     |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| William Abbott                                                                                                 |       |                                | 0          |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Wilford V.  Bane, Jr.(7)                                                                                  |       |                                | 13,165     |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Arnold L.  Chavkin(3)(5)                                                                                       |       |                                | 58,077,970 |                       |       |                            | 78.3       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |
| Glenn Curtis                                                                                                   |       |                                | 0          |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Robert J. Druten                                                                                               |       |                                | 18,500     |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Paul A.  FitzPatrick                                                                                           |       |                                | 0          |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Brian E. Gardner                                                                                               |       |                                | 0          |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Herbert A. Granath                                                                                             |       |                                | 0          |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| David E. Hall                                                                                                  |       |                                | 2,500      |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Donald J.  Hall, Jr.(8)                                                                                   |       |                                | 58,080,470 |                       |       |                            | 78.3       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |
| Irvine O.  Hockaday, Jr.(9)                                                                               |       |                                | 39,770     |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Anil Jagtiani                                                                                                  |       |                                | 8,000      |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| David Kenin(10)                                                                                                |       |                                | 201,500    |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Peter A. Lund(7)                                                                                               |       |                                | 13,165     |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| John P.  Mascotte(7)(11)                                                                                       |       |                                | 77,865     |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Chris R. Moseley                                                                                               |       |                                | 0          |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| Deanne R. Stedem                                                                                               |       |                                | 1,000      |                       |       |                            | *          |                 |       | —                          |       |   | — |   |   |   | * |   |   |
| All directors and  executive officers as a group  (22 persons)(5)(8)(12)                                       |       |                                | 58,560,985 |                       |       |                            | 78.7       | %                    |       | 30,670,422                      |       |   | 100 | % |   |   | 95.8 | % |   |

 

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*                    The percentageof shares or voting power beneficially owned does not exceed 1% of the class.

(1)          Pursuant to Rule 13d-3under the Securities and Exchange Act of 1934, as amended, a person hasbeneficial ownership of any securities as to which such person, directly orindirectly, through any contract, arrangement, undertaking, relationship, orotherwise has or shares voting power and/or investment power or as to whichsuch person has the right to acquire such voting and/or investment power within60 days from February 15, 2006. Percentage of beneficial ownership as toany person as of a particular date is calculated by dividing the number ofshares beneficially owned by such person by the sum of the number of sharesoutstanding as of such date and the number of unissued shares as to which theperson has the right to acquire voting and/or investment power within 60 days. Thenumber of shares shown includes outstanding shares of common stock owned as of February 15,2006 

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by the person indicatedand shares underlying options owned by such person on February 15, 2006that were exercisable within 60 days of that date. Percentage of total votingpower is based on votes of outstanding shares.

(2)          Based on a Schedule13D/A filed on August 15, 2005, jointly by Hallmark Cards, HEIC andHallmark Entertainment Holdings, who as of that date shared voting anddispositive power with respect to 30,670,422 shares of Class B CommonStock, which are convertible at the option of the holder into an equivalentnumber of shares of Class A Common Stock, and 53,215,080 shares of Class ACommon Stock. Does not include, under the column headed “Class A CommonStock,” the number of shares of Class A Common Stock that HEIC would holdif it converted all of its shares of Class B Common Stock into shares of Class ACommon Stock, which, if so converted, together with its shares of Class ACommon Stock would equal approximately 80% of the total outstanding Class ACommon Stock. HEIC is a majority owned subsidiary of Hallmark EntertainmentHoldings and Hallmark Entertainment Holdings is a wholly-owned subsidiary ofHallmark Cards.

(3)          On March 11, 2003,Hallmark Entertainment Holdings, Liberty and J.P. Morgan Partners contributed100% of their Company shares in return for HEIC shares representing the followingpercentage interest in HEIC: Hallmark Entertainment Holdings, 83.4%; Liberty,11.2%; and J.P. Morgan Partners, 4.6%. In addition, VISN contributed 10% of itsCompany shares in return for HEIC shares representing an 0.8% interest in HEIC.Each of the HEIC stockholders entered into the stockholders agreementconcerning HEIC and Crown shares. As a result, each of the above parties may bedeemed to beneficially own Company shares held by HEIC described in note (2) above.The total number of shares shown as beneficially owned by HEIC includes4,849,725 shares of Class A Common Stock beneficially owned by VISN and13,165 shares beneficially owned by JP Morgan Partners outside of HEIC becausethe parties to the HEIC stockholders agreement may be deemed to be acting as agroup. Beneficial ownership of these 4,862,890 shares of Class A CommonStock has been disclaimed by the other HEIC stockholders. Each of HallmarkEntertainment Holdings, Liberty and J.P. Morgan Partners has the right tonominate directors to the HEIC Board; and VISN is entitled to designate anon-voting observer to HEIC’s Board. In addition, Liberty and JP MorganPartners each have the right to nominate directors to the Crown Media Holdings’Board. Under the HEIC stockholders agreement, Hallmark Entertainment Holdingsdirects the voting of Crown Media Holdings shares owned by HEIC. Pursuant tothe HEIC stockholders agreement, HEIC may not sell, pledge, distribute ortransfer its Crown Media Holdings common stock without the consent of Liberty andJ.P. Morgan Partners, except for mergers and other combinations approved inaccordance with the Crown Media Holdings stockholders agreement. Thisrequirement terminates on the later of such date as each party (1) ceasesto own beneficially at least 2.5% of the outstanding HEIC common stock and (2) ceasesto own beneficially 75% of the HEIC stock owned by the party at March 11,2003.

(4)          Based on a Schedule13D/A filed on March 12, 2003 by Liberty.

(5)          Includes 13,165 sharesof Class A Common Stock underlying options that are held by J.P. MorganPartners, and which are vested or will vest within 60 days. Mr. Chavkinis: the Chief Investment Officer of J.P. Morgan Partners; one of the limitedpartners of JPMP Master Fund Manager, L.P.; the general partner of J.P. MorganPartners; and the Chief Investment Officer of JPMP Capital Corp., which is thesole general partner of JPMP Master Fund Manager, L.P. Mr. Chavkindisclaims beneficial ownership of all such shares, except to the extent of hispecuniary interest therein.

(6)          Based on a Schedule13G/A filed on February 13, 2004 by Hughes Electronics Corporation.

(7)          Consists of 13,165shares of Class A Common Stock underlying options that are vested or willvest within 60 days.

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(8)          Donald J. Hall, Jr.,may also be deemed to be a beneficial owner of the shares beneficially owned byHEIC because Mr. Hall is a co-trustee of a voting trust which controls allof the voting securities of Hallmark Cards and he is Vice Chairman of the boardof directors, Chief Executive Officer and President of Hallmark Cards. See note(2). Mr. Hall disclaims beneficial ownership of such shares, except to theextent of his pecuniary interest therein.

(9)          Includes 3,073 shares ofClass A Common Stock underlying options that are vested or will vestwithin 60 days.

(10)   Includes 200,000 shares of Class ACommon Stock underlying options that are vested or will vest within 60 days.

(11)   In addition, John P. Mascotte,may be deemed to be a beneficial owner of the shares beneficially owned by HEICbecause Mr. Mascotte is a co-trustee of a voting trust which controls allof the voting securities of Hallmark Cards and a director of Hallmark Cards. Seenote (2). Mr. Mascotte disclaims beneficial ownership of such shares.

(12)   Includes 255,733 shares of Class ACommon Stock underlying options that are vested or will vest within 60 days.

(13)   The National Interfaith CableCoalition, Inc. is a not-for-profit coalition of faith groups. NICC isgoverned by a board of sixteen trustees appointed by the major faith groups whoare members of NICC.

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

***Stock Plans***

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

**ITEM 13.**         CertainRelationships and Related Transactions

*The followingsummary descriptions of agreements to which we are a party are qualified intheir entirety by reference to the agreement to which each summary descriptionrelates, each of which we have filed with the SEC.*

Crown Media United Stateshas agreements with RHI Entertainment Distribution (successor of HallmarkEntertainment Distribution), which are described below, for services inconnection with the operation of the Crown film library and the licensing ofprogramming produced or distributed by RHI Entertainment Distribution. Since1995, Hallmark Entertainment Distribution had been a subsidiary of HallmarkEntertainment, LLC, which in turn was a wholly owned subsidiary of HallmarkCards Incorporated. On January 12, 2006, Hallmark Cards, Inc. soldthe equity interests in Hallmark Entertainment, LLC, and, thus indirectly,Hallmark Entertainment Distribution to the management of RHI Entertainment,together with affiliates of Kelso & Company. The name of HallmarkEntertainment, LLC was changed to RHI Entertainment, LLC. Crown Media UnitedStates’ agreements with Hallmark Entertainment Distribution/RHI EntertainmentDistribution are unaffected by the change in name and ownership, except thatthe agreements are now with a non-affiliate party.

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***Agreements Concerning the Film Assets***

In connection with the acquisition of the film assetsin 2001, we entered into the following agreements:

*Services Agreementwith Hallmark Entertainment, now RHI Entertainment*

·       RHIEntertainment provides services related to the administration, distribution andother exploitation of the film assets. We pay RHI Entertainment $750,000 peryear for these services. Prior to the sale of our international business in April 2005,we paid $1.5 million per year for these services.

·       Wepaid RHI Entertainment approximately $473,000 for these services from January 1,2005 through April 25, 2005, when they were providing the services forboth our domestic and international film library operations. Following the saleof our international businesses on April 25, 2005, we paid RHIEntertainment a fee of $500,000 for the remainder of 2005, during which timethey provided services only for our domestic library sales.

·       RHIEntertainment will use commercially reasonable efforts to maximize thelicensing revenue from the film assets consistent with its past efforts forcomparable products among the film library assets.

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

This services agreementwith RHI Entertainment will expire on December 31, 2006, but may beterminated by either party at any time before the expiration date on 60 daysnotice.

*Registration RightsAgreement*

We agreed to grantHallmark Entertainment Distribution four demand registration rights andunlimited piggyback registration rights with respect to the shares of Class Acommon stock that were issued with the purchase of the film assets. Theseregistration rights were later assigned to and are currently held by HEIC.

**HallmarkEntertainment Distribution/RHI Entertainment Distribution Programming Agreement**

Crown Media United States previously licensedprogramming from RHI Entertainment Distribution for distribution under anAmended and Restated Program License Agreement dated as of January 1,2001. This agreement was amended, effective January 1, 2005, by a SecondAmended and Restated Program License Agreement (“Second Restated Agreement”). ThisSecond Restated Agreement expires on December 31, 2008.

Under the Second Restated Agreement, RHI EntertainmentDistribution is required to produce and deliver to Crown Media United States,and Crown Media United States is required to order and license from RHIEntertainment Distribution, 13 original movies and 3 original mini-series in2005, 31 original movies and 6 original mini-series in 2006 and 18 originalmovies and 3 original mini-series in 2007. Crown Media United States may,however, completely cancel the 2007 commitment to order 18 original movies and3 original mini-series or it may reduce the number of original movies it isrequired to license in each of 2006 and 2007 by up to six movies per year. CrownMedia United States has exercised this option to reduce the original moviesproduced in 2006 to 12 movies. Crown Media United States has exclusive rightsto these original movies and mini-series during a three year exhibition window(the window is five years for certain holiday-themed movies and movies producedin 2005). Crown Media United States may exhibit the original movies andmini-series in any television media in the United States, its territories andpossessions (together with  Puerto Rico),including pay per view and high definition television. Crown Media United 

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States may also sublicenseits exhibition rights in any television media regarding the original and othermovies and mini-series covered by the agreement to third parties, subject tothe reasonable consent of RHI Entertainment Distribution. The license feepayable for the original movies produced in 2005 is $1,600,000 per movie; in2006 is $1,680,000 per movie and in 2007 is $1,764,000 per movie. If the moviesare produced for the Hallmark Channel’s “Mystery Movie” series, the licensefees are increased by $200,000 and if they are holiday-themed movies, thelicense fees are increased by $100,000. The license fees for mini-seriesproduced in 2005 are $800,000 per hour; in 2006 are $840,000 per hour; and in2007 are $882,000 per hour.  If the totalcompensation Crown Media United States receives from a sublicense exceeds thelicense fee which it is obligated to pay to RHI Entertainment Distribution, theexcess will be divided equally between Crown Media United States and RHIEntertainment Distribution. Crown Media United States must also share anyrevenues from video on demand or pay per view exploitation with RHIEntertainment Distribution.

In addition to the original movies and mini-Series,Crown Media United States has agreed to license from RHI EntertainmentDistribution 22 “off-network” movies and mini-series in 2005 and a maximum of15 such movies and mini-series in 2006 through 2008. These programs generallywill not have been seen on cable television in the United States prior to theirexhibition on the Hallmark Channel. The license fees payable for theoff-network movies are $268,029 per movie in 2005; $281,420 per movie in 2006;$295,491 per movie in 2007 and $310,266 per movie in 2008. The license feespayable for the off-network mini-series are $335,024 per hour in 2005; $351,775per hour in 2006; $369,364 per hour in 2007 and $387,832 per hour in 2008. CrownMedia United States’ initial exhibition period for these off-network movies andmini-series is three years and Crown Media United States’ exhibition rights areexclusive in all television media in the United States, including Puerto Rico. CrownMedia United States’ exhibition rights to these off-network movies andmini-series do not, however, include pay per view or video on demand. RHIEntertainment Distribution has an option to require Crown Media United Statesto license these off-network movies and mini-series for an additional, consecutivethree year period at a cost of 50% of the initial license fee.

Crown Media United States has also agreed to licenseup to 143 older movies and mini-series from the RHI Entertainment DistributionLibrary for a three year exclusive exhibition window, at an approximate totalcost of $57.5 million. Most of these movies and mini-series have previouslybeen exhibited on the Hallmark Channel and Hallmark Movie Channel.

Historically, the original movies and mini-seriesproduced by RHI Entertainment Distribution have been an essential element ofthe Hallmark Channel’s programming schedule and have been the highest-ratedprogramming on the Channel. This new agreement assures the Hallmark Channelcontinued access to these original productions through 2007. Crown Media UnitedStates is free, however, to acquire original programming from other suppliers. Theoff-network programming and older library programming acquired from RHIEntertainment Distribution have also been a critical part of the HallmarkChannel and Hallmark Movie Channel programming lineups.

A special committee of the Board of Directors and theBoard of Directors approved the Second Restated Agreement, and the Board (withdirectors affiliated with Hallmark Cards and J.P. Morgan Partners abstainingfrom the vote) authorized its execution.

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During the years ended December 31,2004 and 2005, Crown Media United States paid RHI Entertainment Distribution$5.0 million and $93.4 million, respectively under the First and Second Amendedand Restated Program License Agreements. As of December 31, 2004 and 2005,Crown Media United States had $116.6 million and $22.7 in accrued and unpaidprogram license fees under the program agreement, respectively. In addition, atDecember 31, 2005, Crown Media United States also prepaid certain programlicense fees to RHI Entertainment Distribution in the amount of $26.6 million.

***VISN Preferred Interest***

VISN, a subsidiaryof the National Interfaith Cable Coalition, Inc. (“NICC”), owns a $25.0million preferred interest in Crown Media United States. Under the Crown MediaUnited 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 netprofits in excess of $10.0 million, and the preferred interest has not beenredeemed, Crown Media United States will redeem the preferred interest in anamount equal to the lesser of:

·       suchexcess;

·       $5.0million; or

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

The members also agreedthat Crown Media United States will redeem the preferred interest at thepreferred interest liquidation preference on the date of redemption of December 31,2010.

***Crown Media United States Programming Agreement withNICC***

Effective February 22, 2001, Crown Media UnitedStates entered into an agreement with NICC which amended certain programmingproduction, funding and broadcast obligations which had been established underthe 1998 Amended and Restated Company Agreement.

In May 2005, Crown Media Holdings received aletter from NICC threatening litigation. The letter claimed that, among otherthings, Crown Media United States and RHI Entertainment had not honored theircommitments relating to the production and financing of NICC programming underthe 2001 agreement and had thereby breached the agreement. NICC alleged that,as a result of this breach, it had suffered damages in excess of $100.0million.

Effective December 1,2005, Crown Media Holdings and NICC entered into a new programming agreementand agreed to settle this dispute. Under the terms of the 2005 agreement, CrownMedia Holdings, on behalf of Crown Media United States, has agreed to continueto fund and broadcast (or has the right to broadcast) on the Hallmark Channelthrough the end of 2007 the following programming produced by NICC:

·       A Sunday Morning one-hourseries entitled “New Morning with Naomi Judd” at a cost of $3.5 million in2005, $4.6 million in 2006 and $5.6 million in 2007. The 2006 and 2007 amountsare payable quarterly in those years.

·       A weekday one-hour dailyseries entitled “New Morning” at a cost of $1.9 million in 2005, $4.2 millionin 2006 and $5.1 million in 2007. The 2005 amount includes a deferred amount of$535,000 to be paid as indicated below for deferred payments. The 2006 and 2007amounts are payable quarterly in those years.

·       A Sunday morningprogramming block, broadcast from 6 a.m. to 12 noon, at a cost ofapproximately $485,000 in 2005, $5.8 million in 2006 and $5.8 million,increased by a percentage equal to the increase in the Consumer Price Index, in2007. These amounts include deferred 

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payments of $125,000 for2005 and $1.5 million for each of 2006 and 2007. The 2006 and 2007 amounts notdeferred are payable quarterly in those years.

In addition, Crown Media Holdings has agreed to finishfunding four specials, the production of which had been commenced under the2001 agreement, at a total additional cost of $1.4 million in 2005 and 2006,and to fund an additional two non-dramatic specials, to be produced in 2006 and2007, at a total cost of $1.3 million. Amounts for the additional two specialsare payable one quarter in January, 2006 (provided production has commenced),one quarter in June, 2006 and one half in June, 2007 or upon a change incontrol (that is, a sale or merger where the aggregate ownership of theHallmark Channel by the current owners becomes less than 50%). The HallmarkChannel is not obligated to broadcast the latter two specials. Crown MediaHoldings will also provide $2.0 million in each of 2005, 2006 and 2007 to fundthe development by NICC of “made for television” movies and will pay NICC anadditional $1.0 million if the movie “A Reason to Believe”, which was to beproduced under the prior agreement, is not ultimately produced. The 2005 amountincludes a deferred payment of $1.8 million; the 2006 amount is payablesemi-annually in 2006; the 2007 amount is payable in January 2007; and thepossible additional $1.0 million is payable in July, 2006 or, if sooner, upon achange in control. The Hallmark Channel will have a right of first negotiationto acquire broadcast rights to the movies resulting from this development and,if it elects not to acquire these rights, may still recover a portion of itsfunding if the movies are produced for others. In addition, NICC will receive$45,000 in consulting fees from a series which HEI has produced, payable nolater than July, 2006, and a deferred payment of $750,000 as the last paymentfor certain terminated obligations.

The deferred payments mentioned above are payable toNICC on December 31, 2007 or upon a change in control, whichever comesfirst. Added to the deferred amounts will be (1) interest at the ratecharged by NICC’s prime lender or (2) if NICC sells Crown Media Holdingscommon stock to finance any deficit, the increase in the sale price of thecommon stock between the time NICC sells the stock to fund a deferred amountand the market price of the Crown Media Holdings common stock on the date thedeferred amounts are paid by Crown Media Holdings.

In the event there is a change of control of CrownMedia Holdings, NICC will immediately receive a $15.0 million “terminationpayment,” any remaining portions of the payments for the non-dramatic specialsand the “made for television” movie development described above and thedeferred payments described above. The Hallmark Channel will be obligated tocontinue to broadcast and pay for the Sunday “New Morning with Naomi Judd” andweekday “New Morning” series and the Sunday morning programming block for anadditional six months following the change in control, after which all fundingand broadcast obligations to NICC will cease. The total amount payable in theevent of a change of control would be approximately $25.0 million if a changein control closed in June, 2006. Also, under existing obligations, Crown MediaHoldings would be required to redeem the $25.0 million preferred interest ofNICC in Crown Media United States for that amount plus accrued interest atLIBOR from November 27, 2005.

If there has not been a change of control by June 30,2007, Crown Media Holdings is required to negotiate with NICC for a period of60 days regarding continuation of the programming commitments. If at the end ofthe negotiating period the parties have not reached agreement and Crown MediaHoldings is not willing to continue the programming commitments at the samelevels, NICC may compel Crown Media Holdings to buy all NICC’s outstandingshares of Crown Media Holdings common stock at the then current market value bya written notice given no later than November 1, 2007. If NICC sells morethan 50% of the shares of Crown Media Holdings common stock which it owned asof February 22, 2001, except as part of a sale of Crown Media Holdings,most of the commitments and obligations related to programming as describedabove cease at the end of the then current broadcast season (approximately August 31).

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The new agreement contains a mutual release of claimsfor any claims arising under the prior agreement. Hallmark Entertainment hadagreed to pay $3.0 million of the settlement amount, however, as part of thesale of Hallmark Entertainment, Hallmark Cards agreed to assume responsibilityfor $3 million of this payment and has indicated that it will credit the amountagainst amounts payable to it by the Company. RHI Entertainment remainsresponsible for payment of an additional $45,000.

During the years ended December 31,2004 and 2005, Crown Media United States paid the National Interfaith Cable Coalition$12.3 million and $12.5 million, respectively, related to this 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 theAffiliation Agreement, DirecTV distributes the Hallmark Channel on the TOTALCHOICE ® tier of its DBS distribution system in the United States and pay uslicense fees for such distribution. At the same time we entered into a StockPurchase Agreement with DIRECTV Enterprises whereby we issued 5,360,202 sharesof our Class A common stock, which shares were subsequently transferred toits parent company, Hughes Electronics Corporation. As of December 31,2005, DIRECTV accounted for 13.1 million of our subscribers.

***Hallmark Advertising***

Hallmark Cards purchased$1.8 million and $2.3 million of advertising on the Hallmark Channel in theUnited States at negotiated market rates, respectively, during the years ended December 31,2004 and 2005.

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

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

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

On December 14,2001, the Company executed a promissory note in the amount of $75.0 millionpayable to HC Crown in replacement of the promissory note with HC Crown dated September 28,2001. This note may be borrowed against or prepaid without penalty and has afinal maturity date no later than December 21, 2007. The line of credit issubordinate to the bank credit facility and its availability may be reduceddollar for dollar in an amount equal to additional capital raised by CrownMedia Holdings. The rate of interest under the line of credit is equal to LIBORplus three percent, payable quarterly. As of both December 31, 2004 and2005, the Company had borrowed $75.0 million, respectively, under this note.Under this note, the Company is obligated to pay a commitment fee of 1.5% ofthe initial maximum amount of the note, which may be paid by issuing commonstock valued at the average closing price of the common stock for the 15trading days prior to the date the fee is due. The commitment fee is payable inarrears in four equal installments on the last business day of each calendarquarter during 2002. We issued 192,262 shares as payment for the commitment feein the amount of $1.1 million. The line of credit was required by the creditfacility.

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

Hallmark Cards and RHIEntertainment entered into certain agreements in order to induce the banksyndicate to enter into the Company’s credit facility. Hallmark Cards, CrownMedia Holdings and the banks are parties to a subordination and supportagreement dated August 31, 2001. Under the subordination and supportagreement, the obligations of Crown Media Holdings to pay (a) anyborrowings under the HC Crown line of credit, and (b) approximately $70.0million in accounts payable to RHI Entertainment Distribution, which has beenconverted into a $70.0 million note payable to Hallmark Entertainment Holdings,are subordinated in right of payment to Crown Media Holdings’ obligations underits credit facility. In the subordination and support agreement, Hallmark Cardsalso agrees to cause HC Crown to advance up to $75.0 million under the HC Crownline of credit to Crown Media Holdings (less the amount of any reduction on theHC Crown line of credit because of the application of net cash proceeds fromissuing debt or equity as permitted by the bank credit agreement), to theextent necessary to enable Crown Media Holdings to meet its cash needsincluding the repayment of the bank loans, provided that Crown Media Holdingshas borrowed the full amount then available under the credit facility. Further,Hallmark Cards agreed that the HC Crown line of credit will not be declared dueand payable if any obligations to the banks remain outstanding.

As of both December 31, 2004 and 2005, borrowingsunder the HC Crown line of credit were $75.0 million. Accrued interest on thenote was $6.1 million and $11.3 million, respectively.

By an Amendment No. 9 dated as of March 21,2006, to the agreement for the bank credit facility, Hallmark Cards has beenprovided the right, by giving five business days written notice, to purchaseall of the bank lenders’ interest in the loans under the bank credit facilityfor an amount equal to the principal plus accrued, unpaid interest and otheramounts owing to any of the lending banks. Under the waiver and standbypurchase agreement described below, we can cause Hallmark Cards to completesuch a purchase. We view this purchase right as an alternative to the lendingbanks drawing down on the letter of credit described below.

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

Pursuant to Amendment No. 8, Hallmark Cards hasprovided an irrevocable letter of credit issued to JPMorgan Chase Bank byCitibank, N.A. in the amount of $320.0 million, as credit support for ourobligations under our credit facility. The support letter of credit was reducedto $220.0 million upon the consummation of the sale of our internationalbusiness and the reduction of the aggregate outstanding credit exposure of ourlenders to $220.0 million. Drawdowns under the letter of credit may be made foramounts due and payable under the credit facility and upon the occurrence ofcertain other events. Any proceeds received by JPMorgan Chase Bank from drawingunder this support letter of credit will not be applied to repay ourobligations, but will be used to purchase on the part of Hallmark Cards fromthe bank lenders subordinated participations in our obligations under our bankcredit facility, junior in payment to the bank lenders under the bank creditfacility. The support letter of credit automatically expires on June 10,2006.

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The credit facility, asamended, contains a number of affirmative and negative covenants, includinglimitations on “Restricted Payments.” Restricted Payments include any distribution on our equity; anyredemption or other acquisition of our equity; and any payment to HallmarkCards, RHI Entertainment or any of their affiliates. The credit agreement,however, permits Crown Media Holdings to pay Restricted Payments which are,among other things:  (1) Payments toHallmark Cards or an affiliate in payment of a valid outstanding obligation inan aggregate amount equal to the financial benefits received by us as a resultof the reduction of interest charges under the bank credit facility inAmendment No. 8 plus any fees and costs incurred by Hallmark Cards inconnection with the support letter of credit provided in accordance withAmendment No. 8; and (2) payments to RHI Entertainment Distributionpursuant to license agreements.

***Waiver and Standby Purchase Agreement***

For information onagreement of Hallmark Cards regarding amounts payable to Hallmark Cards and itsaffiliates, including any amounts resulting from a drawdown of the letter ofcredit that supports the credit facility with JP Morgan Chase Bank, see “BankCredit Facility and Hallmark Notes—Waiver and Standby Purchase Agreement” inItem 7 Management’s Discussion and Analysis of Financial Condition and Resultsof Operations above.

***Stockholders Agreement and Registration Rights***

*General*

We are a party to a stockholders agreement, amendedand restated as of August 30, 2001, as amended with VISN, HughesElectronics Corporation (“Hughes”), and Hallmark Entertainment Investments. Thestockholders agreement provides that our Board will consist of not less than 15directors, with 12 nominated by Hallmark Entertainment Investments, onenominated by VISN and two independent directors, who must not be officers,directors or employees of any of the parties or their affiliates, and who willbe nominated by the Board. The rights of the parties to nominate a directorwill terminate on the later of (1) such party owning less than 5% of ourcommon stock then outstanding or (2) such party ceasing to own at least75% of the number of shares of our common stock held by them immediately afterour initial public offering in May 2000. Hughes is entitled to appoint anobserver to the board of directors of Crown Media Holdings until Hughes and itsaffiliates cease to own beneficially in the aggregate at least 75% of theshares of our common stock acquired by DirecTV, the predecessor holder of theshares now held by Hughes, in the August 2001 transaction.

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

In addition, thestockholders agreement provides that, in the event that Hallmark EntertainmentInvestments proposes to transfer 20% or more of our outstanding common stock toan unaffiliated third party, each other party to the stockholders agreementwill have the right to participate on the same terms in that transaction withrespect to a proportionate number of such other party’s shares, except forHughes.

*HallmarkEntertainment Investments Co. Stockholders Agreement*

On March 11,2003, Hallmark Entertainment Holdings contributed 100% of the Crown MediaHoldings shares owned by it to Hallmark Entertainment Investments. Two of CrownMedia Holdings investors, Liberty Crown, Inc. (“Liberty”), a subsidiary ofLiberty Media, and J.P. Morgan, also contributed 100% of their Crown MediaHoldings Shares to Hallmark Entertainment Investments and VISN 

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contributed10% of its Crown Media Holdings shares to Hallmark Entertainment Investments,all in return for Hallmark Entertainment Investments shares. Prior to theHallmark Entertainment Investments transaction, J.P. Morgan and Liberty wereparties to the Crown Media Holdings stockholders agreement described above. Asa result of the Hallmark Entertainment Investments transaction, J.P. Morgan andLiberty no longer have any rights pursuant to such stockholders agreement.However, Hallmark Entertainment Investments has advised Crown Media Holdingsthat J.P. Morgan and Liberty will retain similar rights with respect to CrownMedia Holdings pursuant to the Hallmark Entertainment Investments stockholdersagreement dated March 11, 2003, among Hallmark Entertainment Investments,Hallmark Entertainment Holdings, Liberty, VISN, and J.P. Morgan, including thefollowing:

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

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

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

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

·       if Hallmark EntertainmentHoldings proposes to transfer 20% or more of Hallmark Entertainment Investmentscommon stock to an unaffiliated third party, each of J.P. Morgan, Liberty andVISN will have the right to participate on the same terms in the transaction ona proportional basis.

*Registration Rights*

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

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

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*Rights Relating ToCrown Media United States Amended and Restated Company Agreement*

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

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

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

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

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

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

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

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

In addition, we haveagreed not to transfer any of our interests in Crown Media United States afterthe second anniversary of our initial public offering unless the transfer isconditioned on the requirement that the transferee assume our obligationsdescribed above. Under the terms of the stockholders agreement, the transferee’sobligations will generally expire on the later of (1) the fifthanniversary of the initial public offering, (2) the second anniversary ofthe transfer or (3) the repayment of VISN’s preferred interest in CrownMedia United States, except that the obligations of the transferee will expireupon dissolution of Crown Media United States.

***Intercompany Services Agreement***

The Company has anintercompany services agreement with Hallmark Cards, which was entered into in2003 for a term of three years and then extended for an additional year throughJanuary 1, 2007. Under the agreement, Hallmark Cards provides us with thefollowing services:

·       taxservices;

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

·       legalservices;

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·       treasuryand cash management services; and

·       realestate consulting services.

We have agreed to payHallmark Cards $515,000 per year for these services, plus out-of-pocketexpenses and third party fees, payable in arrears on the last business day ofeach quarter. The balance of the payable for services, expenses and fees underthis and the previous services agreement as of December 31, 2004 and 2005,was approximately $3.5 million and $4.0 million, respectively. The intercompanyservices agreement was originally negotiated between officers of Crown MediaInternational and Hallmark Cards. The management of Crown Media Internationalbelieved that the services provided under the agreement had a value at leastequal to the annual fee.

***Hallmark Trademark License Agreements***

Crown Media United States operates under the benefitof a limited trademark license agreement with Hallmark Licensing, Inc.,amended and restated on March 27, 2001, which has also been extendedthrough September 1, 2006. The amended and restated Crown Media UnitedStates trademark agreement permits Crown Media United States to name itsnetwork service as the “Hallmark Channel.” The agreement contains usage standards, which limit certain types ofprogramming and programming content aired on Crown Media United States’network. Crown Media United States also has a similar trademark licenseagreement with Hallmark Licensing, Inc., which is effective January 1,2004, and expires September 1, 2006, to permit the use of the Hallmarktrademark in the name of the “Hallmark Movie Channel”.

Under the agreement, if Hallmark Cards notifies us inwriting that it has determined that we have failed to comply with the usagestandards set forth in the agreement or have otherwise breached our obligationsunder the agreement, we are required to stop any non-complying activity within10 days of that notice or we may be in default of the agreement. We also may bein default if Hallmark Cards delivers such a written notice to us with respectto 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 theprogram agreement with Hallmark Entertainment Distribution, if we fail to makeany payments due under loan agreements within five days of the due date, or ifwe receive an opinion from our auditors that shows that we no longer are agoing concern.

The license agreement canbe terminated immediately and without notice if we transfer in any way ourrights under the license agreement, if we have an event of default under theagreement or in events of bankruptcy, insolvency or similar proceedings.

***Tax Sharing Agreement***

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into theTax Sharing Agreement with Hallmark Cards. Hallmark Cards includes Crown MediaHoldings in its consolidated federal income tax returns. Accordingly, HallmarkCards benefits from future tax losses, which may be generated by Crown MediaHoldings. Based on the Tax Sharing Agreement, Hallmark Cards has paid and willpay Crown Media Holdings all of the benefits realized by Hallmark Cards as aresult of consolidation, 75% in cash on a quarterly basis and the balance whenCrown Media Holdings becomes a taxpayer. Under the Tax Sharing Agreement, atHallmark Cards’ option, this 25% balance may also be applied as an offsetagainst any amounts owed by Crown Media Holdings to any member of the HallmarkCards consolidation group under any loan, line of credit or other payable,subject to any limitations under any loan indentures or contracts restrictingsuch offsets.

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

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The Company received $56.6 million and $56.1 million(including the $30.0 million offset to intercompany debt during the thirdquarter of 2005) under the Tax Sharing Agreement during 2004 and 2005,respectively.

Hallmark EntertainmentHoldings contributed 100% of the Crown Media Holdings shares owned by it toHallmark Entertainment Investments. Two of Crown Media Holdings’ investors,Liberty and J.P. Morgan, also contributed 100% of their Crown Media Holdingsshares to Hallmark Entertainment Investments and VISN contributed 10% of itsCrown Media Holdings shares to Hallmark Entertainment Investments, all inreturn for Hallmark Entertainment Investments shares. Crown Media Holdingsunderstands that Hallmark Entertainment Investments intends to hold the CrownMedia Holdings Shares and to evaluate media investment opportunities in whichCrown Media Holdings does not have an interest. Hallmark EntertainmentHoldings, as the more than 80% owner of Hallmark Entertainment Investments,will have voting power over all of the Crown Media Holdings shares. The newstructure does not change the control of Crown Media Holdings.

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

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

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

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

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

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

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

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

In the event thatone of our directors or officers who is also a director or officer of HallmarkCards acquires knowledge of a potential transaction or matter which may be acorporate opportunity for both us 

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andHallmark Cards, that director or officer will have fully satisfied his or herfiduciary duty to us and our stockholders with respect to that corporateopportunity if that director or officer acts in a manner consistent with thefollowing policy:

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

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

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

For purposes of thepolicy:

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

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

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

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

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

***Transactions with JP Morgan Chase Bank***

We have a credit agreement with a syndicate of bankslead by JP Morgan Chase Bank providing a secured line of credit and term loanof up to a total of $220.0 million due May 31, 2006. For informationregarding the terms of the bank credit agreement, please see Item 7 Management’sDiscussion and Analysis of Financial Condition and Results of Operation under “BankCredit Facility and HC Crown Loans.” As part of this credit facility, JP MorganChase Bank originally committed to lend to us up to $45.0 million, now reducedto $31.0 million. At December 31, 2004 and 2005, JP Morgan Chase Bank hadoutstanding loans to us under the line of credit of $43.4 million and $29.6million, respectively. Each loan under the credit facility bears interest at aEurodollar rate or an alternate base rate as we may request at the time ofborrowing in accordance with the credit agreement. We are required to pay acommitment fee of 0.2% per annum of the committed, but not outstanding, amountsunder the revolving credit facility, payable in quarterly installments. Thiscommitment fee was 0.5% per annum prior to an amendment effective March 2005.We paid a total of $13.9 million in interest and $125,000 in fees to JP MorganChase Bank under the credit facility for the year ended December 31, 2004.We paid a total of $10.3 million in 

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interest and $125,000 infees to JP Morgan Chase Bank under the credit facility for the year ended December 31,2005.

JP Morgan Chase Bank served as an indenture trusteefor debentures issued by us in 2001 to Crown Media Trust in connection with theissuance of preferred securities by Crown Media Trust in a private placement. JPMorgan Chase Bank served as the property trustee under the trust creating theCrown Media Trust, which is one of several trustees of the Crown Media Trust,and also as the preferred guarantee trustee relating to our guarantee of thepreferred securities issued by Crown Media Trust. Chase Manhattan Bank USA,National Association, an affiliate of JP Morgan Chase Bank, served as theDelaware trustee of Crown Media Trust, which is a trustee with its principalplace of business in the State of Delaware. As a result of the repurchase ofthe Crown Media Trust preferred securities by Crown Media Holdings in 2003,this trust was dissolved.

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

Mr. Chavkin is theChief Investment Officer of JP Morgan Partners, LLC, a separate privateequity division of a large global services group, JP Morgan Chase &Co. He is also the Chief Investment Officer of JPMP CapitalCorp., which is one of the limited partners of JPMP Master Fund Manager,L.P. and general partner to various JPMP related funds.

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

*Audit Fees*

Thefollowing table presents aggregate fees billed for professional servicesrendered by KPMG LLP, our principal accountant in fiscal years 2004 and 2005:

| ** **                | ** ** | **Fiscal Year** | ** ** |
|---------------------------|------------|----------------------|------------|
| **Type of Fee** | ** ** | ** **           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Audit Fees(1)             |       | $                    | 801,807    |   | $ | 1,622,516 |   |
| Audit-Related  Fees(2)    |       | 291,098              |       | 105,985 |   |
| Tax Fees(3)               |       | —               |       | 52,136 |   |
| All Other Fees(4)         |       | 118,459              |       | — |   |
| Total Fees                |       | $                    | 1,211,364  |   | $ | 1,780,637 |   |
|                           |            |                      |            |  |  |  |  |  |  |

 

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(1)          *Audit Fees* are for the audit of our annualfinancial statements and review of financial statements included in our Forms 10-Qand statutory audits required for certain of our foreign subsidiaries.

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(2)          *Audit Related Fees*. In 2004 and 2005, these fees are for services rendered inconnection with management’s assessment of internal controls over financialreporting and the related report in accordance with the requirements of Section 404of the Sarbanes-Oxley Act of 2002.

(3)          *Tax Fees*.In 2004, these fees are for services rendered in connection with tax advice,the filing of foreign income tax returns and the filing of other forms.

(4)          *All Other Fees*. In 2005, these fees are for services rendered in connectionwith the Company’s sale of its international operations in 2004.

**Independence**

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

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**PART IV**

**ITEM 15.**         Exhibits and Financial Statement Schedules

(A)                List of Documents Filed as Part ofThis Report

(1) Consolidated Financial Statements

Reportsof KPMG LLP, Independent Registered Public Accounting Firm

ConsolidatedBalance Sheets as of December 31, 2004 and 2005

ConsolidatedStatements of Operations and Comprehensive Loss for the Years Ended December 31,2003, 2004, and 2005

ConsolidatedStatements of Stockholders’ Equity for the Years Ended December 31, 2003,2004, and 2005

ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2003, 2004, and2005

Notes to Consolidated Financial Statements

(2)          Exhibits

| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Purchase and Sale Agreement,  dated as of February 23, 2005, by and among CM Intermediary, LLC,  Bagbridge Limited and, solely with respect to Section 10.14 of the  Agreement, Crown Media Holdings, Inc. (previously filed as  Exhibit 2.1 to our Current Report on Form 8-K, filed on  February 23, 2005 and incorporated herein by reference).                |
| 2.2                 |       | Asset Purchase and Sale  Agreement, dated as of February 23, 2005, by and among Crown Media  Distribution, LLC, Bagbridge Limited and, solely with respect to  Section 10.14 of the Agreement, Crown Media Holdings, Inc.  (previously filed as Exhibit 2.2 to our Current Report on Form 8-K,  filed on February 23, 2005 and incorporated herein by reference). |
| 3.1                 |       | Amended and Restated  Certificate of Incorporation (previously filed as Exhibit 3.1 to our  Registration Statement on Form S-1/A (Amendment No. 2),  Commission File No. 333-95573, and incorporated herein by  reference).                                                                                                                                                 |
| 3.2                 |       | 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 and incorporated herein by reference).                                                                                                                                                         |
| 3.3                 |       | Amended and Restated By-Laws  (previously filed as Exhibit 3.2 to our Registration Statement on  Form S-1/A (Amendment No. 3), Commission File No. 333-95573,  and incorporated herein by reference).                                                                                                                                                                       |
| 4.1                 |       | Form of Specimen  Certificate for our Class A Common Stock (previously filed as  Exhibit 4.1 to our Registration Statement on Form S-1/A  (Amendment No. 1), Commission File No. 333-95573, and  incorporated herein by reference).                                                                                                                               |
| 10.1                |       | Second Amended and Restated  Stockholders Agreement, dated August 30, 2001 (previously filed as  Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on  November 13, 2001 and incorporated herein by reference).                                                                                                                                                       |
| 10.2                |       | Acknowledgment and Agreement  to the Second Amended and Restated Stockholders Agreement, dated as of  December 31, 2001, by Hallmark Entertainment Holdings, Inc.  (previously filed as Exhibit 10.2 to our Annual Report on Form 10-K  filed on March 29, 2002 and incorporated herein by reference).                                                                 |
| 10.3                |       | Acknowledgment and Agreement to the Second Amended and  Restated Stockholders Agreement, dated as of March 11, 2003, by Hallmark  Entertainment Investments Co. (previously filed as Exhibit 10.3 to our  Annual Report on Form 10-K filed on March 28, 2003 and  incorporated herein by reference).                                                                        |

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4                |       | Acknowledgement to the Second Amended and Restated  Stockholders Agreement, dated March 11, 2003, by JP Morgan Partners  (BHCA), L.P. (previously filed as Exhibit 10.4 to our Annual Report on  Form 10-K filed on March 28, 2003 and incorporated herein by  reference).                                                                                                                                                                                                 |
| 10.5                |       | Acknowledgement to the Second Amended and Restated  Stockholders Agreement, dated March 11, 2003, by Liberty  Crown, Inc. and Liberty Media Corporation. (previously filed as Exhibit 10.5  to our Annual Report on Form 10-K filed on March 28, 2003 and  incorporated herein by reference).                                                                                                                                                                         |
| 10.6                |       | Consent and Waiver to Second 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 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 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 and incorporated  herein by reference).                                                                                                                                                                                                  |
| 10.9                |       | Acknowledgment and Agreement to the Second Amended and  Restated Stockholders Agreement, dated as of February 28, 2003, by Hughes  Electronics Corporation (previously filed as Exhibit 10.9 to our Annual  Report on Form 10-K filed on March 28, 2003 and incorporated  herein by reference).                                                                                                                                                                            |
| 10.10               |       | Credit, Security, Guaranty and Pledge Agreement, dated  August 31, 2001, by and among Crown Media Holdings, Inc., its  Subsidiaries named therein, the Lenders named therein and The Chase Manhattan  Bank (now known as JPMorgan Chase Bank) as Administrative Agent and Issuing  Bank (previously filed as Exhibit 10.1 to our Current Report on  Form 8-K, filed on October 3, 2001 and incorporated herein by  reference).                                        |
| 10.11               |       | Amendment No. 1, dated as of December 14,  2001, to the Credit, Security, Guaranty and Pledge Agreement, dated as of  August 31, 2001, among Crown Media Holdings, Inc. as Borrower, the  Guarantors named therein, the Lenders named therein and JPMorgan Chase Bank  as Administrative Agent and as Issuing Bank (previously filed as  Exhibit 10.1 to our Current Report on Form 8-K, filed on  December 18, 2001 and incorporated herein by reference). |
| 10.12               |       | Amendment No. 2, dated as of December 31,  2001, to the Credit, Security, Guaranty and Pledge Agreement, dated as of  August 31, 2001, among Crown Media Holdings, Inc. as Borrower, the  Guarantors named therein, the Lenders named therein and JPMorgan Chase Bank  as Administrative Agent and as Issuing Bank (previously filed as  Exhibit 10.5 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).    |
| 10.13               |       | Amendment No. 3, dated as of March 29, 2002,  to the Credit, Security, Guaranty and Pledge Agreement, dated as of  August 31, 2001, among Crown Media Holdings, Inc. as Borrower, the  Guarantors named therein, the Lenders named therein and JPMorgan Chase Bank  as Administrative Agent and as Issuing Bank (previously filed as  Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on  May 15, 2002 and incorporated herein by reference).      |
| 10.14               |       | Amendment No. 4, dated as of May 15, 2002,  to the Credit, Security, Guaranty and Pledge Agreement, dated as of  August 31, 2001, among Crown Media Holdings, Inc. as Borrower, the  Guarantors named therein, the Lenders named therein and JPMorgan Chase Bank  as Administrative Agent and as Issuing Bank (previously filed as  Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed on  May 15, 2002 and incorporated herein by reference).        |

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15               |       | Amendment No. 5, dated as  of February 5, 2003, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.15 to our Annual Report on  Form 10-K, filed on March 28, 2003 and incorporated herein by  reference).      |
| 10.16               |       | Amendment No. 6, dated as  of August 4, 2003, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders named  therein and JPMorgan Chase Bank as Administrative Agent and as Issuing Bank  (previously filed as Exhibit 10.3 to our Current Report on Form 8-K,  filed on August 6, 2003 and incorporated herein by reference).          |
| 10.17               |       | Amendment No. 7, dated as  of October 28, 2004, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.3 to our Quarterly Report on  Form 10-Q, filed on November 15, 2004 and incorporated herein  by reference). |
| 10.18               |       | Amendment No. 8, dated as  of March 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               |       | Subordination and Support  Agreement dated August 31, 2001, among Crown Media Holdings, Inc.,  Hallmark Cards, Incorporated and The Chase Manhattan Bank (now known as JP  Morgan Chase Bank) as agent for the Lenders and the Issuing Bank referred to  in the Credit Agreement (previously filed as Exhibit 10.3 to our Current  Report on Form 8-K, filed on October 3, 2001, and  incorporated herein by reference).                                                 |
| 10.20               |       | Amended and Restated Limited  Guarantee Agreement and Acknowledgement, dated as of August 31, 2001 as  amended and restated as of December 14, 2001, made by Hallmark Cards,  Incorporated in favor of JP Morgan Chase Bank (formerly known as The Chase  Manhattan Bank) as agent on behalf of the Lenders and the Issuing Bank  (previously filed as Exhibit 10.7 to our Annual Report on Form 10-K,  filed on March 29, 2002 and incorporated herein by reference).   |
| 10.21               |       | Hallmark Inducement Agreement  dated August 31, 2001, between Hallmark Entertainment, Inc. and The  Chase Manhattan Bank (now known as JP Morgan Chase Bank) in its capacity as  agent under the Credit Agreement (previously filed as Exhibit 10.5 to  our Current Report on Form 8-K, filed on October 3, 2001, and  incorporated herein by reference).                                                                                                                |
| 10.22               |       | Securities Purchase Agreement,  dated as of December 17, 2001, by and among Crown Media  Holdings, Inc., Crown Media Trust and the Investors Named Therein  (previously filed as Exhibit 10.3 to our Current Report on Form 8-K,  filed on December 18, 2001, and incorporated herein by reference).                                                                                                                                                                     |
| 10.23               |       | Contingent Appreciation Certificate Agreement, dated  as of December 17, 2001, by and among Crown Media Holdings, Inc.  and the Holders Named Therein (previously filed as Exhibit 10.4 to our  Current Report on Form 8-K, filed on December 18, 2001, and  incorporated herein by reference).                                                                                                                                                                          |

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24               |       | Indenture, dated as of  December 17, 2001, by and between Crown Media Holdings, as Issuer, and  JPMorgan Chase Bank, as Indenture Trustee (previously filed as  Exhibit 10.5 to our Current Report on Form 8-K, filed on  December 18, 2001, and incorporated herein by reference).                                                                                                                                 |
| 10.25               |       | Preferred Securities Guarantee Agreement, dated as of  December 17, 2001, by and between Crown Media Holdings, Inc., as  Guarantor, and JPMorgan Chase Bank, as Preferred Guarantee Trustee  (previously filed as Exhibit 10.6 to our Current Report on Form 8-K,  filed on December 18, 2001, and incorporated herein by reference).                                                                          |
| 10.26               |       | Subordination and Support Agreement, dated as of  December 17, 2001, by and among Crown Media Holdings, Inc.,  Obligor, Crown Media Trust, Hallmark Cards, Incorporated, JPMorgan Chase  Bank, Indenture Trustee, and the holders of Certificates identified therein (previously  filed as Exhibit 10.7 to our Current Report on Form 8-K,  filed on December 18, 2001, and incorporated herein by reference). |
| 10.27               |       | 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).                                                |
| 10.28               |       | 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, and incorporated herein by  reference).                                                                         |
| 10.29               |       | Trademark License Extension Agreement, dated as of  November 30, 2002, by and between Hallmark Licensing, Inc. and  Crown Media United States, LLC (previously filed as Exhibit 10.32 to our  Annual Report on Form 10-K filed on March 28, 2003 and  incorporated by reference herein).                                                                                                                       |
| 10.30               |       | Trademark License Amendment and Extension Agreement,  dated as of August 28, 2003, by and between Hallmark  Licensing, Inc. and Crown Media United States, LLC (previously filed as  Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on  November 10, 2003 and incorporated by reference herein).                                                                                                      |
| 10.31               |       | 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).                                                                                                                     |
| 10.32               |       | 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).                                                                                                   |
| 10.33               |       | 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).                                                                                             |
| 10.34               |       | Security Agreement, dated as of August 1, 1999,  by and between Hallmark Entertainment Networks, Inc. (now known as Crown  Media International, Inc.) and Hallmark Cards, Incorporated (previously  filed as Exhibit 10.10 to our Registration Statement on Form S-1/A  (Amendment No. 1), Commission File No. 333-95573, and  incorporated herein by reference).                                    |
| 10.35               |       | Security Agreement, dated as of March 27, 2001,  by and between Odyssey Holdings, LLC (now known as Crown Media United States,  LLC) and Hallmark Licensing, Inc. (previously filed as  Exhibit 10.20 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                                                                                       |

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                             |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.36               |       | 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).                                                   |
| 10.37               |       | Amendment to the Amended and Restated Company  Agreement of Odyssey Holdings, LLC, dated March 15, 2001 (previously  filed as Exhibit 10.22 to our Annual Report on Form 10-K,  filed on March 29, 2002 and incorporated herein by reference).                                                                                                 |
| 10.38               |       | 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 and  incorporated herein by reference).                                                  |
| 10.39               |       | Agreement, dated as of March 5, 2003, by and  among Odyssey Holdings, LLC, National Interfaith Cable Coalition, Inc.  and VISN Management Corp. (previously filed as Exhibit 10.5 to our  Quarterly Report on Form 10-Q filed on May 15, 2003, and incorporated  herein by reference).                                                    |
| 10.40               |       | 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).                                  |
| 10.41               |       | Intercompany Services Agreement, made as of  December 23, 2002, by and between Hallmark Cards, Incorporated and Crown  Media Holdings, Inc. (previously filed as Exhibit 10.38 to our  Annual Report on Form 10-K filed on March 28, 2003 and  incorporated herein by reference).                                                         |
| 10.42               |       | Intercompany  Services Extension Agreement, dated as of January 1, 2006, by and  between Hallmark Cards, Incorporated and Crown Media Holdings, Inc.                                                                                                                                                                                                     |
| 10.43               |       | $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 and incorporated herein by reference).                                                                                      |
| 10.44               |       | $75,000,000 Promissory Note, dated December 14,  2001, made by Crown Media Holdings, Inc., Crown Media  International, Inc. and Crown Media United States, LLC in favor of HC  Crown Corp. (previously filed as Exhibit 10.2 to our Current Report on  Form 8-K, filed on December 18, 2001, and incorporated herein  by reference). |
| 10.45               |       | $150,000,000 Irrevocable  Standby Letter of Credit No. TS-07001786, dated October 3,  2001, issued by Credit Suisse First Boston, in favor of the Crown Media  Holdings, Inc. (previously filed as Exhibit 10.51 to our Annual  Report on Form 10-K, filed on March 29, 2002 and incorporated  herein by reference).                 |
| 10.46               |       | Reduction Certificate to $150,000,000 Irrevocable  Standby Letter of Credit, dated December 21, 2001 (previously filed as  Exhibit 10.52 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                                                                                    |
| 10.47               |       | Note Purchase Agreement, dated as of August 1,  2003 between Crown Media Holdings, Inc. and HC Crown Corp. (previously  filed as Exhibit 10.1 to our Current Report on Form 8-K filed  on August 6, 2003 and incorporated by reference herein).                                                                                           |
| 10.48               |       | 10.25% Senior Unsecured Discount Note dated  August 5, 2003 issued by Crown Media Holdings, Inc. (previously  filed as Exhibit 10.2 to our Current Report on Form 8-K filed  on August 6, 2003 and incorporated by reference herein).                                                                                                     |
| 10.49               |       | 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).                |

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.50               |       | Purchase  and Sale Agreement, dated April 10, 2001, by and between Crown Media  Holdings, Inc. and Hallmark Entertainment Distribution, LLC (previously  filed as Appendix A to definitive proxy materials filed on May 7, 2001,  and incorporated by reference herein).                                                                                                                                     |
| 10.51               |       | Service Agreement, dated  September 28, 2001, by and between Hallmark Entertainment, Inc.  (now RHI Entertainment LLC) and Crown Media Holdings, Inc., as assigned  to Crown Media Distribution, LLC, pursuant to letter dated December 14,  2001 (previously filed as Exhibit 10.28 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference). |
| 10.52               |       | Amendment to Library Services  Agreement, dated as of April 26, 2005, by and between Hallmark  Entertainment and Crown Media Distribution, LLC.                                                                                                                                                                                                                                                                        |
| 10.53               |       | Registration Rights Agreement,  dated as of September 28, 2001, by and between Crown Media  Holdings, Inc. and Hallmark Entertainment Distribution, as amended by  assignments dated September 28, 2001 and December 31, 2001  (previously filed as Exhibit 10.29 to our Annual Report on Form 10-K,  filed on March 29, 2002 and incorporated herein by reference).                     |
| 10.54               |       | Extension Agreement, dated as  of March 1, 2002, by and between Crown Media Holdings, Inc., Crown  Media Distribution, LLC and Hallmark Entertainment Distribution, LLC  (previously filed as Exhibit 10.44 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated by reference herein).                                                                                      |
| 10.55               |       | Federal Income Tax Sharing  Agreement, dated March 11, 2003, by and between Hallmark Cards,  Incorporated and Crown Media Holdings, Inc. (previously filed as  Exhibit 10.45 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated by reference herein).                                                                                                                     |
| 10.56               |       | Amendment No. 1 to  Federal Income Tax Sharing Agreement, dated August 5, 2003, by and  between Hallmark Cards, Incorporated and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.4 to our Quarterly Report on  Form 10-Q filed on August 14, 2003 and incorporated by  reference herein).                                                                                         |
| 10.57               |       | Stock Purchase Agreement,  dated as of August 20, 2001, by and between Crown Media  Holdings, Inc. and DIRECTV Enterprises, Inc. (previously filed as  Exhibit 10.7.1 to our Amendment No.1 to our Quarterly Report on  Form 10-Q/A filed on January 10, 2002 and incorporated herein  by reference).                                                                                         |
| 10.58               |       | Affiliation Agreement for DBS  Satellite Exhibition of Cable Network Programming, dated as of  August 20, 2001, by and between Crown Media United States, LLC, and  DIRECTV, Inc. (previously filed as Exhibit 10.7.2 to our Amendment  No.1 to our Quarterly Report on Form 10-Q/A filed on  January 10, 2002 and incorporated herein by reference).                                              |
| 10.59               |       | Affiliation Agreement for DBS  Satellite Exhibition of Cable Network Programming, dated as of March 6,  2000, by and between Crown Media United States, LLC, and DIRECTV, Inc.  (previously filed as Exhibit 10.7.3 to our Amendment No.1 to our  Quarterly Report on Form 10-Q/A filed on January 10, 2002 and  incorporated herein by reference).                                                |
| 10.60               |       | Letter, dated August 30,  2001, by and between DIRECTV, Inc. and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.7.4 to our Amendment No.1 to our  Quarterly Report on Form 10-Q/A filed on January 10, 2002 and  incorporated herein by reference).                                                                                                                              |

79

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.61               |       | Lease,  dated as of June 1, 1998, by and between High Pointe I Development Group  L.L.C. and Hallmark Entertainment Network, Inc. (now known as Crown  Media International, Inc.) (previously filed as Exhibit 10.20 to  our Registration Statement on Form S-1/A (Amendment No. 1),  Commission File No. 333-95573, and incorporated herein by  reference).                        |
| 10.62               |       | First Amendment to Lease,  dated as of March 23, 1999, by and between High Pointe I Development  Group L.L.C. and Hallmark Entertainment Network, Inc. (now known as  Crown Media International, Inc.) (previously filed as Exhibit 10.21  to our Registration Statement on Form S-1/A (Amendment  No. 1), Commission File No. 333-95573, and incorporated  herein by reference).   |
| 10.63               |       | Second Amendment to Lease,  dated as of August 17, 1999, by and between High Pointe I Development  Group L.L.C. and Hallmark Entertainment Network, Inc. (now known as  Crown Media International, Inc.) (previously filed as Exhibit 10.22  to our Registration Statement on Form S-1/A (Amendment  No. 1), Commission File No. 333-95573, and incorporated  herein by reference). |
| 10.64               |       | Third Amendment to Lease,  dated as of September 26, 2000, by and between High Pointe I Development  Group L.L.C. and Crown Media, Inc. (formerly known as Hallmark  Entertainment Networks, Inc.) (previously filed as Exhibit 10.20 to  our Annual Report on Form 10-K filed on March 27, 2001, and  incorporated herein by reference).                                                |
| 10.65               |       | Fourth Amendment to Lease,  dated as of February 6, 2001, by and between High Pointe I Development  Group, L.L.C. and Crown Media Inc. (now known as Crown Media International, Inc.)  (previously filed as Exhibit 10.21 to our Annual Report on Form 10-K  filed on March 27, 2001, and incorporated by reference herein).                                                                  |
| 10.66               |       | Fifth Amendment to Lease,  dated as of February 12, 2002, by and between High Pointe I Development  Group LLC and Crown Media, Inc. (previously filed as Exhibit 10.39  to our Annual Report on Form 10-K, filed on March 29, 2002  and incorporated herein by reference).                                                                                                                    |
| 10.67               |       | Sixth Amendment to Lease,  dated as of June 26, 2003, by and between High Point I Development Group  LLC and Crown Media International, LLC (previously filed as  Exhibit 10.62 to our Annual Report on Form 10-K, filed on  March 15, 2004 and incorporated herein by reference).                                                                                                                 |
| 10.68               |       | Guaranty of Lease Obligations,  dated June 1, 1998, by Hallmark Entertainment, Inc. for High Pointe  I Development Group L.L.C. (previously filed as Exhibit 10.23 to our  Registration Statement on Form S-1/A (Amendment No. 1),  Commission File No. 333-95573, and incorporated herein by  reference).                                                                               |
| 10.69*              |       | Amended and Restated Crown  Media Holdings, Inc. 2000 Long Term Incentive Plan (previously filed as  Exhibit 10.13 to Our Annual Report on Form 10-K filed on  March 27, 2001, and incorporated herein by reference).                                                                                                                                                                              |
| 10.70*              |       | 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).                                                                                                                                                            |
| 10.71*              |       | 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).                                                                                                                                                                             |
| 10.72*              |       | Form of Crown Media  Holdings, Inc. 2005 Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                                                                                    |
| 10.73*              |       | Employment Agreement, dated as  of September 18, 2001, between Crown Media Holdings, Inc. and David  Evans (previously filed as Exhibit 10.8 to our Quarterly Report on  Form 10-Q filed on November 13, 2001 and incorporated herein  by reference).                                                                                                                                         |

80

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                        |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.74*              |       | Amendment  No. 1 to Employment Agreement, dated as of May 28, 2004, between  Crown Media Holdings, Inc. and David Evans (previously filed as  Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on  August 9, 2004 and incorporated herein by reference).                                                 |
| 10.75*              |       | Employment Agreement Amendment  No. 2, dated as of August 17, 2005, by and between David Evans and  Crown Media Holdings, Inc.                                                                                                                                                                                                 |
| 10.76*              |       | Crown Media  Holdings, Inc. 2004 Restricted Stock Unit Agreement, dated as of  May 28, 2004, by and between Crown Media Holdings, Inc. and David  Evans (previously filed as Exhibit 10.5 to our Quarterly Report on  Form 10-Q filed on August 9, 2004 and incorporated herein by  reference).                 |
| 10.77*              |       | Amended and Restated Crown  Media Holdings, Inc. Restricted Stock Unit Agreement, dated as of  May 25, 2004, by and between Crown Media Holdings, Inc. and David  Evans (previously filed as Exhibit 10.6 to our Quarterly Report on  Form 10-Q filed on August 9, 2004 and incorporated herein by  reference). |
| 10.78*              |       | Crown Media  Holdings, Inc. 2005 Restricted Stock Unit Agreement, dated as of  August 17, 2005, by and between Crown Media Holdings, Inc. and  David Evans.                                                                                                                                                                    |
| 10.79*              |       | Amendment to Crown Media  Holdings, Inc. 2005 Restricted Stock Unit Agreement, dated as of  August 17, 2005, by and between Crown Media Holdings, Inc. and  David Evans.                                                                                                                                                       |
| 10.80*              |       | Employment Agreement, dated as  of June 20, 2003, between Crown Media Holdings, Inc. and Chris  Moseley (previously filed as Exhibit 10.9 to our Quarterly Report on  Form 10-Q, filed on November 10, 2003 and incorporated herein  by reference).                                                                  |
| 10.81*              |       | Letter Agreement dated as of  May 24, 2004, by and between Crown Media Holdings, Inc. and Chris  Moseley (previously filed as Exhibit 10.84 to our Annual Report on  Form 10-K, filed on May 27, 2005 and incorporated herein by  reference).                                                                        |
| 10.82*              |       | Employment Agreement, dated as  of October 25, 2003, by and between Crown Media Holdings, Inc. and  Charles Stanford (previously filed as Exhibit 10.66 to our Annual Report  on Form 10-K, filed on March 15, 2004 and incorporated herein  by reference).                                                          |
| 10.83*              |       | Employment Agreement,  effective as of January 1, 2004, by and between Crown Media  Holdings, Inc. and William Aliber (previously filed as  Exhibit 10.86 to our Annual Report on Form 10-K, filed on  May 27, 2005 and incorporated herein by reference).                                                           |
| 10.84*              |       | Employment Agreement, dated as  of September 15, 2003, by and between Crown Media Holdings, Inc.  and Paul FitzPatrick (previously filed as Exhibit 10.8 to our Quarterly  Report on Form 10-Q, filed on November 10, 2003 and  incorporated herein by reference).                                                   |
| 10.85*              |       | Employment Agreement, dated as  of December 20, 2001, by and between Crown Media  International, Inc. and Russel H. Givens, Jr. (previously filed as  Exhibit 10.47 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                          |
| 10.86*              |       | Letter Agreement dated  April 2, 2004, amending Employment Agreement by and between Crown Media  International, Inc. and Russel H. Givens, Jr. (previously filed as  Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on  May 10, 2004, and incorporated herein by reference).                          |
| 10.87*              |       | Employment Agreement, dated as  of December 20, 2001, by and between Crown Media United States, LLC and  David Kenin (previously filed as Exhibit 10.6 to our Quarterly Report on  Form 10-Q, filed on May 15, 2003 and incorporated herein by  reference).                                                               |
| 10.88*              |       | 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)                                                          |

81

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| Exhibit Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.89*              |       | Employment Agreement, dated as  of June 23, 2003, by and between Crown Media Holdings, Inc. and  William Abbott (previously filed as Exhibit 10.7 to our Quarterly Report  on Form 10-Q, filed on November 10, 2003 and incorporated  herein by reference).                                                                |
| 10.90*              |       | Employment Agreement, dated as  of September 25, 2001, by and between Crown Media United States, LLC and  Lana Corbi (previously filed as Exhibit 10.46 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference).                                                                     |
| 10.91*              |       | Severance Agreement, dated  December 26, 2002, by and between Lana Corbi and Crown Media United  States, LLC (previously filed as Exhibit 10.63 to our Annual Report on  Form 10-K, filed on March 28, 2003 and incorporated herein by  reference).                                                                             |
| 10.92*              |       | Employment Agreement, dated as  of March 12, 2004, by and between Crown Media International, Inc.  and Jeff Henry. (previously filed as Exhibit 10.2 to our Quarterly  Report on Form 10-Q, filed on May 10, 2004 and incorporated  herein by reference).                                                                  |
| 10.93*              |       | Letter Agreement, dated as of  July 9, 2004, by and between Crown Media Holdings, Inc. and Jeff Henry  (previously filed as Exhibit 10.1 to our Quarterly Report on  Form 10-Q, filed on August 9, 2004 and incorporated herein by  reference).                                                                            |
| 10.94*              |       | 2005 Deferred Compensation  Plan of Crown Media Holdings, Inc. (previously filed as  Exhibit 10.98 to our Annual Report on Form 10-K, filed on  May 27, 2005 and incorporated herein by reference).                                                                                                                             |
| 10.95               |       | 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).                                                 |
| 10.96*              |       | Compromise Agreement, dated as  of April 22, 2005, by and between Jeffrey Henry and Crown Media  International, LLC. (previously filed as Exhibit 10.100 to our Annual  Report on Form 10-K, filed on May 27, 2005 and incorporated  herein by reference).                                                                      |
| 10.97               |       | $132,785,424 Promissory Note,  dated October 1, 2005, made by Crown Media United States, LLC in favor  of Hallmark Entertainment Distribution, LLC.                                                                                                                                                                                            |
| 10.98               |       | Waiver and Standby Purchase Agreement, dated as of  March 21, 2006 among Hallmark Cards Incorporated, HC Crown Corp.,  Hallmark Entertainment Holdings, Inc. and Crown Media  Holdings, Inc., Crown Media United States LLC and subsidiaries of Crown  Media Holdings, Inc.                                           |
| 10.99               |       | 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. |
| 21.1                |       | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                               |
| 23.2                |       | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                |
| 31.1                |       | Rule 13a-14(a) Certification  executed by the Company’s President and Chief Executive Officer.                                                                                                                                                                                                                                       |
| 31.2                |       | Rule 13a-14(a) Certification  executed by the Company’s Executive Vice President and Chief Financial  Officer.                                                                                                                                                                                                                       |
| 32                  |       | Section 1350  Certifications.                                                                                                                                                                                                                                                                                                                  |
| 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 orcompensating plan or arrangement.

82

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**SIGNATURES**

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

|          | CROWN MEDIA HOLDINGS, INC. |
|----------|----------------------------|
|     | By:                        | /s/ DAVID J. EVANS |
|     |                       | David J. Evans |
| * * |                       | *President and Chief Executive Officer* |

March 29, 2006

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

| Signature                    | ** ** | **Title**                | ** ** | **Date**             |
|------------------------------|------------|--------------------------|------------|----------------------|
| /s/  DAVID J. EVANS          |       | Director  and Principal  |       | March 29,  2006 |
| David J. Evans               |       | Executive Officer        |       |                 |
| /s/  WILLIAM J. ALIBER       |       | Principal  Financial and |       | March 29,  2006 |
| William J. Aliber            |       | Accounting Officer       |       |                 |
| /s/  WILFORD V. BANE, JR.    |       | Director                 |       | March 29,  2006 |
| Wilford V. Bane, Jr.    |       |                     |       |                 |
| /s/  ARNOLD L. CHAVKIN       |       | Director                 |       | March 29,  2006 |
| Arnold L. Chavkin            |       |                     |       |                 |
| /s/  GLENN CURTIS            |       | Director                 |       | March 29,  2006 |
| Glenn Curtis                 |       |                     |       |                 |
| /s/  ROBERT J. DRUTEN        |       | Director                 |       | March 29,  2006 |
| Robert J. Druten             |       |                     |       |                 |
| /s/  BRIAN GARDNER           |       | Director                 |       | March 29,  2006 |
| Brian Gardner                |       |                     |       |                 |
| /s/  HERBERT GRANATH         |       | Director                 |       | March 29,  2006 |
| Herbert Granath              |       |                     |       |                 |
| /s/  DAVID E. HALL           |       | Director                 |       | March 29,  2006 |
| David E. Hall                |       |                     |       |                 |
| /s/  DONALD J. HALL, JR.     |       | Director                 |       | March 29,  2006 |
| Donald J. Hall, Jr.     |       |                     |       |                 |
| /s/  IRVINE O. HOCKADAY, JR. |       | Director                 |       | March 29,  2006 |
| Irvine O. Hockaday, Jr. |       |                     |       |                 |
| /s/  ANIL JAGTIANI           |       | Director                 |       | March 29,  2006 |
| Anil Jagtiani                |       |                     |       |                 |
| /s/  PETER A. LUND           |       | Director                 |       | March 29,  2006 |
| Peter A. Lund                |       |                     |       |                 |
| /s/  JOHN P. MASCOTTE        |       | Director                 |       | March 29,  2006 |
| John P. Mascotte             |       |                     |       |                 |
| /s/  DEANNE R. STEDEM        |       | Director                 |       | March 29,  2006 |
| Deanne R. Stedem             |       |                     |       |                 |

 

83

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Reports of Independent Registered Public Accounting  Firm                                                                      |       | F-3      |       |
| Consolidated Balance Sheets as of December 31,  2004 and 2005                                                        |       | F-6      |       |
| Consolidated Statements of Operations and  Comprehensive Loss for the Years  Ended December 31, 2003, 2004 and 2005  |       | F-8      |       |
| Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31,  2003, 2004 and 2005 |       | F-9      |       |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2003, 2004  and 2005                         |       | F-10     |       |
| Notes to Consolidated Financial Statements                                                                                     |       | F-12     |       |

 

F-1

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(This page intentionally left blank)

F-2

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors and StockholdersCrown Media Holdings, Inc.:

We have audited the accompanying consolidated balancesheets of Crown Media Holdings, Inc. and subsidiaries (the Company) as of December 31,2005 and 2004, and the related consolidated statements of operations andcomprehensive loss, stockholders’ equity (deficit), and cash flows for each ofthe years in the three-year period ended December 31, 2005. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Crown Media Holdings, Inc. and subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2005,in conformity with U.S. generally accepted accounting principles.

Crown Media Holdings, Inc. and subsidiariesadopted Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity*, effective July 1, 2003.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 28,2006****expressed an unqualifiedopinion on management’s assessment of, and an adverse opinion on the effectiveoperation of, internal control over financial reporting.

/s/ KPMG LLP

Denver, ColoradoMarch 28, 2006

F-3

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors and StockholdersCrown Media Holdings, Inc.:

We have audited management’s assessment, included inthe accompanying “Management’s Report on Internal Control over Financial Reporting”(Item 9A.b), that Crown Media Holdings, Inc. (the Company) did notmaintain effective internal control over financial reporting as of December 31,2005, because of the effect of material weaknesses identified in management’sassessment, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Crown Media Holdings, Inc.’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

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

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

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

A material weaknessis a control deficiency, or combination of control deficiencies, that resultsin more than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. The followingmaterial weaknesses have been identified and included in management’sassessment as of December 31, 2005:

·       TheCompany does not have sufficient policies and procedures related to the reviewof the Company’s annual and interim consolidated financial statements.Specifically, the following deficiencies were identified: (a) ineffectivereview of the consolidated statement of cash flows; (b) inadequatedetailed and comprehensive review of the underlying information supporting theamounts included in the Company’s annual and interim consolidated financialstatements and disclosures; and (c) inadequate review of informationavailable subsequent to the financial reporting close process for appropriaterecognition and disclosure in the Company’s annual and 

F-4

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interim consolidatedfinancial statements. These deficiencies resulted in a material error in thepresentation of a non-cash item in the consolidated statements of cash flowsfor the nine-month period ended September 30, 2005 and the year ended December 31,2005; errors in the classification of short- and long-term balance sheetaccounts in the December 31, 2005 consolidated financial statements; anderrors in the amounts of commitments and contingencies disclosed in the December 31,2005 consolidated financial statements. These errors were corrected prior tothe issuance of the Company’s consolidated financial statements as of and forthe year ended December 31, 2005. These deficiencies result in more than aremote likelihood that a material misstatement of the annual or interimconsolidated financial statements would not be prevented or detected on atimely basis.

·       TheCompany’s controls over access to the general ledger and certain accountingapplication systems were not designed effectively to provide adequatesegregation of duties. Specifically, the following design deficiencies wereidentified: (a) certain members of accounting management had the abilityto both initiate and approve journal entries; (b) certain members ofaccounting management had the ability to initiate and approve the payment ofinvoices and sign checks; and (c) a member of accounting management hadaccess to an accounting application system and the ability to changeinformation included therein without review and approval. These deficienciesresult in more than a remote likelihood that a material misstatement of theannual or interim consolidated financial statements would not be prevented ordetected on a timely basis.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Crown Media Holdings, Inc. and subsidiariesas of December 31, 2005 and 2004, and the related consolidated statementsof operations and comprehensive loss, stockholders’ equity (deficit) and cashflows for each of the years in the three-year period ended December 31,2005. The aforementioned material weaknesses were considered in determining thenature, timing, and extent of audit tests applied in our audit of the 2005consolidated financial statements, and this report does not affect our reportdated March 28, 2006, which expressed an unqualified opinion on thoseconsolidated financial statements.

In our opinion, management’sassessment that Crown Media Holdings, Inc. did not maintain effectiveinternal control over financial reporting as of December 31, 2005, isfairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, becauseof the effect of the material weaknesses described above on the achievement ofthe objectives of the control criteria, Crown Media Holdings, Inc. has notmaintained effective internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

/s/ KPMG LLP

Denver, ColoradoMarch 28, 2006

F-5

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

| ** **                                                                                              | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ASSETS                                                                                                  |       |                                  |       |   |   |
| Cash and cash equivalents                                                                               |       | $                                     | 12,102     |   | $ | 15,926 |   |
| Accounts receivable, less allowance for doubtful accounts of  $6,695 and $1,565, respectively |       | 75,459                                |       | 65,935 |   |
| Program license fees—affiliates                                                                    |       | 40,048                                |       | 35,528 |   |
| Program license fees—non-affiliates                                                                |       | 78,823                                |       | 73,670 |   |
| Subtitling and dubbing, net                                                                             |       | 1,143                                 |       | — |   |
| Receivable from affiliate                                                                               |       | 16,644                                |       | 1,815 |   |
| Receivable from buyer of international business                                                         |       | —                                |       | 422 |   |
| Prepaid and other assets                                                                                |       | 6,237                                 |       | 6,051 |   |
| Prepaid program license fee assets                                                                      |       | 7,650                                 |       | 30,377 |   |
| Total current assets                                                                                    |       | 238,106                               |       | 229,724 |   |
| Accounts receivable                                                                                     |       | 6,798                                 |       | 9,101 |   |
| Program license fees—affiliates                                                                    |       | 59,987                                |       | 79,875 |   |
| Program license fees—non-affiliates                                                                |       | 135,372                               |       | 148,022 |   |
| Subtitling and dubbing                                                                                  |       | 1,583                                 |       | — |   |
| Film assets, net                                                                                        |       | 599,013                               |       | 380,322 |   |
| Subscriber acquisition fees, net                                                                        |       | 120,013                               |       | 80,594 |   |
| Property and equipment, net                                                                             |       | 32,829                                |       | 18,560 |   |
| Goodwill                                                                                                |       | 314,033                               |       | 314,033 |   |
| Prepaid and other assets                                                                                |       | 5,034                                 |       | 13,595 |   |
| Total assets                                                                                            |       | $                                     | 1,512,768  |   | $ | 1,273,826 |   |

 

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

F-6

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

 

| ** **                                                                                                                                                                 | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                       |       |                                  |       |   |   |
| LIABILITIES:                                                                                                                                                               |       |                                  |       |   |   |
| Accounts  payable and accrued liabilities                                                                                                                                  |       | $                                     | 40,228     |   | $ | 29,876 |   |
| Accrued  restricted stock units                                                                                                                                            |       | 13,649                                |       | 9,299 |   |
| Subscriber  acquisition fees payable                                                                                                                                       |       | 35,223                                |       | 12,238 |   |
| License  fees payable to affiliates                                                                                                                                        |       | —                                |       | 25,433 |   |
| License  fees payable to non-affiliates                                                                                                                                    |       | 79,815                                |       | 27,757 |   |
| Payables  to affiliates                                                                                                                                                    |       | 13,512                                |       | 12,826 |   |
| Payable  to buyer of international business                                                                                                                                |       | —                                |       | 10,050 |   |
| Interest  payable                                                                                                                                                          |       | 479                                   |       | 169 |   |
| Capital  lease obligations                                                                                                                                                 |       | 2,276                                 |       | 612 |   |
| Deferred  revenue                                                                                                                                                          |       | 612                                   |       | 1,149 |   |
| Deferred  credit from technical services agreement                                                                                                                         |       | —                                |       | 1,323 |   |
| Total  current liabilities                                                                                                                                                 |       | 185,794                               |       | 130,732 |   |
| Accrued  liabilities                                                                                                                                                       |       | 21,617                                |       | 24,427 |   |
| Subscriber  acquisition fees payable                                                                                                                                       |       | 678                                   |       | — |   |
| License  fees payable to affiliates                                                                                                                                        |       | 151,980                               |       | 586 |   |
| License  fees payable to non-affiliates                                                                                                                                    |       | 111,761                               |       | 186,268 |   |
| Line  of credit and interest payable to HC Crown                                                                                                                           |       | 81,067                                |       | 86,309 |   |
| Payable  to Hallmark Cards affiliates                                                                                                                                      |       | 100,000                               |       | 70,000 |   |
| Payable  to buyer of international business                                                                                                                                |       | —                                |       | 8,395 |   |
| Senior  unsecured note to HC Crown, including accrued interest                                                                                                             |       | 460,930                               |       | 509,386 |   |
| Credit  facility                                                                                                                                                           |       | 310,000                               |       | 210,000 |   |
| Note  and interest payable to Hallmark Cards affiliate                                                                                                                     |       | —                                |       | 135,187 |   |
| Capital  lease obligations                                                                                                                                                 |       | 22,817                                |       | 16,170 |   |
| Company  obligated mandatorily redeemable preferred  interest                                                                                                         |       | 11,488                                |       | 14,537 |   |
| Deferred  credit from technical services agreement                                                                                                                         |       | —                                |       | 5,018 |   |
| Total  liabilities                                                                                                                                                         |       | 1,458,132                             |       | 1,397,015 |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                              |       |                                  |       |   |   |
| STOCKHOLDERS’ EQUITY  (DEFICIT):                                                                                                                                      |       |                                  |       |   |   |
| Class A  common stock, $.01 par value; 200,000,000 shares authorized; 73,863,037 and  74,117,654 shares issued and outstanding as of December 31, 2004 and  2005 |       | 739                                   |       | 741 |   |
| Class B  common stock, $.01 par value; 120,000,000 shares  authorized; 30,670,422 shares issued and  outstanding as of December 31, 2004 and 2005      |       | 307                                   |       | 307 |   |
| Paid-in  capital                                                                                                                                                           |       | 1,365,450                             |       | 1,423,815 |   |
| Accumulated  other comprehensive income                                                                                                                                    |       | 3,434                                 |       | — |   |
| Accumulated  deficit                                                                                                                                                       |       | (1,315,294                            | )          | (1,548,052 | ) |
| Total  stockholders’ equity (deficit)                                                                                                                                 |       | 54,636                                |       | (123,189 | ) |
| Total liabilities and  stockholders’ equity (deficit)                                                                                                                 |       | $                                     | 1,512,768  |   | $ | 1,273,826 |   |

 

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

F-7

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except per share data)**

| ** **                                                                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue:                                                                                                                       |       |                                        |       |   |   |   |   |
| Subscriber  fees                                                                                                               |       | $                                           | 4,329      |   | $ | 9,874 |   | $ | 18,746 |   |
| Advertising                                                                                                                    |       | 76,153                                      |       | 104,481 |   | 143,780 |   |
| Advertising  by Hallmark Cards                                                                                                 |       | 1,397                                       |       | 1,846 |   | 2,335 |   |
| Film  asset license fees                                                                                                       |       | 17,548                                      |       | 22,035 |   | 21,693 |   |
| Sublicense  fees and other revenue                                                                                             |       | 6                                           |       | — |   | 10,830 |   |
| Total  revenue, net                                                                                                            |       | 99,433                                      |       | 138,236 |   | 197,384 |   |
| Cost of Services:                                                                                                              |       |                                        |       |   |   |   |   |
| Programming costs                                                                                                              |       |                                        |       |   |   |   |   |
| Affiliates                                                                                                                     |       | 27,697                                      |       | 35,066 |   | 46,028 |   |
| Non-affiliates                                                                                                                 |       | 40,578                                      |       | 54,812 |   | 74,549 |   |
| Amortization  of film assets                                                                                                   |       | 12,965                                      |       | 28,905 |   | 51,619 |   |
| Impairment  of film assets                                                                                                     |       | —                                      |       | 22,003 |   | 25,542 |   |
| Subscriber  acquisition fee amortization expense                                                                               |       | 22,961                                      |       | 26,020 |   | 35,928 |   |
| Amortization  of capital leases                                                                                                |       | —                                      |       | 96 |   | 1,158 |   |
| Other  costs of services                                                                                                       |       | 13,351                                      |       | 10,939 |   | 20,448 |   |
| Total  cost of services                                                                                                        |       | 117,552                                     |       | 177,841 |   | 255,272 |   |
| Selling, general and administrative expense                                                                                    |       | 41,811                                      |       | 52,209 |   | 55,162 |   |
| Marketing expense                                                                                                              |       | 16,619                                      |       | 16,477 |   | 24,160 |   |
| Reorganization expense                                                                                                         |       | 993                                         |       | — |   | — |   |
| Depreciation and amortization expense                                                                                          |       | 6,245                                       |       | 6,306 |   | 4,471 |   |
| Loss  from operations before interest expense and income tax  provision                                                   |       | (83,787                                     | )          | (114,597 | ) | (141,681 | ) |
| Loss on early extinguishment of debt                                                                                           |       | (39,812                                     | )          | — |   | — |   |
| Guaranteed preferred beneficial interest accretion                                                                             |       | (23,218                                     | )          | — |   | — |   |
| Interest expense                                                                                                               |       | (39,758                                     | )          | (60,179 | ) | (73,856 | ) |
| Loss  before discontinued operations and cumulative effect of change in accounting  principle                                  |       | (186,575                                    | )          | (174,776 | ) | (215,537 | ) |
| Loss from discontinued operations, net of tax                                                                                  |       | (35,574                                     | )          | (142,030 | ) | (10,683 | ) |
| Loss from sale of discontinued operations                                                                                      |       | —                                      |       | — |   | (6,538 | ) |
| Loss  before cumulative effect of change in accounting principle                                                               |       | (222,149                                    | )          | (316,806 | ) | (232,758 | ) |
| Cumulative effect of change in accounting principle                                                                            |       | 17,000                                      |       | — |   | — |   |
| Net  loss                                                                                                                      |       | $                                           | (205,149   | ) | $ | (316,806 | ) | $ | (232,758 | ) |
| Other comprehensive income  (loss):                                                                                            |       |                                        |       |   |   |   |   |
| Foreign currency translation adjustment                                                                                        |       | 1,366                                       |       | 1,421 |   | (3,434 | ) |
| Comprehensive  loss                                                                                                            |       | $                                           | (203,783   | ) | $ | (315,385 | ) | $ | (236,192 | ) |
| Weighted average number of Class A and Class B shares outstanding,  basic and diluted                           |       | 104,484                                     |       | 104,533 |   | 104,619 |   |
| Loss per share before discontinued operations and cumulative effect  of change in accounting principle, basic and diluted |       | $                                           | (1.78      | ) | $ | (1.67 | ) | $ | (2.06 | ) |
| Loss per share from discontinued operations, basic and  diluted                                                           |       | (0.34                                       | )          | (1.36 | ) | (0.16 | ) |
| Cumulative effect of change in accounting principle, basic  and diluted                                                   |       | 0.16                                        |       | — |   | — |   |
| Net loss per share, basic and diluted                                                                                          |       | $                                           | (1.96      | ) | $ | (3.03 | ) | $ | (2.22 | ) |

 

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

F-8

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands)**

| ** **                                                 | ** ** | **Class A**  Shares | ** ** | **Class A**  Common  Stock | ** ** | **Class B**  Shares | ** ** | **Class B**  Common  Stock | ** ** | **Paid-in**  Capital | ** ** | **Accumulated**  Other  Comprehensive  Income (Loss) | ** ** | **Accumulated**  Deficit | ** ** | **Total**  Stockholders’  Equity  (Deficit) | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------------------|------------|---------------------------------|------------|----------------------|------------|-----------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------------|------------|
| Balances, December 31, 2002                           |       |                     | 73,795     |                            |       |                     | $          | 738                             |       |                 |       | 30,670                                                    |       |                     |       | $                                                | 307        |   |   | $ | 1,259,242 |   |   | $ | 647 |   |   |   | $ | (793,339 | ) |   |   | $ | 467,595 |   |   |
| Issuance of stock for payment of debt issuance  costs |       |                     | 68         |                            |       |                     | 1          |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 282 |   |   | — |   |   |   | — |   |   |   | 283 |   |   |
| Stock-based compensation                                   |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 6 |   |   | — |   |   |   | — |   |   |   | 6 |   |   |
| Foreign currency translation adjustment               |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | — |   |   | 1,366 |   |   |   | — |   |   |   | 1,366 |   |   |
| Contributions under affiliate tax sharing  agreement  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 49,350 |   |   | — |   |   |   | — |   |   |   | 49,350 |   |   |
| Net loss                                                   |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | — |   |   | — |   |   |   | (205,149 | ) |   |   | (205,149 | ) |   |
| Balances, December 31, 2003                           |       |                     | 73,863     |                            |       |                     | 739        |                            |       |                 | 30,670     |                                                      |       |                     | 307        |                                             |       | 1,308,880 |   |   | 2,013 |   |   |   | (998,488 | ) |   |   | 313,451 |   |   |
| Stock-based compensation                                   |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 5 |   |   | — |   |   |   | — |   |   |   | 5 |   |   |
| Foreign currency translation adjustment               |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | — |   |   | 1,421 |   |   |   | — |   |   |   | 1,421 |   |   |
| Contributions under affiliate tax sharing  agreement  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 56,565 |   |   | — |   |   |   | — |   |   |   | 56,565 |   |   |
| Net loss                                                   |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | — |   |   | — |   |   |   | (316,806 | ) |   |   | (316,806 | ) |   |
| Balances, December 31, 2004                           |       |                     | 73,863     |                            |       |                     | 739        |                            |       |                 | 30,670     |                                                      |       |                     | 307        |                                             |       | 1,365,450 |   |   | 3,434 |   |   |   | (1,315,294 | ) |   |   | 54,636 |   |   |
| Issuance of stock for exercise of options             |       |                     | 255        |                            |       |                     | 2          |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 2,149 |   |   | — |   |   |   | — |   |   |   | 2,151 |   |   |
| Stock-based compensation                                   |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 116 |   |   | — |   |   |   | — |   |   |   | 116 |   |   |
| Foreign currency translation adjustment               |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | — |   |   | (3,434 | ) |   |   | — |   |   |   | (3,434 | ) |   |
| Contributions under affiliate tax sharing  agreement  |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | 56,100 |   |   | — |   |   |   | — |   |   |   | 56,100 |   |   |
| Net loss                                                   |       |                     | —     |                            |       |                     | —     |                            |       |                 | —     |                                                      |       |                     | —     |                                             |       | — |   |   | — |   |   |   | (232,758 | ) |   |   | (232,758 | ) |   |
| Balances, December 31, 2005                           |       |                     | 74,118     |                            |       |                     | $          | 741                             |       |                 |       | 30,670                                                    |       |                     |       | $                                                | 307        |   |   | $ | 1,423,815 |   |   | $ | — |   |   |   | $ | (1,548,052 | ) |   |   | $ | (123,189 | ) |   |

 

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

F-9

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                               |       | $                                           | (205,149   | ) | $ | (316,806 | ) | $ | (232,758 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:           |       |                                        |       |   |   |   |   |
| Loss from discontinued  operations                                                     |       | 35,574                                      |       | 142,030 |   | 10,683 |   |
| Loss from sale of discontinued  operations                                             |       | —                                      |       | — |   | 6,538 |   |
| Depreciation and amortization                                                          |       | 122,371                                     |       | 166,008 |   | 225,565 |   |
| Accretion on guaranteed  preferred beneficial interest                                 |       | 22,018                                      |       | — |   | — |   |
| Loss on change in fair value  of derivative asset  and liability                  |       | 1,200                                       |       | — |   | — |   |
| Accretion on trust preferred  securities                                               |       | 8,029                                       |       | — |   | — |   |
| Accretion on company obligated  mandatorily redeemable  preferred  interest       |       | 1,079                                       |       | 2,409 |   | 3,049 |   |
| Provision for allowance for  doubtful accounts                                         |       | 1,101                                       |       | 171 |   | 8,972 |   |
| Cumulative effect of change in  accounting principle                                   |       | (17,000                                     | )          | — |   | — |   |
| Impairment of film assets                                                              |       | —                                      |       | 22,003 |   | 25,543 |   |
| Loss on early extinguishment  of debt                                                  |       | 39,812                                      |       | — |   | — |   |
| Gain on sale of property and  equipment                                                |       | —                                      |       | — |   | (24 | ) |
| Stock-based compensation                                                               |       | 5,912                                       |       | 11,488 |   | 8,571 |   |
| Changes in operating assets and liabilities:                                           |       |                                        |       |   |   |   |   |
| Increase in accounts  receivable                                                       |       | (23,162                                     | )          | (11,311 | ) | (18,727 | ) |
| Increase in receivable from  buyer of international business                           |       | —                                      |       | — |   | (1,308 | ) |
| Additions to program license  fees                                                     |       | (162,411                                    | )          | (160,593 | ) | (189,607 | ) |
| Additions to subscriber  acquisition fees                                              |       | (5,292                                      | )          | (45,070 | ) | (8,554 | ) |
| Increase in prepaid and other  assets                                                  |       | (5,800                                      | )          | (3,991 | ) | (40,771 | ) |
| Increase in accounts payable,  accrued and other liabilities                           |       | 71,823                                      |       | 45,696 |   | 26,964 |   |
| Increase in interest payable                                                           |       | 15,314                                      |       | 47,283 |   | 56,090 |   |
| Increase (decrease) in  subscriber acquisition fees payable                            |       | (38,562                                     | )          | 25,908 |   | (23,662 | ) |
| Increase in license fees  payable to affiliates                                        |       | 17,347                                      |       | 61,080 |   | 6,825 |   |
| Increase (decrease) in  payables to affiliates                                         |       | (10,504                                     | )          | (1,651 | ) | 14,143 |   |
| Increase (decrease) in  deferred revenues                                              |       | (137                                        | )          | 148 |   | 542 |   |
| Net cash used in operating  activities                                                 |       | (126,437                                    | )          | (15,198 | ) | (121,926 | ) |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                                        |       |   |   |   |   |
| Purchases of property and  equipment                                                   |       | (2,544                                      | )          | (878 | ) | (504 | ) |
| Payments to buyer of  international business                                           |       | —                                      |       | — |   | (8,358 | ) |
| Proceeds from disposition of  international business,  net of  funds transfer fee |       | —                                      |       | — |   | 221,979 |   |
| Proceeds from disposition of  property and equipment                                   |       | —                                      |       | — |   | 25 |   |
| Net cash provided by (used in) investing activities.                                   |       | (2,544                                      | )          | (878 | ) | 213,142 |   |
|                                                                                        |            |                                             |            |  |  |  |  |  |  |  |

F-10

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)**

 

| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                                  |   |     |   |    |   |     |   |
|---------------------------------------------------------------------------------------------------------|--------|----------|--------|---------|--------|----------|--------|
| Proceeds  from the issuance of common stock upon exercise  of stock options                        |   | —   |   | —  |   | 2,151    |   |
| Proceeds  from tax sharing agreement with Hallmark Cards                                                |   | 49,350   |   | 56,565  |   | 26,100   |   |
| Borrowings  under the HC Crown demand note payable                                                      |   | 70,000   |   | —  |   | —   |   |
| Borrowings  under the HC Crown senior unsecured note payable                                            |   | 400,000  |   | —  |   | —   |   |
| Borrowings under the credit  facility                                                                   |   | 56,250   |   | 15,000  |   | 95,000   |   |
| Payments on the credit  facility                                                                        |   | (76,250  | )      | (5,000  | )      | (195,000 | )      |
| Repurchase of trust preferred  securities                                                               |   | (326,674 | )      | —  |   | —   |   |
| Distribution to holders of guaranteed  preferred beneficial interests                              |   | (7,406   | )      | —  |   | —   |   |
| Principal payments on capital  lease obligations                                                        |   | —   |   | —  |   | (580     | )      |
| Net cash provided by (used in)  financing activities                                                    |   | 165,270  |   | 66,565  |   | (72,329  | )      |
| CASH  FLOWS FROM DISCONTINUED OPERATIONS  (Revised—See  Note 2):                              |   |     |   |    |   |     |   |
| Net cash used in discontinued  operating activities                                                     |   | (28,737  | )      | (40,376 | )      | (15,326  | )      |
| Net cash used in discontinued  investing activities                                                     |   | (2,152   | )      | (811    | )      | (60      | )      |
| Net cash used in discontinued  financing activities                                                     |   | (1,434   | )      | (1,559  | )      | (411     | )      |
| Effect of exchange rate  changes on cash                                                                |   | 5        |   | 53      |   | 734      |   |
| Net cash used in discontinued operations                                                                |   | (32,318  | )      | (42,693 | )      | (15,063  | )      |
| Net increase in cash and cash  equivalents                                                              |   | 3,971    |   | 7,796   |   | 3,824    |   |
| Cash and cash equivalents, beginning of year                                                            |   | 335      |   | 4,306   |   | 12,102   |   |
| Cash and cash equivalents, end of year                                                                  |   | $        | 4,306  |    | $      | 12,102   |   | $ | 15,926 |   |
| Supplemental  disclosure of cash and non-cash activities:                                               |   |     |   |    |   |     |   |
| Interest paid                                                                                           |   | $        | 14,119 |    | $      | 14,621   |   | $ | 15,311 |   |
| Interest paid on preferred  securities                                                                  |   | $        | 8,944  |    | $      | —   |   | $ | — |   |
| Income taxes paid                                                                                       |   | $        | 3,189  |    | $      | 2,288    |   | $ | 857 |   |
| Asset acquired through capital  lease obligation                                                        |   | $        | — |    | $      | 17,363   |   | $ | — |   |
| Issuance of Class A  common stock for payment of HC Crown  demand note payable commitment fee |   | $        | 283    |    | $      | —   |   | $ | — |   |
| Tax sharing payment from Hallmark  Cards applied to  payable to  Hallmark Cards affiliate          |   | $        | — |    | $      | —   |   | $ | 30,000 |   |
| License fees payable converted  into note payable to  Hallmark  Cards affiliate                    |   | $        | — |    | $      | —   |   | $ | 132,785 |   |
| Payable to buyer of  international business                                                             |   | $        | — |    | $      | —   |   | $ | 26,803 |   |
| Deferred credit from technical  services agreement                                                      |   | $        | — |    | $      | —   |   | $ | 7,644 |   |

 

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

F-11

----

**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2003, 2004 and 2005**

**1. Business and Organization**

***Organization***

CrownMedia Holdings, Inc. (“Crown Media Holdings,” “Crown Media” or the “Company”),through its subsidiaries, owns and operates pay television channels(collectively the “Hallmark Channel” or the “channel”) dedicated to highquality, entertainment programming for adults and families, in the UnitedStates. The Hallmark Channel is operated and distributed by Crown Media UnitedStates, LLC (“Crown Media United States”). Significant investors in Crown MediaHoldings include Hallmark Entertainment Investments Co. (“HallmarkEntertainment Investments”), a subsidiary of Hallmark Cards, Incorporated (“HallmarkCards”), the National Interfaith Cable Coalition, Inc. (“NICC”), and,indirectly through their investments in Hallmark Entertainment Investments,Liberty Media Corporation (“Liberty Media”) and J.P. Morgan Partners (BHCA), L.P. (“J.P. Morgan”).

***Sale of theInternational Business***

In April 2005, theCompany completed the sale of  its international business to a group ofinvestors comprised of Equity Partners, 3i and U.K. executive David Elstein(collectively, “Sparrowhawk,” the “buyer” or the “buyer of  internationalbusiness”). The sale included the international versions of the HallmarkChannel distributed outside the United States, the international rights to over580 titles in the Crown Media film library, and the Network Operations Centerbased in Denver, Colorado. The Company received cash proceeds of $209.3million, net of the prepayment described below, and recognized an accountingloss of $6.5 million from the sale. Approximately $4.7 million of transactioncosts were incurred by the Company in connection with the sale.

In accordance with theconditions of the sale and subsequent settlement, the Company has accrued $26.8million at December 31, 2005, which represents the estimated present valueof the cash expected to be paid by the Company to or on behalf of the buyer atvarious times through December 31, 2015. Included in this amount was $16.7million at the sale date, of estimated payments, which were determined usingthe contractual payments due on certain lease arrangements that were assumed bythe buyer. The Company is obligated to reimburse the buyer for these leasepayments at or about the same time the buyer is obligated to pay the lessor. Also,the Company estimated a liability of approximately $4.5 million to pay the estimatedresidual and participation costs that the buyer would otherwise be obligated topay to third parties through April 2015 in connection with film librarysales. The amount of this liability could fluctuate based upon the actualinternal usage or sales of these films by the buyer. Any revisions to theseestimated liabilities will be reflected as gain (loss) from the sale ofdiscontinued operations in future periods.

In the fourth quarter of2005, the Company recorded charges of $4.6 million to recognize additionalcosts for the settlement of certain disputed items and claims of the buyer.These charges included $3.4 million related to the interpretation ofworking capital representations used in determining the original sales priceand $0.9 million related to disputed operating costs incurred at the time ofthe closing date of the sale. The post closing adjustments are covered by theaccrual described in the preceding paragraph.

The Company will continueto use the Network Operations Center sold to Sparrowhawk for the distributionof the domestic channel pursuant to a $25.3 million, seven year technicalservices agreement with the buyer. The Company made a prepayment under thetechnical services agreement to the buyer in the amount of $12.7 million upon closingof the sale transaction and the balance is payable monthly in 

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equalinstallments through the expiration of the agreement. The unused portion of theprepayment is classified as Prepaid and Other Assets in the accompanyingcondensed consolidated balance sheet and will be amortized to operating expenseover the life of the contract. A deferred credit of $7.6 million was recordedto reflect the amount by which the $25.3 million contract exceeded theestimated fair value of the related services. The deferred credit will beamortized over the life of the contract, resulting in a reduction of operatingexpenses in future periods.

Subsequent to the sale,the Company has no continuing economic involvement with the operations of theinternational business.

***Strategic Alternatives for the Company***

The Company announced on August 18,2005, that its Board of Directors has authorized the Company to explorestrategic alternatives for the Company, including a potential sale of theCompany to a third party. In support of this initiative, a Special Committee ofindependent directors of the Board of Directors is overseeing the process.There can be no assurance that the Company will enter into or consummate anytransaction, or as to terms or timing thereof.

***Liquidity***

As of December 31,2005, the Company had $15.9 million in cash and cash equivalents on hand and$10.0 million available under its bank credit facility. The $10.0 million ofthe availability under the bank credit facility is subject to the approval ofHallmark Cards prior to the Company being able to draw such funds. As of December 31,2005, the Company had borrowed $210.0 million under its bank credit facility,which matures May 31, 2006. In March 2006, the Company drew down theremaining $10.0 million available under the credit facility, which increasedthe balance due under the credit facility to $220.0 million. The proceeds willbe used for general working capital purposes.

The Company’s principalsources of funds are currently available cash on hand, cash generated byoperations, and tax sharing payments from Hallmark Cards. Payments under thetax sharing agreement are affected by Hallmark Cards’ tax position and itsability to utilize the Company’s tax losses. The Company has received $5.0million in tax sharing payments in January 2006 and does not currentlyexpect to receive any additional cash payments during 2006.

The ability of theexisting sources of liquidity to be sufficient to fund the Company’soperations, depend upon the Company’s ability to achieve forecasts. Inparticular, continued growth in subscriber revenue and advertising revenue, aswell as maintaining the cash flow from library sales, are required. As aresult, any decline in the popularity of the Hallmark Channel, any significantfuture modifications to the Company’s distribution agreements, an economicdecline in the advertising market, an increase in program acquisition costs, anincrease in competition or other adverse operating conditions would impact theCompany’s liquidity and its ability to fund the current level of operations. Tothe extent that the Company requires additional capital and additional drawingson the bank credit facility are either not available or insufficient, theCompany would be forced to seek additional funding from the issuance of debt orequity securities, a sale of certain assets or from strategic transactionswhich provide capital. There can be no assurance that the Company would be ableto secure additional financing or complete any such transactions.

The Company expects tocontinue making investments in programming, marketing and distribution duringthe next twelve months ending December 31, 2006. However, the Company’sliquidity position has demanded that all areas of expenses, includingprogramming, marketing and distribution be closely monitored and controlled. TheCompany reduced expenses in certain areas during the fourth quarter of 2005 andexpects that further expense reductions will occur in 2006, including, amongother things, a decrease in marketing and third-party programming acquisitions.

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The Company’s principaluses of funds for 2006 are expected to include the payment of 2005 and 2006operating expenses, accounts payable and accrued expenses, licensing ofprogramming, and interest under its bank credit facility.

The Company currentlybelieves that cash on hand, cash generated by operations, and tax sharingpayments from Hallmark Cards, will be sufficient to fund the Company’soperations and meet its liquidity needs through December 31, 2006.

The Company’s bank creditfacility will expire on May 31, 2006.  If the Company is not able to arrange for theextension, refinancing or replacement of the bank credit facility prior to itsmaturity and the bank draws down on the irrevocable letter of credit or alternativelyHallmark Cards purchases the interests of the lending banks, Hallmark Cardswould have all obligations and the rights of the lending banks under the bankcredit facility. In that event, Hallmark Cards could demand payment ofoutstanding amounts at any time. However, Hallmark Cards has also agreed withthe Company under a waiver and standby purchase agreement explained below thatit will not request any reimbursement of amounts drawn on such letter of creditor the payment of amounts due under the credit facility prior to May 31,2007 (see below and note 12). This waiver and standby purchase agreementis subject to prepayments and termination events as described in Note 12.

Upon maturity of the credit facility on May 31, 2006,the lending group led by JP Morgan Chase has the right to elect to forego thereceipt of cash to pay the principal amount of the credit facility in full,which is provided for under the terms of an irrevocable letter of creditprovided by Hallmark Cards described in note 12, but instead can elect toinitiate a process to foreclose on the Company’s assets. Suchforeclosure proceedings, which we view as a remote possibility, would affectour ability to continue our operations. Prior to any such possible foreclosureproceedings, however, the Company would consider various alternatives asindicated above. In the alternative, the Company would cause Hallmark Cards,pursuant to the terms of the waiver and standby purchase agreement, to exerciseits option to purchase the banks interest in the credit facility and the creditfacility would then be subject to Hallmark Cards agreement not to demandpayment prior to May 31, 2007.

Due to the Company’sliquidity issues and its inability to meet its obligations when they come duein May 2007 under the waiver and standby purchase agreement describedbelow, the Company anticipates that prior to May 31, 2007, it will benecessary to either extend or refinance (i) the bank credit facility and (ii) $678.0million covered by notes described below payable to affiliates of HallmarkCards. As part of a combination of actions and in order to obtain additionalfunding, the Company may consider various alternatives as indicated above,including refinancing the bank credit facility, raising additional capitalthrough the issuance of equity or debt securities, a sale of certain assets orentering into strategic alternatives.

**2. Summary of Significant Accounting Policies andEstimates**

***Basis of Presentation***

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

In February 2005,the Company signed a definitive agreement to complete the sale of itsinternational business and, accordingly, classified the operating results ofthe international business as discontinued operations in the accompanyingstatements of operations for all periods presented. The Company’s discontinuedoperations consisted of the international channel operations and theinternational rights to the film library assets.

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***Use of Estimates***

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

***Film Assets andFilm Library Impairment***

The Company amortizes itsfilm assets using the individual-film-forecast-computation method over amaximum period of 9.25 years from the date of acquisition. Theindividual-film-forecast-computation method amortizes such assets in the sameratio that current period actual revenue bears to estimated ultimate futurerevenues.

On a quarterly basis, theCompany assesses whether events or circumstances have changed indicating thatthe fair value of a film is lower than its unamortized cost or carrying value.If the carrying value of any individual film asset exceeds its fair value, the filmasset is written-down to its estimated fair value. A discounted cash flowmodel, based on management’s anticipated ultimate future revenue of the film,is used to estimate the fair value of the individual films. The Companyconsiders the following factors, among others, in estimating ultimate futurerevenue for each film:  (a) theoperating environment expected for the next several years, (b) the size ofthe library as a whole, (c) historical license fee revenue per film, (d) eachtitle’s age, quality, and marketability, (e) existing sales plansincluding the amount of product desired to be sold each year, (f) futureperformance estimates, (g) assumptions and estimates underlying past andfuture estimates, and (h) risk factors that could effect future operationsof the Library. In estimating a film’s fair value, the Company considers thosecash outflows necessary to generate the film’s cash inflows such asexploitation, residual and participation costs and taxes. The discount rateused in the Company’s discounted cash flow model is based upon management’sestimate of the rate a purchaser would require related to the risks anduncertainties surrounding the timing and probability of the cash flowestimates.

The Company reviews itsestimates of ultimate future revenues and participation costs as of eachreporting date to reflect currently available information. Estimated ultimatefuture revenues are based on the history of each film and similar films, salesand marketing plans, and other factors, all of which require significantjudgment and estimation by management. Differences between amortization expensedetermined using the new estimates and any amounts previously expensed duringthat current fiscal year are charged or credited to the statement of operationsin the period in which the estimates are revised.

For use of the film assetson the Hallmark Channel and the Hallmark Movie Channel, the Company estimatesthe fair value of the internal usage based upon the portion of the film’sultimate revenues attributable to the term of the license window. The Companyfirst calculates the amount of cost attributable to the internal use using theindividual-film-forecast-computation method described above and then expensessuch amounts ratably over the term of the license window.

***Cash and Cash Equivalents***

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

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***Allowance for Doubtful Accounts***

Theallowance for doubtful accounts is based upon the Company’s assessment ofprobable loss related to uncollectible accounts receivable. The Company uses anumber of factors in determining the allowance, including, among other things,collection trends. The Company’s bad debt expense was $1.1 million, $171,000,and $9.0 million for the years ended December 31, 2003, 2004 and 2005, respectively.

***Allowance for doubtful accounts iscomprised of the following:***

| ** **                             | ** ** | **Balance at  Beginning of  Year** | ** ** | **Additions  Charged to  Expense** | ** ** | **Deductions (including  transfer to buyer of  international business)** | ** ** | **Balance at End  of Year** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ***Allowance  for doubtful accounts*** |       |                                         |       |                                    |       |                                                                                              |       |                                       |       |   |   |   |   |   |   |   |   |
| Year-ended December 31, 2003      |       |                                         | $          | 7,516                                   |       |                                                                                              |       | $                                          | 499        | (1) |   |   | $ | (1,312 | ) |   |   | $ | 6,703 |   |   |
| Year-ended December 31, 2004      |       |                                         | $          | 6,703                                   |       |                                                                                              |       | $                                          | 1,297      | (2) |   |   | $ | (1,305 | ) |   |   | $ | 6,695 |   |   |
| Year-ended  December 31, 2005     |       |                                         | $          | 6,695                                   |       |                                                                                              |       | $                                          | 8,972      |   |   |   | $ | (14,102 | )(3) |   |   | $ | 1,565 |   |   |

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(1)          Includes $602,000 of bad debt recovery now classified in discontinuedoperations.

(2)          Includes $1.1 million of bad debt expense now classified in discontinuedoperations.

(3)          Represents amounts written off of $9.7 million and $4.4 milliontransferred to buyer of international business.

***Program License Fees***

Programlicense fees are paid in connection with the acquisition of the rights to airprograms acquired from others. Program rights are generally deferred and thenamortized on a straight-line basis over their contractual license periods oranticipated usage. Crown Media Holdings periodically evaluates therealizability of these deferred license fees in relation to the estimatedfuture revenues.

Estimatesof net realizable value for program license fees are determined using futureestimated advertising revenues and anticipated patterns of programming usage ona day part basis as it pertains to programming licensed to the channel. Theseestimates of expected annual future estimated revenues are compared to net bookvalue of the program license fee assets to determine if the programming assetsare expected to be recovered. Where the analysis indicates the costs are inexcess of the estimated net realizable value, an impairment is recognized.

***Subscriber Acquisition Fees***

Subscriberacquisition fees are generally required to be paid to obtain carriage ondomestic pay distributors systems. Under certain of these agreements with paydistributors, Crown Media United States is obligated to pay subscriberacquisition fees if defined subscriber levels are met or in order to obtainadditional carriage of the Hallmark Channel by those pay distributors. Suchcosts are accrued when Crown Media United States receives notice from thedistributors that they have met the contractual penetration percentage orsubscriber count.

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

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***Property and Equipment***

Propertyand equipment are stated at historical cost. Equipment under capital leases areinitially recorded at the present value of the minimum lease payments.

Depreciationon equipment is calculated using the straight-line method over the estimateduseful lives of the assets. Equipment held under capital leases and leaseholdimprovements are amortized straight-line over the shorter of the lease term orestimated useful life of the asset.

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

***Long-Lived Assets***

The Company reviewslong-lived assets, other than goodwill and other intangible assets withindefinite lives, for impairment whenever facts and circumstances indicate thatthe carrying amounts of the assets may not be recoverable. An impairment lossis recognized if the carrying amount of the asset is not recoverable andexceeds its fair value. Recoverability of assets to be held and used ismeasured by comparing the carrying amount of an asset to the estimatedundiscounted future net cash flows expected to be generated by the asset. Ifthe asset’s carrying value is not recoverable, an impairment charge isrecognized for the amount by which the carrying amount of the asset exceeds itsfair value. The Company determines fair values by using a combination ofcomparable market values and discounted cash flows, as appropriate.

Goodwill is reviewed forimpairment annually on November 30 or whenever an event occurs or there isa change in circumstances that indicates fair value might be below carryingvalue. Goodwill is carried at historical cost if the estimated fair value isgreater than the carrying amounts. However, if estimated fair value is lessthan the carrying amount, goodwill is reduced to estimated fair value throughan impairment charge to the Company’s consolidated statements of operations.

***Revenue Recognition***

Subscriberrevenue from pay television distributors is recognized as revenue when anagreement is executed, programming is provided, the price is determinable, andcollectibility is reasonably assured. Subscriber fees from pay televisiondistributors are recorded net of amortization of subscriber acquisition costsin accordance with Emerging Issues Task Force No. 01-9 (“EITF No. 01-9”),*Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products)*. If theamortization expense exceeds the revenue recognized on a cumulative perdistributor basis, the excess amortization is included as a component of costof services. In 2005, $2.3 million and $920,000, which previously werereported as subscriber acquisition fee amortization expense, have beenreclassified as reductions of subscriber fees revenue for the years ended December 31,2003 and 2004, respectively.

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

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Revenuefrom film asset licensing agreements is recognized in accordance with Statementof Position (“SOP”) 00-2,*Accountingby Producers or Distributors of Films*. Revenues are recognized whenall of the following have occurred:  anagreement is executed, the film is available for exhibition by the licensee,the license fee is fixed or determinable, collectibility is reasonably assuredand the cost of each film is known or reasonably determinable. Revenue fromfilm asset licensing agreements containing multiple film titles is allocatedamong the various film titles based on their relative estimated fair values.Payments received from licensees prior to the availability of a film arerecorded as deferred revenue. Fees payable with terms in excess of one year arediscounted for revenue recognition purposes at the customer’s estimatedincremental borrowing rate in accordance with Accounting Principles Board (“APB”)Opinion No. 21, *Interest on Receivablesand Payables.*

***Taxes on Income***

Pursuantto the tax sharing agreement entered into with Hallmark Cards in March 2003,the Company’s results of operations for tax purposes became a part of theHallmark Cards consolidated federal tax return as of and subsequent to March 2003.However, the Company continues to account for income taxes on a separate returnbasis. Accordingly, the Company accounts for income taxes using an asset andliability method which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and net operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to be applied to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. TheCompany reduces deferred tax assets by a valuation allowance if it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Any payments received from Hallmark Cards under the taxsharing agreement are recorded as  anincrease in additional paid-in capital. Basedon the tax sharing agreement, the Company may ultimately owe Hallmark Cards forits share of the consolidated federal tax liability caused by the inclusion ofthe Company in the consolidated group. Such payments would be treated as areduction to paid-in capital to the extent of amounts previously received underthe Tax Sharing Agreement.

***Stock-Based Compensation***

The Company accounts for itsstock-based employee compensation plan using the intrinsic value method underthe recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and relatedInterpretations. Accordingly, compensation cost for stock options issued toemployees is measured as the excess, if any, of the quoted market price of theCompany’s stock at the date of the grant over the exercise price of theunderlying stock options. In December 2002, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS No. 123.*SFASNo. 148 requires certain additional disclosures of the estimated fairvalue of stock-based compensation. Such estimated fair value is determinedthrough the use of the Black-Scholes option pricing model. SFAS No. 123, *Accounting for Stock-Based Compensation,* encourages, butdoes not require, companies to record compensation cost for stock-basedemployee compensation plans at fair value.

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Had compensation expense for these plans been determinedconsistent with SFAS No. 123 and SFAS No. 148, Crown Media Holdings’net loss and loss per share would have been increased to the following proforma amounts for the years ended December 31, 2003, 2004 and 2005:

**ProForma Effects(In thousands, except per share amounts)**

| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net loss                                                      |       | $                                           | (205,149   | ) | $ | (316,806 | ) | $ | (232,758 | ) |
| Pro forma stock options expense at  estimated fair value |       | (6,500                                      | )          | (2,644 | ) | (1,056 | ) |
| Stock plan expense included in net loss                       |       | 6                                           |       | 5 |   | 116 |   |
| Pro forma net loss                                            |       | $                                           | (211,643   | ) | $ | (319,445 | ) | $ | (233,698 | ) |
| Weighted average shares                                       |       | 104,484                                     |       | 104,533 |   | 104,619 |   |
| Pro forma net loss per share, basic and diluted          |       | $                                           | (2.03      | ) | $ | (3.06 | ) | $ | (2.23 | ) |

 

***Net Loss Per Share***

Basicnet loss per share is computed by dividing the net loss for the period by theweighted average number of common shares outstanding during the period. Dilutednet loss per share is computed based on the weighted average number of commonshares and potentially dilutive common shares outstanding. The calculation ofdiluted net loss per share excludes potential common shares if the effect wouldbe antidilutive. Potential common shares consist of incremental common sharesissuable upon the exercise of stock options. Approximately 1.6 million, 1.4million, and 812,000 stock options for the years ended December 31, 2003,2004, and 2005, respectively, have been excluded from the calculations ofearnings per share because their effect would have been antidilutive.

***Translation of Foreign Currency***

ThroughApril 26, 2005, the balance sheets and statements of operations and comprehensiveloss of certain Crown Media Holdings’ foreign subsidiaries were measured usinglocal currency as the functional currency. Revenues, expenses and cash flows ofsuch subsidiaries were translated into United States dollars at the averageexchange rates prevailing during the period. Assets and liabilities weretranslated at the rates of exchange at the balance sheet date. Translationgains and losses were deferred as a component of accumulated othercomprehensive income (loss). Foreign currency transaction gains and lossesrecorded upon the remeasurement of financial assets and liabilities denominatedin currencies other than the functional currency of the subsidiary wereincluded in determining net loss for the period. In conjunction with the sale ofthe international business, the cumulative foreign currency translation gain ofapproximately $3.4 million was realized as a component of the loss on sale ofdiscontinued operations in the accompanying consolidated statement ofoperations.

***Concentration of Credit Risk***

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

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***Derivative Financial Instruments***

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

***Cash Flows***

In2005, the Company has separately disclosed the operating, investing andfinancing portions of the cash flows attributable to its discontinuedoperations, which in prior periods were reported on a combined basis as asingle amount.

***Restatement of September 30,2005 Unaudited Condensed Consolidated Statement of Cash Flows***

Pursuant to the taxsharing agreement, Hallmark Cards has benefited from past tax losses and maybenefit from future federal tax losses, which may be generated by the Company. Basedon the tax sharing agreement, Hallmark Cards has agreed to pay the Company allof the benefits realized by Hallmark Cards as a result of including the Companyin its consolidated income tax return. These benefits are estimated and paid75% in cash on a quarterly basis and the balance when the Company becomes afederal taxpayer. Under the tax sharing agreement, as more fully discussed atNote 16, 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 bythe Company to any member of the Hallmark Cards consolidated group under anyloan, line of credit or other payable, subject to limitations under any loanindentures or contracts restricting such offsets. During the third quarter of2005, Hallmark Cards used $30.0 million of the approximately $45.7 millionbalance of this 25% balance to offset debt owed by the Company to HallmarkCards or its affiliates. The Company treated the offset amount as a cashtransaction, including it in “Proceeds from tax sharing agreement with HallmarkCards” under “Cash Flows from Financing Activities” in its Unaudited CondensedConsolidated Statement of Cash Flows contained in the Company’s quarterlyreport on Form 10-Q for the third quarter of 2005.

The Company has determinedthat this transaction should have been reflected as a non-cash activity. TheCompany changed the “Proceeds from tax sharing agreement with Hallmark Cards”under “Cash Flows Used in Financing Activities” from $56.1 million to $26.1million and changed the “Decrease in payable to affiliates” under “Cash FlowsUsed in Operating Activities,” from $34.2 million to $4.2 million. The Companychanged the “Cash Flows Used in Financing Activities” from $72.6 million to$102.6 million and changed the “Cash Flows Used in Operating Activities” from$128.8 million to $98.8 million. The accompanying Consolidated Statement ofCash Flows for the year ended December 31, 2005, reflects this transactionas a non-cash activity.

***Reclassifications***

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

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***Recently Issued AccountingPronouncements***

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

In December 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment*. SFAS No. 123Rreplaced SFAS No. 123, *Accounting  for Stock-Based  Compensation*, and supersededAccounting  Principles  Board Opinion No. 25,  *Accounting  for Stock  Issued to Employees*. SFAS No. 123Rwill require compensation cost related to share-based payment transactions to be recognized in the financial  statements. As permitted by SFAS No. 123,Crown Media Holdings elected to follow the guidance of APB Opinion No. 25,which allowed companies to use the intrinsic value method of accounting tovalue their share-based payment transactions with employees. Based on thismethod, Crown Media Holdings did not recognize compensation expense in itsfinancial statements as the stock options granted had an exercise price equalto the fair market value of the underlying common  stock on the date of thegrant. SFAS No. 123R requires measurement of the cost of share-basedpayment transactions to employees at the fair value of the award on the grantdate and  recognition  of expense over the requisite service or vesting period. SFAS No. 123R allowsimplementation  using a modified versionof prospective  application,  under which compensation  expense for the unvested portion ofpreviously granted awards and all new awards will be recognized on or after thedate of adoption. SFAS No. 123R also allows companies to adopt SFAS No. 123Rby restating previously issued financial statements, basing the amounts on theexpense  previously  calculated and  reported in their pro formafootnote  disclosures  required under SFAS No. 123. Theprovisions of SFAS No. 123R will be adopted by Crown Media Holdings usingthe modified prospective method beginning January 1, 2006.

In March 2005, the SEC staff issued guidance onFASB Statement No. 123 (revised 2004), *Share-BasedPayment,* SFAS No. 123R. Staff Accounting Bulletin (“SAB”) No. 107was issued to assist preparers by simplifying some of the implementationchallenges of SFAS No. 123R while enhancing the information that investorsreceive. SAB No. 107 creates a framework that is premised on twooverarching themes: (a) considerable judgment will be required bypreparers to successfully implement SFAS No. 123R, specifically whenvaluing employee stock options; and (b) reasonable individuals, acting ingood faith, may conclude differently on the fair value of employee stockoptions. Key topics covered by SAB No. 107 include: (a) valuationmodels—SAB No. 107 reinforces the flexibility allowed by SFAS No. 123Rto choose an option-pricing model that meets the standard’s fair valuemeasurement objective; (b) expected volatility—the SAB provides guidanceon when it would be appropriate to rely exclusively on either historical orimplied volatility in estimating expected volatility; and (c) expectedterm—the new SAB 

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includes examples and somesimplified approaches to determining the expected term under certaincircumstances. The Company will apply the principles of SAB No. 107 inconjunction with its adoption of SFAS No. 123R.

As of December 31, 2005,there was $299,000 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the Plan. Thatcost is expected to be recognized over a weighted-average period of 0.5 years. Asof December 31, 2005, the total unrecognized compensation cost related toPerformance RSUs granted under the Plan is $2.2 million.

In May 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections—Replacement of APB Opinion No. 20 and FASB Statement No. 3*(SFAS 154). SFAS 154 replaces APB Opinion No. 20, *Accounting Changes*, and FASB Statement No. 3, *Reporting Accounting Changes in Interim Financial Statements*,and changes the requirements for the accounting for and reporting of a changein accounting principle. Opinion No. 20 previously required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of the change the cumulative effect of changing to the newaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle. SFAS 154defines retrospective application as the application of a different accountingprinciple to prior accounting periods as if that principle had always been usedor as the adjustment of previously issued financial statements to reflect achange in the reporting entity. SFAS 154 also requires that a change indepreciation, amortization, or depletion method for long-lived, non-financialassets be accounted for as a change in accounting estimate affected by a changein accounting principle. We are required to adopt the provisions of SFAS 154 asof January 1, 2006, although earlier adoption is permitted.

**3.Impairment of Film Assets**

In the third and fourth quarters of 2004, theestimated fair value of the domestic rights of the film assets was based uponthe discounted cash flows attributable to estimated future third party salesand internal use at September 30, and December 31, 2004. A non-cashimpairment charge was recorded in both the third and fourth quarters of 2004for each film where the estimated fair value was less than its carrying value.The resulting non-cash impairment charge of $22.0 million is included inimpairment of film assets on the accompanying statement of operations for theyear ended December 31, 2004.

In the third and fourthquarters of 2005, the Company reviewed its film asset titles for impairment.The Company computed the fair value of the rights to each of the evaluated filmtitles. The estimated fair value of the film assets was based upon thediscounted cash flows attributable to estimated future third party sales andinternal use at September 30, 2005 and December 31, 2005. Non-cashimpairment charges were recorded in both the third and fourth quarters of 2005for each film where the estimated fair value was less than its carrying value. Theresulting non-cash impairment charge of $25.5 million is included in impairmentof film assets on the accompanying statement of operations for the year ended December 31,2005.

**4.Subscriber Acquisition Fees**

Subscriber acquisition fees are comprised of thefollowing:

| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(In thousands)**               | ** ** |
| Subscriber acquisition fees, at cost |       |                                  | $          | 236,447 |   |   |   | $ | 221,594 |   |   |
| Accumulated amortization             |       |                                  | (116,434   | ) |   |   | (141,000 | ) |   |
| Subscriber acquisition fees, net     |       |                                  | $          | 120,013 |   |   |   | $ | 80,594 |   |   |

 

F-22

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Of thenet balance at December 31, 2005, the Company expects $19.0 million willbe recognized as a reduction of subscriber fee revenue and $61.6 million willbe recognized as subscriber acquisition fee expense in future periods. TheCompany expects to amortize the net balance at December 31, 2005, asfollows:

| **Years Ended December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                     | ** ** | ** ** | ** ** |
| 2006                                        |       | $          | 39,552     |       |
| 2007                                        |       | 37,890     |       |
| 2008                                        |       | 1,184      |       |
| 2009                                        |       | 984        |       |
| 2010                                        |       | 984        |       |
| Total amortization                          |       | $          | 80,594     |       |

 

As of December 31,2004 and 2005, the consolidated balance sheets also reflect subscriberacquisition fees payable of $35.9 million and $12.2 million, respectively. Forthe years ended December 31, 2003, 2004 and 2005, the Company made cashpayments of $44.3 million, $19.2 million, and $32.0 million, respectively,relating to current subscriber acquisition fee obligations.

**5.Film Assets**

Amortization expense for the film assets was $13.0million, $28.9 million and $51.6 for the years ended December 31, 2003,2004, and 2005, respectively. The Company recorded impairment charges of $22.0 millionand $25.5 million for the years ended December 31, 2004 and 2005,respectively. The Company expects to amortize $55.0 million to $75.0 million offilm assets during the year ending December 31, 2006.

The following table summarized the carrying amounts ofthe film assets as of December 31, 2004 and 2005.

| ** **                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**               | ** ** |
| Film assets                             |       |                                  | $          | 825,864 |   |   |   | $ | 533,742 |   |   |
| Accumulated amortization and impairment |       |                                  | (226,851   | ) |   |   | (153,420 | ) |   |
| Film assets, net                        |       |                                  | $          | 599,013 |   |   |   | $ | 380,322 |   |   |

 

**6.Program License Fees**

Program license fees are comprised of the following:

| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In thousands)**               | ** ** |
| Program license fees—Hallmark Cards affiliate |       | $                                     | 144,848    |   | $ | 159,158 |   |
| Program license fees—NICC                     |       | 2,448                                 |       | 9,411 |   |
| Program license fees—other affiliates         |       | 5,906                                 |       | 5,962 |   |
| Program license fees—non-affiliates           |       | 329,021                               |       | 365,429 |   |
| Program license fees, at cost                      |       | 482,223                               |       | 539,960 |   |
| Accumulated amortization                           |       | (167,993                              | )          | (202,865 | ) |
| Program license fees, net                          |       | $                                     | 314,230    |   | $ | 337,095 |   |

 

F-23

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Programming costs for theyears ended December 31, 2003, 2004, and 2005 were $68.3 million, $89.9 million,and $120.6 million, respectively.

During the years ending December 31,2003, 2004 and 2005, certain program license fees were written-down to theirnet realizable values, resulting in additional costs of $3.6 million, $3.0million, and $585,000, respectively, which have been included as a component ofprogramming cost in the accompanying consolidated statements of operations.

At December 31, 2004and 2005, $7.7 million and $30.4 million (including $29.5 million toaffiliates) of program license fees were included in prepaid and other assetson the accompanying consolidated balance sheets as the Company made payment,but the license period had not commenced.

License fees payable are comprised of the following:

| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In thousands)**               | ** ** |
| License fees payable—Hallmark Cards affiliate |       | $                                     | 151,980    |   | $ | 22,704 |   |
| License fees payable—NICC                     |       | —                                |       | 3,315 |   |
| License fees payable—non-affiliates           |       | 191,576                               |       | 214,025 |   |
| Total license fees payable                         |       | 343,556                               |       | 240,044 |   |
| Less current maturities                            |       | (79,815                               | )          | (53,190 | ) |
| Long-term license fees payable                     |       | $                                     | 263,741    |   | $ | 186,854 |   |

 

**7. Property and Equipment**

Property and equipment are comprised of the following:

| ** **                        | ** ** | **As of December 31,** | ** ** | ** **          | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | **2004**                              | ** ** | **2005**            | ** ** | **Depreciable Life** | ** ** |
| ** **                        | ** ** | **(In thousands)**               | ** ** | **(In years)** | ** ** |
| Technical equipment and computers |       | $                                     | 38,947     |                | $          | 14,650 |   |   | 3-5 |   |   |
| Leased assets                     |       | 30,615                                |       | 17,363              |       |   | 8-15 |   |   |
| Furniture, fixtures and equipment |       | 2,078                                 |       | 1,235               |       |   | 5 |   |   |
| Leasehold improvements            |       | 10,402                                |       | 3,344               |       |   | 3-7 |   |   |
| Construction-in-progress          |       | 161                                   |       | 18                  |       |   |   |   |   |
| Property and equipment, at  cost  |       | 82,203                                |       | 36,610              |       |   |   |   |   |
| Accumulated depreciation          |       | (49,374                               | )          | (18,050             | )          |   |   |   |   |
| Property and equipment, net       |       | $                                     | 32,829     |                | $          | 18,560 |   |   |   |   |   |

 

Depreciationexpense related to property and equipment was $3.5 million, $3.4 million, and$3.5 million for the years ended December 31, 2003, 2004 and 2005,respectively.

Software and other intangibleassets of $3.2 million and $2.0 million as of December 31, 2004 and 2005,respectively, have been included in prepaid and other assets in theaccompanying consolidated balance sheets.

**8.Reorganization**

InOctober 2002, the Company began reorganizing its operations in order toconcentrate its efforts on the Hallmark Channel in the U.S. and in its moresuccessful international markets. The Company completed decentralizing manyoversight and non-technical support functions formerly located in the Company’sU.S.-based offices and transferred those responsibilities to regional staff. InLatin America, the Company entered into an agreement with a local distributionpartner, Pramer S.C.A., who was made responsible for the day-to-day operationsof the Hallmark Channel in this region. At the completion of the reorganizationin April 2003, the Company’s workforce was reduced by approximately 30% or130 positions.

F-24

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

Thefollowing table displays the activity and balances of the reorganizationaccrual account from October 7, 2002, to December 31, 2005, which wasincluded in accounts payable and accrued liabilities in the accompanyingconsolidated balance sheets.

| ** **                                            | ** ** | ** **              | ** ** | ** **     | ** ** | **Satellite and** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                                            | ** ** | **Severance**           | ** ** | **Facilities** | ** ** | **Transponder**        | ** ** | **Total**  | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Balance at  October 7, 2002                      |       |                    | $          | 5,492          |       |                   |       | $          | 1,651      |   |   |   | $ | 21,658 |   |   | $ | 28,801 |   |
| Deductions due to  payments                           |       |                    | (2,097     | )              |       |                   | —     |       |       |   | (545 | ) |   | (2,642 | ) |
| Balance at  December 31, 2002                    |       |                    | 3,395      |           |       |                   | 1,651      |       |       |   | 21,113 |   |   | 26,159 |   |
| Additions due to  accretion                           |       |                    | —     |           |       |                   | 61         |       |       |   | 692 |   |   | 753 |   |
| Additions due to  adjustments to estimates            |       |                    | —     |           |       |                   | —     |       |       |   | 1,194 |   |   | 1,194 |   |
| Deductions due to  settlement of contract             |       |                    | —     |           |       |                   | —     |       |       |   | (2,951 | ) |   | (2,951 | ) |
| Deductions due to  payments                           |       |                    | (3,391     | )              |       |                   | (189       | )          |       |   | (6,537 | ) |   | (10,117 | ) |
| Balance at  December 31, 2003                    |       |                    | 4          |           |       |                   | 1,523      |       |       |   | 13,511 |   |   | 15,038 |   |
| Additions due to  accretion                           |       |                    | —     |           |       |                   | —     |       |       |   | 52 |   |   | 52 |   |
| Deductions due to  adjustments to estimates, net      |       |                    | (4         | )              |       |                   | (126       | )          |       |   | (353 | ) |   | (483 | ) |
| Deductions due to  payments                           |       |                    | —     |           |       |                   | (337       | )          |       |   | (3,550 | ) |   | (3,887 | ) |
| Balance at  December 31, 2004                    |       |                    | —     |           |       |                   | 1,060      |       |       |   | 9,660 |   |   | 10,720 |   |
| Deductions due to  payments                           |       |                    | —     |           |       |                   | (60        | )          |       |   | (989 | ) |   | (1,049 | ) |
| Contracts assumed  by buyer of international business |       |                    | —     |           |       |                   | (1,000     | )          |       |   | (8,671 | ) |   | (9,671 | ) |
| Balance at  December 31, 2005                    |       |                    | $          | —         |       |                   |       | $          | —     |   |   |   | $ | — |   |   | $ | — |   |

 

| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**               | ** ** |
| Accrued reorganization              |       | $                                     | 10,720     |   |   | $ | — |   |   |
| Less current accrued reorganization |       | (2,379                                | )          |   | — |   |   |
| Long-term accrued reorganization    |       | $                                     | 8,341      |   |   | $ | — |   |   |

 

F-25

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**9. Leases**

The Company leases uplink and certain transponder spaceunder a long-term lease agreement that is accounted for as a capital lease inaccordance with SFAS No. 13, *Accountingfor Leases*. In addition, the Company leases transponders, officefacilities and various office equipment under operating leases that aregenerally non-cancelable. These leases expire at various dates through June 2019,and some contain escalation clauses and renewal options. Future minimum leasepayments under the agreements at December 31, 2005, are as follows:

| **Years Ended December 31,**                                | ** ** | ** ** | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|
| **(in thousands)**                                                    | ** ** | ** ** | ** ** | ** **              | ** ** |
| 2006                                                                       |       |       | $          | 2,160                   |       |                      |       | $ | 4,332 |   |   |
| 2007                                                                       |       |       | 2,160      |                    |       |                      | 3,646      |   |   |
| 2008                                                                       |       |       | 2,160      |                    |       |                      | 2,682      |   |   |
| 2009                                                                       |       |       | 2,160      |                    |       |                      | 1,953      |   |   |
| 2010                                                                       |       |       | 2,160      |                    |       |                      | 1,051      |   |   |
| Thereafter                                                                 |       |       | 19,350     |                    |       |                      | 525        |   |   |
| Total minimum  lease payments                                              |       |       | 30,150     |                    |       |                      | $          | 14,189 |   |   |
| Less amount  representing interest (at implicit rates ranging from 9.375%) |       |       | (13,368    | )                       |       |                      |       |   |   |
| Present value of  net minimum lease payments                               |       |       | 16,782     |                    |       |                      |       |   |   |
| Less current  maturities                                                   |       |       | (612       | )                       |       |                      |       |   |   |
| Long term obligation                                                       |       |       | $          | 16,170                  |       |                      |       |   |   |   |

 

Rent expense under these agreements was $2.2 million,$1.9 million, and $2.0 million, respectively, for the years ended December 31,2003, 2004, and 2005. Amortization of assets held under capital leases isincluded with depreciation expense in the accompanying statements ofoperations.

During 2005, the buyer ofthe international business allowed Crown Media Holdings to inhabit office spacewithout paying rent. Crown Media Holdings would have paid $115,000 in rentexpense for this space during 2005.

**10.Credit Facility**

The Company has a credit agreement with a syndicate ofbanks, led by JP Morgan Chase Bank, under which the banks have extended to theCompany a secured revolving credit facility of up to $220.0 million. TheCompany and the lending banks originally entered into the facility in 2001 andhave subsequently amended the terms of this facility, with the amendment on March 1,2005. The facility is guaranteed by the Company’s subsidiaries and is securedby all tangible and intangible property of Crown Media Holdings and itssubsidiaries. The original bank credit facility encompassed a term loan of$100.0 million and a revolving line of credit of $220.0 million, inclusive ofup to $20.0 million of letters of credit available to be issued at the Company’srequest. Upon the consummation of the sale of the international business, theCompany repaid and retired the $100.0 million term loan along with $95.0million on the revolving line of credit under the credit facility. The creditfacility now consists of the revolving line of credit of $220.0 million,which includes up to $20.0 million of letters of credit. Any borrowings by theCompany of amounts in excess of $180.0 million under the revolving line ofcredit requires approval of Hallmark Cards. In March 2006, the Company drewdown the remaining $10.0 million available under the credit facility, whichincreased the balance due under the credit facility to $220.0 million. Theproceeds will be used for general working capital purposes.

Each loan under the bank credit facility bearsinterest at a Eurodollar rate or an alternate base rate as the Company mayrequest at the time of borrowing in accordance with the credit agreement. The 

F-26

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Eurodollar rate is basedon the London interbank market for Eurodollars, and remains in effect for thetime period of the loan ranging from one, two, three, six or twelve months. Thealternate rate is based upon the prime rate of JP Morgan Chase Bank, acertificate of deposit rate or the Federal Funds effective rate, which isadjusted whenever the rates change. The Company is required to pay a commitmentfee of 0.2% per annum (0.5%prior to March 1, 2005) of the committed, but not outstanding, amountsunder the revolving credit facility, payable in quarterly installments.

On March 1, 2005, we entered into Amendment No. 8to the agreement for our bank credit facility. This amendment extended thematurity date to May 31, 2006, as well as made a number of othersignificant changes to the bank credit facility including elimination ofcertain financial covenants, changes to and waivers of financial covenantsconcerning 2004 violations and the future compliance, and a reduction in theinterest rates and commitment fees under the credit facility. See “HallmarkLetter of Credit” in note 12 below regarding an irrevocable letter of credit ofHallmark Cards issued as credit support for obligations under the creditfacility.

At December 31, 2004and 2005, Crown Media Holdings had outstanding borrowings of $310.0 millionand $210.0 million, respectively, under the credit facility and there were noletters of credit outstanding. At December 31, 2004, $310.0 million of theoutstanding balance bore interest at the Eurodollar rate (5.42% at December 31,2004) and $0 bore interest at the JP Morgan Chase Bank prime rate. At December 31,2005, $210.0 million of the outstanding balance bore interest at the Eurodollarrate (5.39% at December 31, 2005) and $0 bore interest at the JP MorganChase Bank prime rate. Interest expense onborrowings under the credit facility for the years ended December 31,2003, 2004 and 2005, was $12.8 million, $13.9 million, and $10.3 million,respectively.

***Covenants***

The credit facility, as amended, contains a number ofaffirmative and negative covenants. Affirmative covenants include thefollowing: (1) (a) within 90 days after the end of each fiscal year,submit audited consolidated financial statements of the Company submitted tothe S.E.C., (b) within 45 days after the end of each of the first threefiscal quarters, submit unaudited consolidated financial statements of theCompany submitted to the S.E.C., (c) submit a certificate of an authorizedofficer regarding knowledge of any event of default, certain affirmativecovenants and any required intellectual property filings, (d) providenotice of any board action concerning issuance of any additional securities and(e) submit any such additional information regarding the financialcondition, business or business prospects of the credit parties and the amountof film inventory on which the credit parties have rights; (2) cause theCompany’s corporate existence to be effective; (3) keep tangibleproperties material to the Company’s business in good condition; (4) providenotice of the following material events: (a) any event of default, (b) materialadverse change in the condition or operations of any credit party, (c) anyaction which could affect the performance of the credit parties’ obligationsunder the Credit Agreement, (d) any other event which could result in amaterial adverse effect, (e) opening or change of any executive office, (f) changein the name of the credit parties, (g) any event which affects thecollectability of receivables or decrease the value of the collateral, (h) proposedmaterial amendment to any material agreement that are part of the collateraland (i) any notice which a credit party received with respect to a claimeddefault; (5) (a) insure its assets adequately, (b) insureagainst other hazards and risks, (c) maintain and insure films in itslibrary, (d) maintain distributor’s “errors and omissions” insurance, (e) maintainbroadcaster’s “errors and omissions” insurance, (f) cause all insurance toprovide to the Lender a written notice of any termination or material change ofcoverage and (g) upon request, provide to the Lender a statement ofinsurance coverage; (6) maintain true and complete books and records offinancial operations and provide the Agent access to such books and records; (7) observeand perform all material agreements with respect to thedistribution/exploitation of the Products (as defined in the Credit Agreement);(8) (a) if a Credit Party has control over any physical materialsrelated to the Products, deliver such materials to a laboratory (or 

F-27

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provide a laboratoryaccess letter, if appropriate) and a pledgeholder agreement to the Agent and (b) withrespect to any products acquired after the closing date, provide, on aquarterly basis, to the Agent and the laboratories a revised schedule ofproduct on deposit with such laboratories; (9) pay all taxes and othergovernmental charges and indebtedness in the ordinary course of business of thecredit parties; (10) defend the collateral against all liens, other thanpermitted encumbrances; (11) upon receipt of any (a) payment from anyobligor which should be remitted to the Agent or (b) the proceeds of anysale of Product, remit such payment or proceeds to the Agent; (12) comply withall applicable environmental laws, notify the Agent of any material violationof any applicable environmental laws and indemnify the Agent and the IssuingBank against any environmental law-related claims; and, (13) (a) uponrequest, execute and deliver all necessary documents to perfect the liens onthe collateral and to carry out the purpose of the Credit Agreement and itsancillary documents and (b) clarify, if necessary, the chain of title forany item of the Products.

Negative covenants include limitations on (1) indebtedness,(2) liens, (3) guaranties, (4) investments, (5) making “RestrictedPayments,” (Restricted Payments include any distribution on our equity, anyredemption or other acquisition of our equity including redemption of thecompany obligated mandatorily redeemable preferred interest, any payment ondebt of the Company which is subordinated to the bank loans, any reduction ofthe HC Crown line of credit for the Company, any payment on certain obligationsassumed by the Company under the purchase agreement for the film assets and anyother payment to Hallmark Cards or any of its affiliates. The credit agreement,however, permits the Company to make payments to Hallmark Cards or an affiliatein payment of a valid outstanding obligation (subject to any applicable subordinationagreement) or in an aggregate amount equal to the financial benefits receivedby us as a result of the reduction of interest charges under the bank creditfacility in Amendment No. 8 plus any fees and costs incurred by HallmarkCards in connection with the support letter of credit provided in accordancewith Amendment No. 8), (6) sale of assets, (7) sale ofreceivables, (8) entering into any sale and leaseback transactions, (9) changingthe location of the Company’s chief executive office or the Company’s name, (10) makingcapital expenditures, (11) entering into transactions with affiliates, (12) amendingthe promissory note with HC Crown, a related letter of credit issued for ourbenefit or certain of our other material agreements, (13) creating negativepledge, (14) mergers or acquisitions, (15) production of any item ofProduct, (16) changing our business activities, (17) entering into certaintransactions that are prohibited under ERISA, (18) entering into any interestrate protection agreement or currency agreement, (19) acquiring or creating anynew subsidiary, (20) using or storing hazardous materials on our premises, (21)incurring cash program acquisition guarantees in excess of a certain amount,(22) using the process of the loans for any purpose other than set forth in theCredit Agreement, (23) permitting EBITDA (as defined in the Credit Agreement)to be less than specified amounts per quarter, (24) permitting payments totelevision distributors for subscribers to be greater than certain amounts and(25) creating any first tier subsidiary other than CM Intermediary or have anyasset related to the Channel at a level above CM Intermediary.

Amendment No. 8 waived the Company’snon-compliance with the following financial covenants:  (1) capital expenditures in 2004; (2) cashprogram acquisition guarantees in 2004; (3) trailing 12-month EBITDAfor the quarter ended December 31, 2004; (4) cash payments totelevision distributors for subscribers in 2004; (5) net worth at December 31,2004; (6) leverage ratio for the quarter ended December 31, 2004; and(7) interest coverage ratio for the 2004 year. Amendment No. 8 alsodeleted the net worth covenant; amended the limit on the Company’s cash programguarantees in 2005; amended the quarterly EBITDA requirements for the remainderof the loan term; revised the EBITDA definition, including adding all non-cashexpenses to consolidated net income in determining EBITDA; and amended thelimit of cash payments to television distributors for subscribers, the minimumnumber of subscribers and the minimum gross subscriber revenue. Further,pursuant to Amendment No. 8, the limitation on Restricted Payments wasamended to allow us to make certain payments to Hallmark Cards or itsaffiliates. The Company was in compliance with its debt covenants at December 31,2005.

F-28

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By an Amendment No. 9dated as of March 21, 2006, to the agreement for the bank credit facility,Hallmark Cards has been provided the right, by giving five business dayswritten notice, to purchase all of the bank lenders’ interest in the loansunder the bank credit facility for an amount equal to the principal plusaccrued, unpaid interest and other amounts owing to any of the lending banks. Underthe waiver agreement described below, we can cause Hallmark Cards to completesuch a purchase. We view this purchase right as an alternative to the lendingbanks drawing down on the letter of credit described below.

**11.Private Placement**

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

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

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

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

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The financing was initially recorded at $265.0 millionand required the allocation of fair value to the various components. Thefollowing table summarizes the transaction as at the transaction date and as ofDecember 31, 2002.

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

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(a)           Accretedprincipal to $45.6 million and additional 11.25% interest to meet minimumreturn requirements over six years.

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

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

(d)          Amortizedto interest expense over six years.

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

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

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

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Thefollowing table summarizes the transaction as of August 5, 2003.

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

 

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

***Waiver and Standby Purchase Agreement***

Under a waiver andstandby purchase agreement dated March 21, 2006, Hallmark Cards agreed todefer all payments due on any of the following obligations and, except wherenoted, payment of interest thereon until May 31, 2007 or an earlier dateas described below as the waiver termination date, whereupon all of theseamounts become immediately due and payable (the “Waiver Period”):

·       Note,dated December 14, 2001, in the original principal amount of $75.0million, payable to HC Crown. The interest accrued on this note through December 31,2005, was $11.3 million.

·       10.25% senior unsecured discount note, dated August 5,2003, in the initial accreted value of $400.0 million, payable to HCCrown. Accreted interest through December 31, 2005, was $109.4 million.

·       $70.0 million account payable to HallmarkEntertainment Holdings arising out of the saleto Crown of the Hallmark Entertainment film library.

·       Note, dated as of October 1, 2005, in theprincipal amount of $132.8 million, payable to Hallmark EntertainmentHoldings. The interest accrued on this note through December 31, 2005, was$2.4 million.

·       Allobligations of the Company under the bank credit facility to Hallmark Cards,Incorporated by virtue of Hallmark Cards’ deemed purchase of participations inall of the obligations under a letter of credit which Hallmark Cards has givenin support of the facility or the purchase by Hallmark Cards of all theseobligations pursuant to Amendment No. 9 to the bank credit facility.

Hallmark Cards has agreed that it will not acceleratethe maturity of any of the foregoing obligations or initiate collectionproceedings during the Waiver Period. Interest will continue to accrue on theseobligations during the Waiver Period. The Company will continue to pay thebanks and/or Hallmark Cards interest on the credit facility during the WaiverPeriod.

The waiver termination date is May 31, 2007 orany of the following if they occur earlier: The Company fails to pay any principal or interest, regardless ofamount, due on any indebtedness with an aggregate principal amount in excess of$5.0 million or any other event or condition occurs that results in any suchindebtedness becoming due prior to its scheduled maturity, provided that thewaiver will not terminate if the Company reduces the principal amount of suchindebtedness to $5.0 million or less within five business days of a writtennotice of termination from Hallmark Cards; certain bankruptcy events occur; theCompany defaults in its payment of licensing fees under the Second Amended andRestated 

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Program License Agreementwith RHI Entertainment Distribution; a representation and warranty of theCompany in the waiver agreement is false or misleading in any material respect;or the Company fails to pay interest on the deferred obligations listed aboveor to perform any covenants in the waiver agreement.

Under the waiver agreement, if the bank’s lendersunder the bank credit facility accelerate any of the indebtedness under thebank credit facility or seek to collect any indebtedness under it, then theCompany may elect to exercise its right to require that Hallmark Cards or itsdesignated subsidiary exercise an option to purchase all the outstandingindebtedness under the bank credit facility as provided in Amendment No. 9to the bank credit facility. All expenses and fees in connection with thispurchase would be added to the principal amount of the credit facilityobligations.

This agreement does not limit any existing rights ofHallmark Cards or its affiliates to offset amounts owed to us under theHallmark Tax Sharing Agreement and Hallmark Cards’ share of the amounts payableunder the December 1, 2005, agreement with NICC (described in Note 14)against these obligations. Pursuant to the agreement, the Company must makeprepayments on the outstanding debt from 100% of any “Excess Cash Flow” duringthe Waiver Period.  “Excess Cash Flow” isdefined as 1) the net proceeds of any debt or equity financings or sale ofassets; 2) the net cash proceeds from the incurrence by the Company ofindebtedness; 3) the net cash proceeds from the sale, transfer or release bythe Company of assets outside the ordinary course of business; and 4) ifpositive, the consolidated net cash flow fromoperations of Crown Holdings for any calendar quarter as shown in an SECreport, less cash funds used to pay current operating expenses and to pay orestablish reasonable reserves for future expenses, indebtedness payments, andcapital improvements and replacements as determined by the Board of Directorsof the Company.

As consideration for the waiver agreement, we agreedto convert the $70.0 million account payable to Hallmark Entertainment Holdingsarising out of our purchase of the Hallmark Entertainment film library to apromissory note bearing interest at LIBOR plus 3% per annum. This note will bepayable in full on May 31, 2007. We also agreed to:

·       amendthe 2001 and 2005 notes described above to add the accrued but unpaid interest,currently and annually, to the outstanding principal amounts;

·       useour commercially reasonable efforts to refinance all of our obligations toHallmark Cards and affiliates noted above; and

·       complywith our covenants and obligations under the bank credit facility.

In addition, we provided a release to Hallmark Cardsand related parties for any matters prior to the date of the waiver agreementand relating to the capacity of the released parties as beneficiaries of our obligationsunder the waiver agreement or the deferred obligations listed above.

See note 10 on Amendment No. 9to the bank credit facility.

***Hallmark Letter of Credit***

Pursuant to Amendment No. 8to the bank credit facility, Hallmark Cards has provided an irrevocable letterof credit issued to JP Morgan Chase Bank by Citibank, N.A. in the originalamount of $320.0 million, as credit support for our obligations under the Company’scredit facility (the “credit facility”). The support letter of credit wasreduced to $220.0 million upon the consummation of the sale of the Company’sinternational business and the reduction of the aggregate outstanding creditexposure of its lenders to $220.0 million. Drawdowns under the letter of creditmay be made for amounts due and payable under the credit facility and upon theoccurrence of certain other events. Any proceeds received by JP Morgan ChaseBank from drawing under this support letter of credit will not be applied torepay the Company’s obligations, but will be used to purchase on the part ofHallmark Cards from the bank lenders 

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subordinatedparticipations in our obligations under its bank credit facility, junior inpayment to the bank lenders under the bank credit facility. The support letterof credit automatically expires on June 10, 2006. The Company pays toHallmark Cards, as compensation for the support letter of credit, the amountsresulting from the 2% reduction in the interest rate and the 0.3% reduction inthe commitment fee payable by the Company under the bank credit facility asprovided in Amendment No. 8.

***Senior Unsecured Note***

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

The senior unsecured notepayable to HC Crown does not require cash payments until August 2007.Instead, the principal amount of the senior unsecured note accretes at 10.25%per annum, compounding semi-annually, to $596.6 million at August 5, 2007.From that date, interest at 10.25% per annum will be payable semi-annually onthe accreted value of the senior unsecured note to HC Crown. The note matureson August 5, 2011, and is pre-payable by Crown Media Holdings at any timeafter August 5, 2004, without penalty. At December 31, 2004 and 2005,$460.9 million and $509.4 million, respectively, of principal and accretedinterest were included in the senior unsecured note payable in the accompanyingconsolidated balance sheets. The note purchase agreement for the seniorunsecured note contains certain covenants which restrict on the part of theCompany, among other matters, from the incurrence of any additionalindebtedness, the repurchase or other acquisitions of the Company’s stock,investments in other parties and the incurrence of liens on the Company’sassets. As a fee for the issuance of the notes, the Company paid $3.0 millionto HC Crown, which was initially capitalized and is being amortized asadditional interest expense over the term of the note payable.

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

On December 14, 2001,the Company executed a $75.0 million promissory note with HC Crown maturing onthe earlier of six months from the termination of the bank credit facility or December 21,2007. Due to the waiver agreement, the line of credit and related interest arenot due until May 31, 2007. This line of credit is subordinate to the bankcredit facility. The rate of interest under this line of credit is equal toLIBOR plus three percent. At both December 31, 2004, and 2005, borrowingsunder the note were $75.0 million. Accrued interest on the note of $6.1 millionand $11.3 million are included in line of credit and interest payable to HCCrown as of December 31, 2004, and 2005, respectively, on the accompanyingcondensed consolidated balance sheets. At December 31, 2004, and 2005,$75.0 million of the outstanding balance bore interest at the Eurodollar ratesof 5.02% and 7.08%, respectively.

***Promissory Note with Hallmark Entertainment Holdings***

As consideration forextending the demand period for the possible reimbursement of amounts drawn onthe letter of credit supporting the credit facility, the Company agreed toconvert a portion of its license fees payable to Hallmark affiliates, whichwere approximately $132.8 million, to a promissory note bearing interest atLIBOR plus 3% per annum. The term of the promissory note began on October 1,2005 and is payable in full on August 31, 2006 (amended to May 31,2007, by the waiver agreement). Accrued interest on the note of $2.4 million isincluded in note and interest payable to Hallmark Cards affiliate as of December 31,2005, on the accompanying condensed consolidated balance sheets. Due to thewaiver agreement, interest is not due until May 31, 2007. At December 31,2005, $132.8 million of the outstanding balance bore interest at the Eurodollarrates of 7.08%. This note was transferred to a subsidiary of Hallmark Cardsprior to the sale by Hallmark Cards of its interests in Hallmark EntertainmentLLC, now called RHI Entertainment LLC.

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***Interest Paid to HC Crown***

Interest expense payableto HC Crown, which formerly was payable to the Company’s bank syndicate andresulted from a reduction in the interest rate and commitment fee payable tothe Company’s bank syndicate in Amendment No. 8 to the Company’s creditfacility, was $3.2 million for the year ended December 31, 2005.

***Related Party Long-TermObligations***

The aggregate maturies of related party long-term debtfor each of the five years subsequent to December 31, 2005, are asfollows:

| ** **                                                                                         | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                         | ** ** | **Total**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2011** | ** ** |
| ** **                                                                                         | ** ** | **(In thousands)**                   | ** ** |
| Line of credit  and interest payable at 5.02% to HC Crown, with principal due May 31,  2007   |       | $                                         | 86,309     |   |   | $ | — |   |   | $ | 86,309 |   | $ | — |   |
| 10.25% Senior  unsecured note to HC Crown, including accrued interest, due August 5,  2011(1) |       | 596,634                                   |       |   | — |   |   | — |   | 596,634 |   |
| Note and interest  payable to Hallmark Entertainment Holdings due May 31, 2007                |       | 135,187                                   |       |   | — |   |   | 135,187 |   | — |   |
| Payable to  Hallmark Cards affiliates due May 31, 2007                                        |       | 70,000                                    |       |   | — |   |   | 70,000 |   | — |   |
|                                                                                               |       | $                                         | 888,130    |   |   | $ | — |   |   | $ | 291,496 |   | $ | 596,634 |   |

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(1)          Cash interest on the $596.6 million will accrue at a rate of 10.25% perannum from and including August 5, 2007, and will be paid semiannually inarrears on February 5 and August 5, commencing February 5, 2008.

**13.Related Party Transactions**

***Tax Sharing Agreement***

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into afederal tax sharing agreement with Hallmark Cards (the “tax sharing agreement”).Hallmark Cards includes Crown Media Holdings in its consolidated federal incometax return. Accordingly, Hallmark Cards has benefited from past tax losses andmay benefit from future federal tax losses, which may be generated by CrownMedia Holdings. Based on the tax sharing agreement, Hallmark Cards has agreedto pay Crown Media Holdings all of the benefits realized by Hallmark Cards as aresult 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 thebalance when Crown Media Holdings becomes a federal taxpayer. A final true-upcalculation is completed within 15 days after Hallmark Cards files itsconsolidated federal income tax return for the year. Pursuant to the true-upcalculation, Crown Media Holdings is obligated to reimburse Hallmark Cards theamount that any estimated payments have exceeded the actual benefit realized byHallmark Cards and Hallmark Cards is obligated to pay Crown Media Holdings theamount that any actual benefit exceeds the estimated payments. Under the taxsharing agreement, at Hallmark Cards’ option, the non-interest bearing balanceof the 25% in federal tax benefits may be applied as an offset against anyamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidated group under any loan, line of credit or other payable, subject tolimitations under any loan indentures or contracts restricting such offsets.During the third quarter of 2005, Hallmark Cards used $30.0 million of theapproximately $45.7 million balance of this 25% balance to offset intercompanydebt.

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The Company received $49.4million, $56.6 million and $56.1 million (including the $30.0 million offset tointercompany debt during the third quarter of 2005) under the Tax Sharing Agreementduring 2003, 2004 and 2005, respectively. Any payments received from HallmarkCards or credited against amounts owed by Crown Media Holdings to any member ofthe Hallmark Cards consolidated group under the tax sharing agreements arerecorded as an addition to paid-in capital in the accompanying consolidatedstatements of stockholders’ equity.

***Hallmark Entertainment Investments***

On March 11, 2003,Hallmark Entertainment Holdings, Inc. (“Hallmark EntertainmentHoldings”, a wholly-owned subsidiary of Hallmark Cards) contributed 100%of the Crown Media Holdings shares owned by it to Hallmark EntertainmentInvestments. Two of Crown Media Holdings’ investors, Liberty Crown, Inc.,a subsidiary of Liberty Media, and JP Morgan, also contributed 100% of theirCrown Media Holdings shares to Hallmark Entertainment Investments, and VISNcontributed 10% of its Crown Media Holdings shares to Hallmark EntertainmentInvestments, all in return for shares in Hallmark Entertainment Investments.Hallmark Entertainment Holdings, now an owner of more than 80% of HallmarkEntertainment Investments, has voting power over all of the Crown MediaHoldings shares owned by Hallmark Entertainment Investments. See note 15 forfurther information on the number of shares owned and percentage of votingpower.

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

Sinceinception, Hallmark Entertainment LLC has at times paid certain costs on behalfof Crown Media Holdings. For the years ended December 31, 2003, 2004, and2005, $430,000, $3.8 million, and $3.9 million, respectively, representedthe change in the intercompany balance with Hallmark Entertainment.Non-interest bearing unreimbursed costs of $4.5 million and $567,000 areincluded in payable to affiliates in the accompanying consolidated balancesheets as of December 31, 2004 and 2005, respectively.

***Services Agreement with HallmarkCards***

Crown Media Holdingsentered into an Intercompany Services Agreement with Hallmark Cards, effective January 1,2003, under which Hallmark Cards agreed for a term of three years to provideCrown Media Holdings with tax, risk management, health safety, environmental,insurance, legal, treasury and cash management services and real estateconsulting services. This services agreement has been renewed for an additionalyear, through January 1, 2007. Under the agreement, the Company agreed topay Hallmark Cards $515,000 per year for these services, plus out-of-pocketexpenses and third party fees, payable in arrears on the last business day ofeach quarter. For each of the years ended December 31,2003, 2004, and 2005, Crown Media Holdings had accrued $515,000 under theagreement. At December 31, 2004 and 2005 non-interest bearing unpaidaccrued service fees and unreimbursed expenses of $8.6 million and $10.1million, respectively, were included in payable to affiliates in theaccompanying consolidated balance sheets. For the years ended December 31,2003, 2004 and 2005, out-of-pocket expenses and third party fees were approximately$1.3 million, $1.3 million and $1.0 million, respectively.

***Film Asset Services Agreementwith RHI Entertainment***

TheCompany has a film asset services agreement with RHI Entertainment (formerlyHallmark Entertainment, LLC), under which RHI Entertainment provides Crown MediaHoldings with services related to the administration, distribution and otherexploitation of the Company’s film assets. In consideration for the servicesprovided by RHI Entertainment, Crown Media Holdings was, prior to the sale ofthe Company’s international operations, obligated to pay a service fee of $1.5million per year, payable in quarterly installments of $375,000. Crown MediaHoldings paid $1.5 million to RHI 

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Entertainment for these services during both 2003 and2004 and $1.0 million during 2005. At December 31, 2004, and 2005,non-interest bearing unpaid accrued service fees of $375,000 and $188,000 wereincluded in payable to affiliates in the accompanying condensed consolidatedbalance sheets. Following the sale of the Company’s international operations,the annual fee for these services was reduced to $750,000 per year.

***Trademark Agreement withHallmark Cards***

CrownMedia United States has a trademark license agreement with Hallmark Licensing, Inc.for use of the “Hallmark” mark for the Hallmark Channel and for the HallmarkMovie Channel. During the third quarter of 2005, Hallmark Cards extended thetrademark license agreements for the Hallmark Channel and the Hallmark MovieChannel to September 1, 2006. The Company is not required to pay any feesunder the trademark license agreements.

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

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

Under the Second Restated Agreement, RHI EntertainmentDistribution is required to produce and deliver to Crown Media United States,and Crown Media United States is required to order and license from RHIEntertainment Distribution, 13 original movies and 3 original mini-series in2005, 31 original movies and 6 original mini-series in 2006 and 18 originalmovies and 3 original mini-series in 2007.  Crown Media United States may, however,completely cancel the 2007 commitment to order 18 original movies and 3 originalmini-series or it may reduce the number of original movies it is required tolicense in each of 2006 and 2007 by up to six movies per year. Crown MediaUnited States has exercised this option to reduce the original movies producedin 2006 to 12 movies. Crown Media United States has exclusive rights to theseoriginal movies and mini-series during a three year exhibition window (thewindow is five years for certain holiday-themed movies and movies produced in2005). Crown Media United States may exhibit the original movies andmini-series in any television media in the United States, its territories andpossessions (together with Puerto Rico), including pay per view and highdefinition television. Crown Media United States may also sublicense its exhibitionrights in any television media regarding the original and other movies andmini-series covered by the agreement to third parties, subject to thereasonable consent of RHI Entertainment Distribution. The license fee payablefor the original movies produced in 2005 is $1,600,000 per movie; in 2006 is$1,680,000 per movie and in 2007 is $1,764,000 per movie. If the movies areproduced for the Hallmark Channel’s “Mystery Movie” series, the license feesare increased by $200,000 and if they are holiday-themed movies, the licensefees are increased by $100,000. The license fees for mini-series produced in2005 are $800,000 per hour; in 2006 are $840,000 per hour; and in 2007 are$882,000 per hour.  Crown Media UnitedStates must also share any revenues from video on demand or pay per viewexploitation with RHI Entertainment Distribution.

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In addition to the original movies and mini-Series,Crown Media United States has agreed to license from RHI EntertainmentDistribution 22 “off-network” movies and mini-series in 2005 and a maximum of15 such movies and mini-series in 2006 through 2008. These programs generallywill not have been seen on cable television in the United States prior to theirexhibition on the Hallmark Channel. The license fees payable for theoff-network movies are $268,029 per movie in 2005; $281,420 per movie in 2006;$295,491 per movie in 2007 and $310,266 per movie in 2008. The license feespayable for the off-network mini-series are $335,024 per hour in 2005; $351,775per hour in 2006; $369,364 per hour in 2007 and $387,832 per hour in 2008.Crown Media United States’ initial exhibition period for these off-networkmovies and mini-series is three years and Crown Media United States’ exhibitionrights are exclusive in all television media in the United States, includingPuerto Rico. Crown Media United States’ exhibition rights to these off-networkmovies and mini-series do not, however, include pay per view or video ondemand. RHI Entertainment Distribution has an option to require Crown MediaUnited States to license these off-network movies and mini-series for anadditional, consecutive three year period at a cost of 50% of the initiallicense fee.

Crown Media United States has also agreed to licenseup to 143 older movies and mini-series from the RHI Entertainment DistributionLibrary for a three year exclusive exhibition window, at an approximate totalcost of $57.5 million. Most of these movies and mini-series have previouslybeen exhibited on the Hallmark Channel and Hallmark Movie Channel.

Both under the current and previous agreements withRHI Entertainment Distribution, if Crown Media United States sub-licenses anylicensed program to a third party, it must equally share with RHI EntertainmentDistribution the excess, if any, of the sublicensing fee over the initialprogram license fee paid by the Crown Media United States. Crown Media UnitedStates did not sub-license any licensed program to a third party during 2003.The Company sub-licensed $1.7 million during the year ended December 31,2004, which resulted in $330,000 owed to RHI Entertainment Distribution. CrownMedia United States  sub-licensed $1.5million during the year ended December 31, 2005, none of which was due toRHI Entertainment Distribution as there was no excess over the license fee.Amounts due to RHI Entertainment Distribution as a result of these sub-licensingagreements have been included in license fees payable to affiliates in theaccompanying consolidated balance sheets as noted below.

Programming costs relatedto the RHI Entertainment Distribution program agreements were $15.0 million,$20.0 million, and $30.1 million for the years ended December 31, 2003,2004 and 2005, respectively. As of December 31, 2004 and 2005, $152.0million and $22.7 million, respectively, are included in license fees payableto affiliates in the accompanying consolidated balance sheets. Crown MediaHoldings paid RHI Entertainment Distribution $15.0 million, $5.0 million and$93.4 million for license fees in 2003, 2004 and 2005, respectively.

**14.Company Obligated Mandatorily Redeemable Preferred Interest and NICC LicenseAgreements**

VISN owns a $25.0 million company obligatedmandatorily redeemable preferred interest in Crown Media United States (the “preferredinterest”) issued in connection with an investment by the Company in CrownMedia United States. On November 13, 1998, the Company, Vision Group, VISNand Henson Cable Networks, Inc. signed an amended and restated companyagreement governing the operation of Crown Media United States, which agreementwas further amended on February 22, 2001, January 1, 2002, March 5,2003, January 1, 2004, November 15, 2004  and December 1, 2005 (the “companyagreement”).

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

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on the date of redemption(December 31, 2010). Due to the mandatory redemption provision of thepreferred interest, on July 1, 2003, the preferred interest was remeasuredat fair value and reclassified to non-current liabilities in accordance withthe provisions of SFAS No. 150. The preferred interest has a liquidation preferenceof $25.0 million.

Under the company agreement, Crown Media United Statesis also obligated to make certain payments for programming to NICC. Formerly,Crown Media United States was required to pay license fees to NICC or fundproduction costs consisting of: (i) a total of $5.3 million per year, withconsumer price index escalations, for two recurring programming blocks producedby NICC; (ii) up to $10.0 million per year for an additional recurring “signature”series program block co-produced by NICC and Crown Media United States; (iii) upto $600,000 per “non-dramatic” holiday special produced by NICC; and (iv) upto $1.0 million per “dramatic” holiday special co-produced by NICC and HallmarkEntertainment.  In addition, Crown MediaUnited States had agreed to advance NICC $3.0 million per year in 2002 through2005 to help fund NICC’s cost of expanding its production operations to producethe aforementioned “signature” series.

Effective December 1,2005, Crown Media Holdings and NICC entered into an amendment to the programagreement under which Crown Media Holdings agreed to continue to fund andlicense the following programming produced by NICC through the end of 2007:

·       ASunday Morning one-hour series entitled “New Morning with Naomi Judd” at a costof $3.5 million in 2005, $4.6 million in 2006 and $5.6 million in 2007. The2006 and 2007 amounts are payable quarterly in those years.

·       Aweekday one-hour daily series entitled “New Morning” at a cost of $1.9 millionin 2005, $4.2 million in 2006 and $5.1 million in 2007. The 2005 amountincludes a deferred amount of $535,000 to be paid as indicated below fordeferred payments. The 2006 and 2007 amounts are payable quarterly in thoseyears.

·       ASunday morning programming block, broadcast from 6 a.m. to 12 noon, at acost of approximately $485,000 in 2005, $5.8 million in 2006 and $5.8 million,increased by a percentage equal to the increase in the Consumer Price Index, in2007. These amounts include deferred payments of $125,000 for 2005 and $1.5million for each of 2006 and 2007. The 2006 and 2007 amounts not deferred arepayable quarterly in those years.

In addition, Crown Media Holdings has agreed to finishfunding four specials, the production of which had been commenced prior to theamendment, at a total additional cost of $1.4 million in 2005 and 2006, and tofund an additional two non-dramatic specials, to be produced in 2006 and 2007,at a total cost of $1.3 million. Amounts for the additional two specials arepayable one quarter in January, 2006 (provided production has commenced), onequarter in June, 2006 and one half in June, 2007 or a change in control (thatis, a sale or merger where the aggregate ownership of the Hallmark Channel bythe current owners becomes less than 50%). The Hallmark Channel is notobligated to broadcast the latter two specials. Crown Media Holdings will alsoprovide $2.0 million in each of 2005, 2006 and 2007 to fund the development byNICC of “made for television” movies and will pay NICC an additional $1.0million if the movie “A Reason to Believe”, which was to be produced under theprior agreement, is not ultimately produced. The 2005 amount includes adeferred payment of $1.8 million; the 2006 amount is payable semi-annually in2006; the 2007 amount is payable in January 2007; and the possibleadditional $1.0 million is payable in July, 2006 or, if sooner, a change incontrol. The Hallmark Channel will have a right of first negotiation to acquirebroadcast rights to the movies resulting from this development and, if itelects not to acquire these rights, may still recover a portion of its fundingif the movies are produced for others. In addition, NICC will receive $45,000in consulting fees from a series which RHI Entertainment has produced, payableno later than July, 2006, and a deferred payment of $750,000 as the lastpayment for certain terminated obligations.

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The deferred payments mentioned above are payable toNICC on December 31, 2007 or a change in control, whichever comes first. Addedto the deferred amounts will be (1) interest at the rate charged by NICC’sprime lender or (2) if NICC sells Crown Media Holdings common stock tofinance any deficit, the increase in the sale price of the common stock betweenthe time NICC sells the stock to fund a deferred amount and a market price ofthe Crown Media Holdings common stock on the date the deferred amounts are paidby Crown Media Holdings.

In the event there is a change of control of CrownMedia Holdings during the original term, NICC will immediately receive a $15.0million “termination payment,” any remaining portions of the payments for thenon-dramatic specials and the “made for television” movie development describedabove and the deferred payments described above. The Hallmark Channel will beobligated to continue to broadcast and pay for the Sunday “New Morning withNaomi Judd” and weekday “New Morning” series and the Sunday morning programmingblock for an additional six months following the change in control, after whichall funding and broadcast obligations to NICC will cease. The total amountpayable in the event of a change of control would be approximately $25.0million if a change in control closed in June, 2006. Also, under existingobligations, Crown Media Holdings would be required to redeem the $25.0 millionpreferred interest of NICC in Crown Media United States, LLC, for that amountplus accrued interest at LIBOR from November 27, 2005.

If there has not been a change of control by June 30,2007, Crown Media Holdings is required to negotiate with NICC for a period of60 days regarding continuation of the programming commitments. If at the end ofthe negotiating period the parties have not reached agreement and Crown MediaHoldings is not willing to continue the programming commitments at the samelevels, NICC may compel Crown Media Holdings to buy all NICC’s outstandingshares of Crown Media Holdings common stock at the then current market value bya written notice given no later than November 1, 2007. If NICC sells morethan 50% of the shares of Crown Media Holdings common stock which it owned asof February 22, 2001, except as part of a sale of Crown Media Holdings,most of the commitments and obligations related to programming as describedabove cease (at the option of Crown Media United States) at the end of the thencurrent broadcast season (approximately August 31).

During the year ended December 31,2003, 2004, and 2005, Crown Media United States paid NICC $10.2 million, $12.3million, and $12.5 million, respectively, related to the company agreement asamended.

**15.Stockholders’ Equity**

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

Hallmark Entertainment InvestmentCompany controls all of the Company’s outstanding shares of Class B commonstock, which, together with the shares of Class A common stock it owns,represents approximately 95.8% as of December 31, 2005, of the votingpower on all matters submitted to the Company’s stockholders. Each share of Class Bcommon stock is convertible at the option of the holder into one share of Class Acommon stock. Shares of Class B common stock are generally automaticallyconvertible into Class A common stock upon sale or other transfer by theselling stockholder. In addition, the Class B common stockholder isentitled to 10 votes per share as compared to one vote per share of Class Acommon stock. With the exception of the voting and conversion rights, shares ofClass A common stock and shares of Class B common stock areidentical.

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

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**16.Income Taxes**

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

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into afederal tax sharing agreement with Hallmark Cards (the “tax sharing agreement”).Hallmark Cards includes Crown Media Holdings in its consolidated federal incometax return. Accordingly, Hallmark Cards has benefited from past tax losses andmay benefit from future federal tax losses, which may be generated by CrownMedia Holdings. Based on the tax sharing agreement, Hallmark Cards has agreedto pay Crown Media Holdings all of the benefits realized by Hallmark Cards as aresult 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 thebalance when Crown Media Holdings becomes a federal taxpayer. A final true-upcalculation is completed within 15 days after Hallmark Cards files itsconsolidated federal income tax return for the year. Pursuant to the true-upcalculation, Crown Media Holdings is obligated to reimburse Hallmark Cards theamount that any estimated payments have exceeded the actual benefit realized byHallmark Cards and Hallmark Cards is obligated to pay Crown Media Holdings theamount that any actual benefit exceeds the estimated payments. Under the taxsharing agreement, at Hallmark Cards’ option, the non-interest bearing balanceof the 25% in federal tax benefits may be applied as an offset against anyamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidated group under any loan, line of credit or other payable, subject tolimitations under any loan indentures or contracts restricting such offsets.During the third quarter of 2005, Hallmark Cards used $30.0 million of theapproximately $45.7 million balance of this 25% balance to offset intercompanydebt. Any payments received from HallmarkCards or credited against amounts owed by Crown Media Holdings to any member ofthe Hallmark Cards consolidated group under the tax sharing agreement arerecorded as an addition to paid-in capital.

Hallmark Cards expects to use approximately $160.7million of the Company’s 2005 tax losses and has used approximately $675.9million (including the $160.7 million generated in 2005) of Crown MediaHoldings tax losses since entering into the tax sharing agreement. Pursuant tothe tax sharing agreement, the Company received $49.4 million, $56.6 million,and $56.1 million (including the $30.0 million offset to intercompany debtduring the third quarter of 2005) under the tax sharing agreement during 2003,2004, and 2005, respectively. These receipts have been recorded as an additionto paid-in capital. The Company has recorded a deferred tax asset of $62.7million related to the taxable loss generated during the year ended December 31,2005, which has been included in the net operating loss component of deferredtax assets in the table below. The Company has recorded a deferred tax asset of$531.3 million related to the cumulative losses generated. The entire amount ofthe Company’s net deferred tax assets have been offset with a valuationallowance. The Company may ultimately reverse the valuation allowance andrecord a tax benefit if it is determined, more likely than not, that theCompany could realize the tax benefit if it were treated as a stand-alonetaxpayer.

Based on the Tax SharingAgreement, the Company may ultimately owe Hallmark Cards for its share of theconsolidated federal tax liability. Such payments would be treated as areduction to paid-in capital to the extent of amounts previously received underthe Tax Sharing Agreement.

Since May 9, 2000, theCompany has been included in certain combined state income tax returns ofHallmark or Hallmark Entertainment Holdings. Consequently, HallmarkEntertainment Holdings and the Company entered into a state tax sharingagreement. Under the state tax sharing agreement, Hallmark 

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EntertainmentHoldings and Crown Media Holdings file consolidated, combined or unitary statetax returns. Crown Media Holdings makes tax-sharing payments to (or receivespayments from) Hallmark Entertainment Holdings equal to the taxes (or taxrefunds) that Crown Media Holdings would pay (or receive) if it filed on astand-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 provisionat the U.S. statutory rate to the provision per the financial statements:

| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**                     | ** ** |
| Taxes computed at 35%                   |       | $                                           | (65,302    | ) | $ | (61,172 | ) | $ | (75,438 | ) |
| Other                                   |       | 1,295                                       |       | 265 |   | 2,222 |   |
| Increase in federal valuation allowance |       | 64,007                                      |       | 60,907 |   | 73,216 |   |
| Income tax provision                    |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

The components of Crown Media Holdings’ deferred taxassets and liabilities are comprised of the following:

| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(In thousands)**               | ** ** |
| Deferred  tax assets:          |       |                                  |       |   |   |
| Deferred revenue               |       | $                                     | 38         |   | $ | 67 |   |
| Bad debt reserve               |       | 2,611                                 |       | 610 |   |
| Accrued compensation           |       | 8,472                                 |       | 5,276 |   |
| Net operating loss             |       | 471,454                               |       | 531,261 |   |
| Depreciation                   |       | 11,360                                |       | 7,981 |   |
| Other                          |       | 5,737                                 |       | 13,626 |   |
| Valuation allowance            |       | (340,129                              | )          | (428,079 | ) |
| Total deferred tax assets      |       | 159,543                               |       | 130,742 |   |
| Deferred  tax liabilities:     |       |                                  |       |   |   |
| Film inventory                 |       | (154,274                              | )          | (126,661 | ) |
| Other                          |       | (5,269                                | )          | (4,081 | ) |
| Total deferred tax liabilities |       | (159,543                              | )          | (130,742 | ) |
| Net deferred taxes             |       | $                                     | —     |   | $ | — |   |

 

The Company has revised thepreviously reported components of deferred tax assets, liabilities andvaluation allowance to include a $23.7 million deferred tax asset andcorresponding valuation allowance related to an acquired temporary differencefrom years prior to 2004. The revision recognizes the deferred tax asset andits related valuation allowance. There was no impact on net deferred taxes.

Asof December 31, 2005, cumulative federal net tax operating losses,exclusive of those used by Hallmark Cards in its consolidated returns, areapproximately $686.3 million and expire in 2020 through 2023.

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**17.Fair Value**

The following table presents the carrying amounts andestimated fair values of the Company’s financial instruments at December 31,2004 and 2005. The estimated fair value of a financial instrument is the amountat which the instrument could be exchanged in a current transaction betweenwilling parties.

| ** **                                                     | ** ** | **2004**                | ** ** | **2005**  | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                                                     | ** ** | **Carrying**            | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                     | ** ** | **Amount**              | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                                     | ** ** | **(In thousands)** | ** ** |
| Senior unsecured  note to HC Crown, including accrued interest |       | $                       | 460,930    |      | $          | 428,765 |   | $ | 509,386 |   | $ | 436,822 |   |
| Company obligated mandatorily  redeemable preferred interest   |       | 11,488                  |       | 12,100    |       | 14,537 |   | 19,300 |   |
|                                                                |            |                         |            |           |            |  |  |  |  |  |  |  |  |

 

Thecarrying amounts shown in the table are included in the accompanyingconsolidated balance sheets under the indicated captions. The Company estimatesthe fair value of the company obligated mandatorily redeemable preferredinterest on an annual basis in November as it is not practicable toperform the valuation more frequently. The valuation is dependent upon thefuture pre-tax income of Crown Media United States since the Company is onlyobligated to make payments on the instrument within 60 days of the fiscal yearin which pre-tax income is generated by Crown Media United States or within 60days of December 31, 2010.

The Company estimates the fairvalue of the senior unsecured note to HC Crown on a quarterly basis. TheCompany estimated the fair value of the senior unsecured note to HC Crown bydetermining the discounted value of future cash flows, based upon a borrowingrate of 13.5%, which is estimated to be the current market interest rate for adebt instrument with similar terms.

Accountspayable and receivable are carried at reasonable estimates of their fair valuesbecause of the short-term nature of these instruments. The interest rates onthe bank credit facility, the line of credit with HC Crown and the note payableto Hallmark Entertainment Holdings, LLC are variable, have relatively shortmaturity periods and/or reset periodically, therefore, the fair value of thisdebt is not significantly affected by fluctuations in interest rates and areconsidered to approximate their fair values.

**18.Share-Based Compensation**

CrownMedia Holdings has one stock option plan, the Amended and Restated Crown MediaHoldings, Inc. 2000 Long Term Incentive Plan (the “Plan”). The Plan coverstwo types of share-based compensation, a Stock Option Plan and a RestrictedStock Unit Plan (RSU) that are subject to FAS 123R commencing on January 1,2006. Before implementation of FAS 123R, Crown Media Holdings accounted for thestock option component of the Plan under APB 25, under which compensation costapproximated $0, $0 and $116,000 for the years ended December 31, 2003,2004 and 2005, respectively. Compensation cost for stock options issued toemployees represented the excess of the quoted market price of the Company’sstock at the measurement date of the grant over the exercise price of theoption.

***Stock Option Plan***

Crown Media Holdings may grantoptions for up to 10.0 million shares under the Plan. The stock options expire10 years from the date of grant and generally vest over service periods thatrange from date of grant to four years. Certain option and share awards providefor accelerated vesting if there is a change in control (as defined in thePlan).

The fair value of each option grant is estimated on thedate of grant using the Black-Scholes option pricing model that uses theassumptions noted in the following table. The Company uses historicaldata to estimate option exercise and employee termination with the valuationmodel; separate groups of 

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employees that have similar historical exercisebehavior are considered separately for valuation purposes. The expected term ofoptions granted is derived from the output of the option valuation model andrepresents the period of time that options granted are expected to beoutstanding; the range given below results from certain groups of employeesexhibiting different behavior. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve.

| ** **                | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|
| Expected  volatility      |       | 38.8     | %          |
| Expected  dividends       |       | 0        |       |
| Expected Term (in  years) |       | 1.16     |       |
| Risk -free rate           |       | 4.38     | %          |

 

There were no stock optiongrants in 2003 and 2004. In December 2005, the Company modified astock option agreement covering vested stock options with a former employee.The modified terms included an extension of the expiration date from December 31,2005, to February 28, 2007, and an extension of the related stock optionexercise dates to January 1, 2007, through February 28, 2007.

A summary of the status of Crown’ Stock Option Plan at December 31,2003, 2004 and 2005, and changes during the years then ended is presentedbelow:

| ** **                       | ** ** | **Shares**              | ** ** | **Exercise  Price  Per Option** | ** ** | **Weighted-   Average  Exercise  Price  Per Option** | ** **  | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------|-------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** | ** **                           | ** ** | ** **                                                     | ** **  | ** **                                           | ** ** | ** **                      | ** ** |
| Balance,  December 31, 2001 |       |                    | 6,891      |                                 |       |                                                           |        |                                                 | $          | 12.66                           |       |   |   |   |   |   |   |   |   |   |
| Options granted                  |       |                    | 1,806      |                                 |       | $                                                              | 9.76-12.50  |                                                 |       | $                               | 12.19      |   |   |   |   |   |   |   |   |   |   |
| Options exercised                |       |                    | (182       | )                                    |       | $                                                              | 8.33-8.94   |                                                 |       | $                               | 8.93       |   |   |   |   |   |   |   |   |   |   |
| Options cancelled                |       |                    | (678       | )                                    |       | $                                                              | 12.50-20.77 |                                                 |       | $                               | 15.62      |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2002 |       |                    | 7,837      |                                 |       |                                                           |        |                                                 | $          | 12.38                           |       |   |   |   |   |   |   |   |   |   |
| Options cancelled                |       |                    | (6,189     | )                                    |       | $                                                              | 7.47-21.00  |                                                 |       | $                               | 12.80      |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2003 |       |                    | 1,648      |                                 |       |                                                           |        |                                                 | $          | 11.12                           |       |   |   |   |   |   |   |   |   |   |
| Options cancelled                |       |                    | (289       | )                                    |       | $                                                              | 8.33-17.45  |                                                 |       | $                               | 13.09      |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2004 |       |                    | 1,359      |                                 |       |                                                           |        |                                                 | $          | 10.71                           |       |   |   |   |   |   |   |   |   |   |
| Options granted                  |       |                    | 450        |                                 |       | $                                                              | 9.10        |                                                 |       | $                               | 9.10       |   |   |   |   |   |   |   |   |   |   |
| Options exercised                |       |                    | (255       | )                                    |       | $                                                              | 8.33-8.94   |                                                 |       | $                               | 8.90       |   |   |   |   |   |   |   |   |   |   |
| Options cancelled                |       |                    | (683       | )                                    |       | $                                                              | 8.94-16.38  |                                                 |       | $                               | 10.69      |   |   |   |   |   |   |   |   |   |   |
| Options forfeited                |       |                    | (4         | )                                    |       | $                                                              | 12.50       |                                                 |       | $                               | 12.50      |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2005 |       |                    | 867        |                                 |       |                                                           |        |                                                 | $          | 10.42                           |       |   |   | 7.75 |   |   |   | $ | 0.00 |   |   |
| Exercisable                      |       |                    | 812        |                                 |       |                                                           |        |                                                 | $          | 10.36                           |       |   |   | 7.87 |   |   |   | $ | 0.00 |   |   |

 

| **Options Outstanding**                             | ** ** | **Options Exercisable** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices  Per Option** | ** ** | **Shares  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** ** | **Exercisable  Shares** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** ** |
| ** **                                               | ** ** | **(In thousands)**      | ** ** | **(In years)** | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $  6.30-10.50                                  |       |                         | 535        |   |   |   | 9.1 |   |   |   | $ | 9.11 |   |   |   | 530 |   |   |   | $ | 9.10 |   |   |
| $10.51-12.60                                             |       |                         | 243        |   |   |   | 6.0 |   |   |   | $ | 11.51 |   |   |   | 193 |   |   |   | $ | 11.56 |   |   |
| $12.61-14.70                                             |       |                         | 45         |   |   |   | 4.2 |   |   |   | $ | 14.00 |   |   |   | 45 |   |   |   | $ | 14.00 |   |   |
| $14.71-21.00                                             |       |                         | 44         |   |   |   | 5.2 |   |   |   | $ | 16.60 |   |   |   | 44 |   |   |   | $ | 16.60 |   |   |
|                                                     |       |                         | 867        |   |   |   |   |   |   |   |   |   |   |   | 812 |   |   |   |   |   |   |

 

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Thetotal intrinsic value of options exercised during the years ended December 31,2003, 2004 and 2005 was $0, $0, and $338,000, respectively.

***Restricted Stock Unit Plan***

In April 2003, the Company’s Board of Directorsapproved actions to provide additional incentives to encourage retention of itsemployees. Crown Media Holdings’ then outstanding stock options held byemployees had exercise prices significantly above the market value of its Class Acommon stock. The Company made an offer in May 2003 to senior managementand vice presidents, totaling approximately 55 persons, to exchange theiroptions for restricted stock units (“RSUs”). The exchange ratio was one RSU forevery 2.5 options for shares of the Company’s Class A common stock,resulting in a total of 5,126,732 options exchanged for 2,050,693 RSUs. EachRSU, upon vesting, represents the right to receive one share of Class Acommon stock or the value of the share in cash at the time of vesting. Thedetermination of whether RSUs will be settled in cash or common stock is madeby the Company’s Board of Directors. The RSUs vest over three years inone-third increments on the anniversary of the grant date each year and theCompany is accruing expense related to the RSUs ratably over each increment’svesting period using the price of our Class A common stock on the last dayof the reporting period.

Options for 279,254 shares of common stock owned bycertain executives and vice presidents that were not exchanged are subject tovariable plan accounting in which compensation is remeasured at each reportingdate until the options are exercised, expire unexercised or are forfeited.

In May 2004, the Company’s Board of Directorsapproved an additional grant to employees of 1,065,000 RSUs. The EmploymentRSUs, which constitute 70% of the award granted in 2004, vest in equalone-third installments over the next three years on the anniversary of thegrant date each year. The Company is accruing expense related to the EmploymentRSUs ratably over each installment’s vesting period using the price of our Class Acommon stock on the last day of the reporting period. The Performance RSUs,constituting 30% of the award granted in 2004, vest on the 3rd anniversary of the grant date, provided thatthe price of the Crown common stock is $14 or higher on that date.

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

The Company recorded $5.9 million, $11.5 million, and$8.5 million, of compensation expense associated with the RSUs during the yearsended December 31, 2003, 2004 and 2005, respectively, which has beenrecorded as a liability for RSUs in the accompanying consolidated balance sheetand is included in selling, general and administrative expense in theaccompanying consolidated statement of operations. The Company settled certainRSUs during the three months ended March 31, 2005, for approximately $4.2 millionin cash. Additionally, in conjunction with the close of the internationaltransaction, the Company immediately vested and settled RSUs held byindividuals employed by the international business in May 2005 forapproximately $4.0 million in cash. In June 2005, the Company settled thecontractually vested RSUs for approximately $3.8 million in cash. In August 2005,the Company immediately vested and settled RSUs held by one employee of theCompany for approximately $139,000 in cash.

In June 2005,the Company’s Board of Directors approved a grant to those Directors who werenot employees of the Company or of Hallmark Cards or its affiliated companies,of 70,884 RSUs. The grant was intended to satisfy incentive compensationobligations to these Directors for 2003 and 2004. The grant was subject toapproval of the Company’s shareholders of a change in the Company’s Amended andRestated 2000 Long Term Incentive Plan to permit the grant of RSUs toDirectors. In July 2005, the shareholders approved this amendment to theLong Term Incentive Plan. The RSUs vest in equal one-third installments overthree years on the anniversary of the grant dates each year. The Company isaccruing expense related to the RSUs ratably over each installment’s vestingperiod using the price of our 

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Class A common stock on the last day of the reportingperiod. Since the effective dates of these grants were in May 2003 and May 2004and some portions of the grants had, therefore, vested, in August 2005,the Company settled the vested RSUs held by these Directors for approximately$353,000 in cash.

In August 2005, the Company’s Board of Directorsapproved an additional grant to employees of 828,000 RSUs. The Employment RSUs,which constitute 50% of the award granted in 2005, vest in equal one-thirdinstallments over the next three years on the anniversary of the grant dateeach year. The Company is accruing expense related to the Employment RSUsratably over each installment’s vesting period using the price of our Class Acommon stock on the last day of the reporting period. The Performance RSUs,constituting 50% of the award granted in 2005, vest on the 3rd anniversary of the grant date, provided thatthe price of the Crown common stock is $14 or higher on that date.

In August 2005, the Company’s Board of Directorsapproved an additional grant to one executive of 115,000 RSUs. The EmploymentRSUs, which constitute 50% of the award granted in 2005, vest in equalone-third installments on dates which are three months, six months and ninemonths, respectively, after the grant date. The Company settled the vested RSUsheld by this executive for approximately $203,000 in cash. The Company isaccruing expense related to the Employment RSUs ratably over each installment’svesting period using the price of our Class A common stock on the last dayof the reporting period. The Performance RSUs, constituting the remaining 50%of the award granted in 2005, vest on the 3rd anniversary of the grant date, provided thatthe price of the Crown common stock is $14 or higher on that date.

Under FAS 123R, the fairvalue of each Employment RSU grant will be estimated on the date of grant usinga Standard Barrier Lattice option pricing model. The fair value of each PerformanceRSU grant will be estimated on the grant using a Monte Carlo Lattice optionpricing model. Beginning in 2006, the Company will also apply a forfeiture rateto the Employment RSUs in order to comply with SFAS No. 123R.

***Bonus***

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

**19.Employee Benefits**

***Benefit Plans***

CrownMedia Holdings adopted a 401(k) retirement plan for all of its UnitedStates employees effective January 1, 2002. Under the provisions of theCrown Media Employee Savings Plan (“ESP”), any full-time or part-time employeemay join the ESP 90 days after his or her employment. Employees that qualifyfor participation can contribute up to 50% of their pre-tax salary, subject toa maximum contribution limit as determined by the Internal Revenue Service, andup to 16% of after-tax salary, not to exceed 50% total of combined and pre-taxand after-tax contributions. Additionally, for every dollar up to 

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six percent of salary an employee contributes, CrownMedia Holdings will contribute fifty cents. Crown Media Holdings contributed$318,000, $345,000, and $392,000 for the years ended December 31, 2003,2004, and 2005, respectively.

***Deferred Compensation Plans***

The Company sponsors adeferred compensation plan for its management. Participants in this plan earninterest on their deferred compensation. The Company’s deferred compensationobligations for this plan are included in its consolidated balance sheet inlong-term accrued liabilities. The deferred compensation liability as of December 31,2004 and 2005, was $2.1 and $3.2 million, respectively. The Company hassuspended this plan for 2006 and there will be no deferrals of employeecompensation earned in 2006. The Company will, however, continue to payinterest on amounts deferred in previous years and pay out these amounts inaccordance with the terms of the plan.

***Retention Program***

In 2004, the Company established a retention programfor approximately 175 employees who could have been affected by the sale ofCrown Media Holdings’ international business. Under the program, employees thatremained with the Company through the earlier of the date on which a sale ofthe international business became effective or December 31, 2004, wereentitled to a retention bonus totaling approximately $7.7 million. The Companyrecorded $7.7 million of expense for the year ended December 31, 2004, inregard to this retention program, of which $7.1 million was paid in 2005.

In August 2005, theBoard of Directors authorized several contingent employee compensation benefitsin contemplation of a possible change in control of the Company. A transactionbonus equal to 40% of employees’ base compensation will be paid employees atthe level of director or below upon a change in control. At its discretion, theCompany may pay an unspecified portion of the transaction bonus if a change incontrol has not yet occurred. The Board also authorized a longevity-andtitle-based severance benefit which provides for salary, wage and bonuspayments, extended health insurance coverage, and outplacement services toemployees who are terminated as a result of the change in control. Most of theexecutive officers of the Company are subject to employment contracts. Based onits personnel roster in October 2005, the Company estimates that the costof the transaction bonuses and severance benefits would be approximately $25.0million to $45.0 million. On March 24, 2006, the Compensation Committee ofthe Board of Directors, approved payment of performance bonuses for 2005. Ifthere is a transaction, these bonuses will, for employees at the level ofdirector and below, be deemed to have been the first installment of thetransaction bonus and thus will be credited against any transaction bonusamounts payable to them.

**20. Non-monetaryTransaction**

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

F-46

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**21.Commitments and Contingencies**

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

SFAS No. 63 requires an entityproviding licensed programming to report an asset and liability for the rightslicensed under a programming agreement only when the license period has begunand when certain other defined requirements are met. As such, the accompanyingconsolidated balance sheets do not reflect both gross assets and liabilities of$166.9 million and $263.9 million as of December 31, 2004 and 2005,respectively, related to committed program license fees payable to HallmarkEntertainment Distribution and various third parties with airing windows whichbegin subsequent to period-end.

Contractual maturities of long-term obligations(including interest) over the next five years are as follows (in thousands):

| ** **                                                            | ** ** | **Total** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Credit facility  and interest payable                                 |       | $         | 210,169    |     | $          | 169      |       | $        | 210,000    |     | $          | —   |       | $              | —     |   | $ | — |   | $ | — |   |
| Company obligated  mandatorily redeemable preferred interest(1)  |       | 25,000    |       | —   |       | —   |       | 5,000    |       | 5,000    |       | 15,000   |       | —         |       |
| HC Crown line of  credit and interest payable                         |       | 86,309    |       | —   |       | 86,309   |       | —   |       | —   |       | —   |       | —         |       |
| Senior unsecured  note to HC Crown, including accretion(2)            |       | 596,634   |       | —   |       | —   |       | —   |       | —   |       | —   |       | 596,634        |       |
| Note payable to  Hallmark Cards affiliate                             |       | 135,187   |       | —   |       | 135,187  |       | —   |       | —   |       | —   |       | —         |       |
| Payable to  Hallmark Cards affiliates                                 |       | 70,000    |       | —   |       | 70,000   |       | —   |       | —   |       | —   |       | —         |       |
| License fees  payable to affiliates                                   |       | 26,019    |       | 25,359   |       | 660      |       | —   |       | —   |       | —   |       | —         |       |
| License fees  payable to non-affiliates                               |       | 214,025   |       | 27,757   |       | 59,695   |       | 47,671   |       | 33,563   |       | 30,670   |       | 14,669         |       |
| License fees  payable to affiliates for future windows(3)(4)          |       | 193,108   |       | 73,249   |       | 36,382   |       | 34,413   |       | 27,254   |       | 8,374    |       | 13,436         |       |
| License fees  payable to non-affiliates for future windows(3)         |       | 70,763    |       | 16,311   |       | 32,518   |       | 18,828   |       | 2,606    |       | —   |       | 500            |       |
| Total Contractual Cash  Obligations                              |       | $         | 1,627,214  |     | $          | 142,845  |       | $        | 630,751    |     | $          | 105,912  |       | $              | 68,423     |   | $ | 54,044 |   | $ | 625,239 |   |

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(1)          Timing ofpayments are estimated as certain payments are due within 60 days of the end ofeach fiscal year in which Crown Media United States reports pretax profitsexceeding $10.0 million. If Crown Media United States does not earn pretaxprofits, the company obligated mandatorily redeemable preferred interest is tobe wholly redeemed within 60 days of fiscal year ending December 31, 2010.

(2)          Cashinterest on the $596.6 million will accrue at a rate of 10.25% per annum fromand including August 5, 2007, and will be paid semiannually in arrears on February 5and August 5, commencing February 5, 2008.

(3)          Representsoff-balance sheet commitments.

(4)          The amounts and timing for certain of these commitments are contingentupon the future delivery date and type of programming produced, and, as such,the estimated amount and timing may change.

F-47

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**22.Segment Reporting**

The Company’s continuing operations are currentlyorganized into two principal divisions representing operating segments:domestic channel and film distribution. The Company evaluates performance andallocates resources based on the results of these segments. The key operatingperformance criteria used in this evaluation include revenue, loss fromcontinuing operations and total assets. The results of operations of ourinternational channel operating segment are not included in the segmentreporting as they are classified separately as discontinued operations in theCompany’s consolidated financial statements (see note 24).

The following tablespresent the Company’s segment information for the periods indicated (inthousands):

*2003*

| ** **                                               | ** ** | ** **   | ** ** | **Film**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                               | ** ** | **Domestic** | ** ** | **Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
| Total revenues                                           |       | $            | 81,884     |             |       | $               | 25,798     |             |       |   | $ | (8,249 | )(1) |   |   | $ | 99,433 |   |   |
| Programming costs                                        |       | (70,098      | )          |             | (2,376     | )               |       |             | 4,199      |  (1) |   |   | (68,275 | ) |   |
| Amortization of  film assets                             |       | —       |       |             | (16,549    | )               |       |             | 3,584      |  (1) |   |   | (12,965 | ) |   |
| Subscriber  acquisition fee amortization expense    |       | (26,865      | )          |             | —     |            |       |             | 3,904      |  (1) |   |   | (22,961 | ) |   |
| Operating costs                                          |       | (11,325      | )          |             | (2,560     | )               |       |             | 534        |  (1) |   |   | (13,351 | ) |   |
| Selling,  marketing, general and administrative expenses |       | (45,291      | )          |             | (20,377    | )               |       |             | —     |   |   |   | —

(65,668 | ) |   |
| Loss from continuing operations                          |       | (71,695      | )          |             | (16,064    | )               |       |             | 3,972      |   |   |   | (83,787 | ) |   |
| Loss on early  extinguishment of debt                    |       | —       |       |             | (39,812    | )               |       |             | —     |   |   |   | (39,812 | ) |   |
| Guaranteed preferred  beneficial interest accretion      |       | —       |       |             | (23,218    | )               |       |             | —     |   |   |   | (23,218 | ) |   |
| Interest expense                                         |       | (1,472       | )          |             | (38,286    | )               |       |             | —     |   |   |   | (39,758 | ) |   |
| Loss from  discontinued operations                       |       | —       |       |             | (35,574    | )               |       |             | —     |  (3) |   |   | (35,574 | ) |   |
| Cumulative effect  of change in accounting principle     |       | 17,000       |       |             | —     |            |       |             | —     |   |   |   | 17,000 |   |   |
| Net loss                                                 |       | $            | (56,167    | )                |       | $               | (152,954   | )                |       |   | $ | 3,972 |   |   |   | $ | (205,149 | ) |   |
| Total assets                                             |       | $            | 661,224    |             |       | $               | 566,568    |             |       |   | $ | 339,340 |  (2) |   |   | $ | 1,567,132 |   |   |

 

F-48

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*2004*

| ** **                                               | ** ** | ** **   | ** ** | **Film**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                               | ** ** | **Domestic** | ** ** | **Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
| Total revenues                                           |       | $            | 116,201    |             |       | $               | 74,493     |             |       |   | $ | (52,458 | )(1) |   |   | $ | 138,236 |   |   |
| Programming costs                                        |       | (101,811     | )          |             | (1,651     | )               |       |             | 13,584     |  (1) |   |   | (89,878 | ) |   |
| Amortization of  film assets                             |       | —       |       |             | (47,326    | )               |       |             | 18,421     |  (1) |   |   | (28,905 | ) |   |
| Impairment of  film assets                               |       | —       |       |             | (22,003    | )               |       |             | —     |   |   |   | (22,003 | ) |   |
| Subscriber  acquisition fee amortization expense         |       | (29,405      | )          |             | —     |            |       |             | 3,385      |  (1) |   |   | (26,020 | ) |   |
| Operating costs                                          |       | (10,936      | )          |             | (749       | )               |       |             | 650        |  (1) |   |   | (11,035 | ) |   |
| Selling,  marketing, general and administrative expenses |       | (45,207      | )          |             | (29,785    | )               |       |             | —     |   |   |   | (74,992 | ) |   |
| Loss from continuing operations                          |       | (71,158      | )          |             | (27,021    | )               |       |             | (16,418    | ) |   |   | (114,597 | ) |   |
| Interest expense                                         |       | (2,495       | )          |             | (57,684    | )               |       |             | —     |   |   |   | (60,179 | ) |   |
| Loss from  discontinued operations                       |       | —       |       |             | (142,030   | )               |       |             | —     |  (3) |   |   | (142,030 | ) |   |
| Net loss                                                 |       | $            | (73,653    | )                |       | $               | (226,735   | )                |       |   | $ | (16,418 | ) |   |   | $ | (316,806 | ) |   |
| Total assets                                             |       | $            | 761,610    |             |       | $               | 526,458    |             |       |   | $ | 224,700 |  (2) |   |   | $ | 1,512,768 |   |   |

 

*2005*

| ** **                                               | ** ** | ** **   | ** ** | **Film**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                               | ** ** | **Domestic** | ** ** | **Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
| Total revenues                                           |       | $            | 175,090    |             |       | $               | 75,926     |             |       |   | $ | (53,632 | )(1) |   |   | $ | 197,384 |   |   |
| Programming costs                                        |       | (148,565     | )          |             | (3,708     | )               |       |             | 31,696     |  (1) |   |   | (120,577 | ) |   |
| Amortization of  film assets                             |       | —       |       |             | (82,398    | )               |       |             | 30,779     |  (1) |   |   | (51,619 | ) |   |
| Impairment of  film assets                               |       | —       |       |             | (25,542    | )               |       |             | —     |   |   |   | (25,542 | ) |   |
| Subscriber  acquisition fee amortization expense    |       | (39,314      | )          |             | —     |            |       |             | 3,386      |  (1) |   |   | (35,928 | ) |   |
| Operating costs                                          |       | (11,243      | )          |             | (10,572    | )               |       |             | 209        |  (1) |   |   | (21,606 | ) |   |
| Selling,  marketing, general and administrative expenses |       | (54,303      | )          |             | (29,490    | )               |       |             | —     |   |   |   | (83,793 | ) |   |
| Loss from continuing operations                          |       | (78,335      | )          |             | (75,784    | )               |       |             | 12,438     |   |   |   | (141,681 | ) |   |
| Interest expense                                         |       | (6,689       | )          |             | (67,167    | )               |       |             | —     |   |   |   | (73,856 | ) |   |
| Loss from  discontinued operations                       |       | —       |       |             | (10,683    | )               |       |             | —     |  (3) |   |   | (10,683 | ) |   |
| Loss on sale of  discontinued operations                 |       | —       |       |             | (6,538     | )               |       |             | —     |  (3) |   |   | (6,538 | ) |   |
| Net loss                                                 |       | $            | (85,024    | )                |       | $               | (160,172   | )                |       |   | $ | 12,438 |   |   |   | $ | (232,758 | ) |   |
| Total assets                                             |       | $            | 843,512    |             |       | $               | 430,314    |             |       |   | $ | — |   |   |   | $ | 1,273,826 |   |   |

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(1)          Represents eliminationof intersegment transactions.

(2)          Represents assets fromdiscontinued operations.

(3)          Represents losses fromdiscontinued operations.

Five of our distributorseach accounted for more than 10% of our consolidated subscriber revenue for theyear ended December 31, 2005 and together accounted for a total of 87% ofconsolidated subscriber revenue at that date. Three of our distributors eachaccounted for more than 15% of our consolidated subscribers for the year ended December 31,2005 and together accounted for 58% of our subscribers on that date.

F-49

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**23.Quarterly Information (Unaudited)**

The following tables contain unaudited quarterlyfinancial data (in thousands, except per share amounts) for the years ended December 31,2004 and 2005.

| ** **                                               | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **2004**                                                 | ** ** | ** **              | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** | **Full Year** | ** ** |
| Total revenues                                           |       | $                       | 33,173     |   | $ | 30,163 |   | $ | 31,295 |   | $ | 43,605 |   | $ | 138,236 |   |
| Programming costs                                        |       | (19,023                 | )          | (20,053 | ) | (21,636 | ) | (29,166 | ) | (89,878 | ) |
| Amortization of  film assets                             |       | (7,330                  | )          | (1,347 | ) | (3,865 | ) | (16,363 | ) | (28,905 | ) |
| Impairment of  film assets                               |       | —                  |       | — |   | (19,321 | ) | (2,682 | ) | (22,003 | ) |
| Subscriber  acquisition fee amortization expense         |       | (5,713                  | )          | (5,863 | ) | (6,780 | ) | (7,664 | ) | (26,020 | ) |
| Operating costs                                          |       | (3,925                  | )          | (248 | ) | (2,953 | ) | (3,909 | ) | (11,035 | ) |
| Selling,  marketing, general and administrative expenses |       | (17,056                 | )          | (19,698 | ) | (15,539 | ) | (22,699 | ) | (74,992 | ) |
| Loss from operations                                     |       | (19,874                 | )          | (17,046 | ) | (38,799 | ) | (38,878 | ) | (114,597 | ) |
| Interest expense                                         |       | (14,218                 | )          | (14,393 | ) | (15,140 | ) | (16,428 | ) | (60,179 | ) |
| Loss from  discontinued operations                       |       | (7,384                  | )          | (9,148 | ) | (51,823 | ) | (73,675 | ) | (142,030 | ) |
| Net loss                                                 |       | $                       | (41,476    | ) | $ | (40,587 | ) | $ | (105,762 | ) | $ | (128,981 | ) | $ | (316,806 | ) |
| Net loss per  share                                      |       | $                       | (0.40      | ) | $ | (0.39 | ) | $ | (1.01 | ) | $ | (1.23 | ) | $ | (3.03 | ) |
|                                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                               | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **2005**                                                 | ** ** | ** **              | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** | **Full Year** | ** ** |
| Total revenues                                           |       | $                       | 40,569     |   | $ | 45,692 |   | $ | 50,670 |   | $ | 60,453 |   | $ | 197,384 |   |
| Programming costs                                        |       | (28,022                 | )          | (28,413 | ) | (29,196 | ) | (34,946 | ) | (120,577 | ) |
| Amortization of  film assets                             |       | (5,681                  | )          | (13,664 | ) | (13,830 | ) | (18,444 | ) | (51,619 | ) |
| Impairment of  film assets                               |       | —                  |       | — |   | (22,939 | ) | (2,603 | ) | (25,542 | ) |
| Subscriber  acquisition fee amortization expense         |       | (9,508                  | )          | (8,695 | ) | (8,688 | ) | (9,037 | ) | (35,928 | ) |
| Operating costs                                          |       | (1,796                  | )          | (4,730 | ) | (3,212 | ) | (11,868 | ) | (21,606 | ) |
| Selling,  marketing, general and administrative expenses |       | (23,332                 | )          | (23,221 | ) | (18,662 | ) | (18,578 | ) | (83,793 | ) |
| Loss from operations                                     |       | (27,770                 | )          | (33,031 | ) | (45,857 | ) | (35,023 | ) | (141,681 | ) |
| Interest expense                                         |       | (16,896                 | )          | (17,444 | ) | (19,346 | ) | (20,170 | ) | (73,856 | ) |
| Income tax  provision                                    |       | —                  |       | (6 | ) | (4 | ) | 10 |   | — |   |
| Loss from  discontinued operations                       |       | (6,241                  | )          | (4,425 | ) | — |   | (17 | ) | (10,683 | ) |
| Loss on sale of  discontinued operations                 |       | —                  |       | (1,349 | ) | (615 | ) | (4,574 | ) | (6,538 | ) |
| Net loss                                                 |       | $                       | (50,907    | ) | $ | (56,255 | ) | $ | (65,822 | ) | $ | (59,774 | ) | $ | (232,758 | ) |
| Net loss per  share                                      |       | $                       | (0.49      | ) | $ | (0.54 | ) | $ | (0.63 | ) | $ | (0.57 | ) | $ | (2.22 | ) |
|                                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**24.Discontinued Operations**

On February 23, 2005, the Company signed anagreement for the sale of its international business and obtained otheragreements enabling the Company to then conduct the sale. The sale closed on April 26,2005. The accompanying condensed consolidated statements of operations and cashflows for each of the three and nine month periods ended September 30,2004 and 2005 present the associated results of operations and cash flows ofthe international assets as “discontinued operations” pursuant to SFAS No. 144*Accounting for the Impairment or Disposal of Long-Lived Assets*.

F-50

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Thenet losses from discontinued operations during each of the years ended December 31,2003, 2004 and 2005, were comprised of the following:

| ** **                         | ** ** | **Years Ending December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In thousands)**                      | ** ** |
| Revenue                            |       | $                                            | 105,784    |   | $ | 102,131 |   | $ | 34,575 |   |
| Costs and  expenses                |       | (131,104                                     | )          | (235,120 | ) | (42,358 | ) |
| Interest expense                   |       | (7,065                                       | )          | (6,753 | ) | (2,081 | ) |
| Income tax  provision              |       | (3,189                                       | )          | (2,288 | ) | (819 | ) |
| Loss from discontinued  operations |       | $                                            | (35,574    | ) | $ | (142,030 | ) | $ | (10,683 | ) |

 

Effective February 23, 2005, the Company ceaseddepreciating and amortizing certain of the international assets held for sale. Hadthe Company not ceased such depreciation and amortization, the loss fordiscontinued operations for the year ended December 31, 2005, would have includedan additional $1.8 million of depreciation and amortization expense and anadditional $3.8 million of amortization of film assets.

Interest expense includesan allocation of interest related to the Company’s bank credit facility thatwas required to be paid as a result of the sale. The allocation was required byEmerging Issues Task Force (“EITF”) Issue No. 87-24, *Allocation of Interest to Discontinued Operations.*Suchinterest expense amounted to $4.7 million, $5.3 million and $1.6 million forthe year ended December 31, 2003, 2004 and 2005, respectively. Uponreceipt of cash from the sale, the Company was required to repay and retire the$100.0 million term loan under the Company’s bank credit facility.

**25.Subsequent Events**

The Company entered into an agreement dated as of March 21,2006, with Hallmark Cards in which Hallmark Cards agreed to defer all paymentsdue on certain obligations and payment of interest thereon until May 31,2007. See note 12.

The Company entered into Amendment No. 9 on March 21,2006, to the agreement for the bank credit facility. See note 10.

In March 2006, the Company drew down the remaining$10.0 million available under the credit facility, which increased the balancedue under the credit facility to $220.0 million. The proceeds will be used forgeneral working capital purposes. See note 10.

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