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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

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
of Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

12700 Ventura Boulevard,
Suite 200,
Studio City, California 91604
(Address of Principal Executive Offices and Zip Code)

(818) 755-2400
(Registrant's Telephone Number, Including Area Code)

         Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of Each Exchange
on Which Registered
Class A Common Stock, $0.01 par value   The NASDAQ Stock Market LLC

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes    o No

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

  Accelerated filer o   Non-accelerated filer ý   Smaller reporting company o

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

         The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2012, the last business day of the registrant's most recently completed second fiscal quarter, was $60,698,580.

         As of February 14, 2013, the number of shares of Class A Common Stock, $.01 par value outstanding was 359,675,936.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's Proxy Statement for the 2013 Annual Meeting of Stockholders, to be filed on or prior to April 30, 2013, are incorporated by reference in Part III of this Form 10-K.

   


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

Part I

    3  

Item 1

 

Business

    3  

Item 1A

 

Risk Factors

    14  

Item 1B

 

Unresolved Staff Comments

    22  

Item 2

 

Properties

    22  

Item 3

 

Legal Proceedings

    22  

Item 4

 

Mine Safety Disclosures

    22  

Part II

   
23
 

Item 5

 

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

    23  

Item 6

 

Selected Financial Data

    25  

Item 7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    27  

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

    49  

Item 8

 

Financial Statements and Supplementary Data

    50  

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    50  

Item 9A

 

Controls and Procedures

    50  

Item 9B

 

Other Information

    51  

Part III

   
51
 

Item 10

 

Directors, Executive Officers and Corporate Governance

    51  

Item 11

 

Executive Compensation

    51  

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    51  

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

    52  

Item 14

 

Principal Accountant Fees and Services

    52  

Part IV

   
52
 

Item 15

 

Exhibits and Financial Statement Schedules

    52  

Signatures

    61  

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

        The name "Hallmark" and other product or service names are trademarks or registered trademarks of entities owned by Hallmark Cards, Incorporated ("Hallmark Cards").


Certain Terms

        The following is a list of certain terms used throughout this Annual Report on Form 10-K:

2011 Refinancing

  The July 14, 2011 transaction pursuant to which the Company used the proceeds from the Term Loan and the Notes to repay the Term A Loan and the Term B Loan and redeem all of the outstanding Preferred Stock.

ADUs

 

Audience Deficiency Units, or units of advertising inventory that are made available to advertisers as fulfillment for past advertisements purchased by the advertiser that did not deliver the guaranteed viewership ratings.

Broadcast Calendar

 

The calendar which conforms to the uniform billing period adopted by broadcasters, agencies and advertisers for billing and planning functions. Under this system, the standard week starts on Monday and ends on Sunday, with each day commencing at 6:00 a.m. and ending at 6:00 a.m. on the following day. The standard broadcast billing month always ends on the last Sunday of the calendar month.

Common Stock

 

Our Class A common stock and Class B common stock, unless the context requires otherwise. As part of the Recapitalization, each outstanding share of Class B common stock was reclassified as a share of Class A common stock and the Class B common stock was eliminated.

CPM

 

Cost per thousand, or advertising rate per thousand viewers.

Federal Tax Deconsolidation

 

On October 31, 2012, pursuant to an agreement dated October 29, 2012, Hallmark Cards caused 40 million shares of the Company's Common Stock to be transferred from HCC to a German subsidiary of Hallmark Cards which is not part of Hallmark Cards' consolidated federal tax group, reducing the ownership of Hallmark Cards' consolidated federal tax group from 90.3% to 79.2%. As a result of such transfer, the Company is no longer part of the Hallmark Cards' consolidated federal tax group for federal income tax purposes.

Hallmark Cards or Hallmark

 

Hallmark Cards, Incorporated., the Company's ultimate parent.

Hallmark Channel

 

A 24-hour cable television destination for family-friendly programming and a leader in the production of original movies.

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Hallmark Movie Channel

 

A 24-hour cable television destination dedicated to offering viewers a collection of movies and long form programming appropriate for the entire family, including a mix of Hallmark Channel original movies, classic theatrical films, and Hallmark Hall of Fame presentations

HCC

 

H C Crown, LLC, formerly H C Crown Corp., a subsidiary of Hallmark Cards.

HEIC

 

Hallmark Entertainment Investments Co.; prior to the Recapitalization, a subsidiary of Hallmark Cards and the Company's immediate parent.

Network or Networks

 

Hallmark Channel or Hallmark Movie Channel, individually or collectively.

Nielsen

 

Nielsen Media Research or The Nielsen Company is an information and measurement company, providing information on marketing and consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows and related assets.

Notes

 

$300.0 million of senior unsecured notes issued in connection with the 2011 Refinancing.

Preferred Stock

 

Shares of the Company's Series A preferred stock issued in connection with the Recapitalization and subsequently redeemed in connection with the 2011 Refinancing.

Recapitalization

 

The June 29, 2010 transaction pursuant to which the Company extinguished approximately $1.2 billion owed to HCC and Hallmark Cards upon issuance of (i) the Term A Loan, the Term B Loan and Preferred Stock in the aggregate face amount of $500 million and (ii) Common Stock.

Scatter Market

 

The period after the close of the Upfront Season during which advertising is sold in close proximity to its air date.

Subscriber

 

A household that receives, on a full or part-time basis, a network as part of a program package or a program tier of a distributor.

Term A Loan

 

The $200.0 million loan issued in connection with the Recapitalization.

Term B Loan

 

The $115.0 million loan issued in connection with the Recapitalization.

Term Loan

 

$210.0 million senior secured term loan issued in connection with the 2011 Refinancing.

Upfront Season

 

The period of time (usually during the month of May) when advertisers commit to a certain volume of advertising for the fourth quarter of the same year and the first three quarters of the following year.

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PART I

ITEM 1.    Business

Company Overview

        We own and operate pay television Networks, each of which is dedicated to high-quality entertainment programming for families. Hallmark Channel features popular television series such as Golden Girls and Frasier as well as original movies with compelling stories and internationally recognized stars. It also offers a "lifestyle" programming block currently featuring Home and Family and Marie, with Marie Osmond. Hallmark Movie Channel is a cable network dedicated to offering movies appropriate for the entire family, consisting primarily of original movies, classic theatrical films, and presentations from the award-winning Hallmark Hall of Fame collection as well as other long form television programming. Consistent with the Hallmark brand, both Networks are a preeminent source of holiday programming, with Hallmark Channel often ranking first among cable networks for movies during the Christmas holiday season.

        Reaching approximately 87 million subscribers, Hallmark Channel is one of the most widely distributed independent networks in the United States. Hallmark Movie Channel is one of the fastest-growing new cable networks, reaching nearly 49 million subscribers as of December 31, 2012.

        We believe that we have established these Networks as destinations for viewers seeking outstanding family entertainment and as attractive outlets for advertisers seeking to target these viewers.

        The following table shows our Networks' programming sources, selected pay television distributors and the total number of subscribers as of December 31, 2012:

 
  Hallmark Channel   Hallmark Movie Channel

Programming Sources

 

Original Productions

 

Original Productions

 

Other third-party sources

 

Other third-party sources

 

Hallmark Hall of Fame

 

Hallmark Hall of Fame

Selected Pay Television Distributors

 

Cablevision

 

Cablevision

 

Charter

 

Charter

 

Comcast

 

Comcast

 

Cox

 

Cox

 

DIRECTV

 

DIRECTV

 

Dish Network

 

Dish Network

 

NCTC

 

NCTC

 

Time Warner

 

Time Warner

 

Verizon Communication (FiOS)

 

Verizon Communication (FiOS)

Total Subscribers

 

86.9 million(1)

 

48.6 million(1)


(1)
Source: Nielsen Focus and The Nielsen Public U.E. December 2012.

        Programming acquired from third parties is an important component of our Networks as we continually develop and refine our programming strategy. This programming includes original movies and "lifestyle" programming produced by a variety of experienced television production companies specifically for us and theatrical movies and "off network" television series licensed to us by major studios and distributors. Our agreements for original movies and lifestyle programming typically provide for exclusive rights in the United States in all media for periods ranging from eight years to perpetuity. Our license agreements for theatrical films and off-network programming usually give us more limited right to exhibit the programming on our Networks, over a period of five or more years. From time to time, for promotional purposes, we also exhibit excerpts of certain programming on our website.

        Hallmark Channel is currently distributed to approximately 84% of all United States pay television subscribers. We currently distribute (a) Hallmark Channel through 5,444 cable, satellite and other pay

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television distribution systems and (b) Hallmark Movie Channel through 3,369 such systems. Five of our distributors each accounted for more than 10%, and together accounted for a total of 86%, of our consolidated subscriber revenue for the year ended December 31, 2012. Two of our distributors each accounted for approximately 15% or more of our consolidated subscribers for the year ended December 31, 2012, and together accounted for 44% of our consolidated subscribers on that date. The loss of one of these distributors could have a significant impact on our operations. Three of our programming content providers each accounted for more than 10% of our total license fees payable for the year ended December 31, 2012, and together accounted for a total of 53% of the consolidated programming liability.

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

        We license the trademark "Hallmark" for use on our Networks pursuant to certain trademark license agreements with a subsidiary of Hallmark Cards. We believe that the use of this trademark is extremely important for our Networks due to the substantial name recognition and favorable characteristics associated with the name in the United States.

        During 2010, 2011 and 2012, the Networks comprised the Company's sole operating segment.

Company History

        Crown Media Holdings was incorporated in the State of Delaware in December 1999. Through its wholly-owned subsidiary Crown Media United States, the Company owns, operates and distributes the Networks. Significant investors in the Company are HCC, and Hallmark Cards GmbH, a German subsidiary of Hallmark Cards. Prior to the Federal Tax Deconsolidation, the significant investor in the Company was HCC.

Business Strategy

        In the current economic environment, we are pursuing the following objectives:

    High-quality, family friendly programming.  We will continue to be the preeminent source for 24/7 family programming that is trusted by our audience and highly desirable to our advertisers.

    Hallmark Channel lifestyle programming block.  We plan to strengthen our program offerings with content that is consistent with our core values of family, home and celebration.

    Original movies and series.  We plan to develop more original movies and have begun developing series that are becoming uniquely identified with the Networks.

    Hallmark Channel and Hallmark Movie Channel differentiation.  We will continue to improve and refine Hallmark Channel and Hallmark Movie Channel programming to make the two networks distinctly different sources of compelling family entertainment.

    Distribution.  We plan to continue increasing distribution of Hallmark Channel and Hallmark Movie Channel by securing new distributors and encouraging existing distributors to place our Networks in packages with a greater number of subscribers.

    Advertising.  We plan to continue maintaining strong relationships with a diverse group of high-quality, stable advertisers and achieve higher advertising pricing rates through our trusted content, valuable target audience demographics and strong ratings.

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    Content provider.  We plan to position ourselves for future growth as a content provider for new technologies by building our library of programming and exploring collaborations in emerging media.

    Profitability.  We will continue to increase our profitability by paying down debt, achieving further cost efficiencies, increasing distribution and focusing on advertising revenue growth.

Employees

        We had 173 employees at December 31, 2011, and 175 employees at December 31, 2012. Neither we nor any of our subsidiaries are parties to collective bargaining agreements. We believe that our relations with our employees are good. Most of our Networks' employees work at our offices in Studio City, California and New York, New York.

Industry Overview

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

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

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

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

Distribution Platforms

        Four major distribution platforms are currently used to transmit programming. First, cable television systems use coaxial or fiber optic cable to transmit multiple networks from a central facility, known as a headend, to the individual subscriber's television set. Second, analog and digital satellite broadcast systems (such as direct-to-home or "DTH") use satellite transponders to broadcast television programming to individual dwellings with satellite reception equipment, including a dish and a decoder. Third, telephone companies ("Telcos") use a combination of traditional cable and Internet Protocol

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Television ("IPTV") technologies to reach their subscribers. For example, Verizon adopted a hybrid model combining traditional cable and IPTV technologies while AT&T launched full-fledged IPTV networks. While traditional cable systems devote a portion of bandwidth to each network and push all the networks to subscribers at one time, IPTV uses architecture in which only the network being watched at that moment is sent through the distribution system to the viewer, freeing up bandwidth capacity for other features and more interactivity. Lastly, networks can also be distributed through satellite master antenna television ("SMATV"). SMATV is used primarily for buildings, such as apartments and hotels that receive programming from satellites by means of a single antenna that is connected to the buildings' headend. The television signals are then distributed to individual units in the building by coaxial cable or fiber.

        From time to time, for promotional purposes, we exhibit excerpts of certain programming on our website.

Sources of Revenue

    Advertising Revenue

        We earn advertising revenue in the form of spot or general rate advertising and direct response advertising. During the fourth quarter of 2010, we implemented program schedules that rely upon content that is supported by general rate and direct response advertising, effectively eliminating paid-programming (i.e., "infomercials") as a source of revenue. Spot advertisements and direct response advertisements are generally 30 seconds long and are aired during or between programs. Spot advertisements are priced at a rate per thousand viewers and almost always bear the Company's commitment to deliver a specified number of viewers. Our revenue from direct response advertising varies in proportion to the direct sales achieved by the advertiser in response to the advertising. It is sold without ratings or product sales commitments. Paid-programming was sold at fixed rates for 30 minute blocks of time, typically airing in the early morning hours. It required no licensed program content. Our advertising revenue is affected by the mix of these forms of advertising.

        Our rates for spot advertisements are generally calculated on the basis of an agreed upon price per unit of audience measurement in return for a guaranteed commitment by the advertiser. We commit to provide advertisers certain rating levels in connection with their advertising. Advertising rates also vary by time of year due to seasonal changes in television viewership.

        Revenue is recorded net of ADUs. Whenever spot advertising is aired in programs that do not achieve promised viewership ratings, we issue ADUs which provide the advertiser with additional spots at no additional cost. We defer a pro rata amount of advertising revenue and recognize a like amount as a liability for programs that do not achieve promised viewership ratings. When the make-good spots are subsequently aired, revenue is recognized and the liability is reduced. The level of inventory that is utilized for ADUs varies over time and is influenced by prior fluctuations in our under-delivery, if any, of viewers against promised ratings as well as the rate at which we and our customers mutually agree to utilize the ADUs.

        We typically sell approximately 40% of our Networks' advertising in the up-front season, generally in June and July of each year, for the last quarter of the same year and the first three quarters of the following year. We hold back a small percentage of our inventory for ADUs and sell the remainder in the spot or Scatter Market and to advertisers that purchase up-front inventory on a calendar year basis.

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        According to Nielsen, there were 86 and 96 advertising-supported cable networks in the United States during 2011 and 2012, respectively. The Networks' ratings and industry rankings for the years ended December 31, 2011 and 2012 are presented below.

 
  Hallmark
Channel
  Hallmark
Movie Channel
 
 
  Rating   Rank   Rating   Rank  

2011

                         

Subscribers at December 31 (rating in millions)

    87.0     38     44.8     89  

Households

                         

Total day viewership

    0.5     16     0.2     43  

Prime time household rating

    0.7     24     0.4     36  

Women 25-54

                         

Total day viewership

    0.2     21     0.1     36  

Prime time household rating

    0.3     27     0.1     48  

2012

                         

Subscribers at December 31 (rating in millions)

    86.9     38     48.6     90  

Households

                         

Total day viewership

    0.5     15     0.3     32  

Prime time household rating

    0.7     22     0.3     42  

Women 25-54

                         

Total day viewership

    0.3     12     0.1     38  

Prime time household rating

    0.1     17     0.1     47  

        Total day means the time period that Nielsen measures each individual day, 6 a.m. to 6 a.m.

        Our networks are broadcast 24 hours per day. The volume of advertising inventory that we have available for sale is determined by our chosen commercial load per hour and the number of broadcast hours in which we air licensed program content. Our need to reserve inventory for the use of ADUs reduces the amount of advertising inventory available for cash sales.

        We have advertising sales offices in New York, Los Angeles, Chicago, and Atlanta. In addition, we have made significant investments in programming, research, marketing and promotions, all specifically designed to support the sale of advertising time on our Networks.

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

    Subscriber Fees

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

    the degree of competition in the market;

    the relative position in the market of the distributor and the popularity of the network;

    the packaging arrangements for the network; and

    length of the contract term and other commercial terms.

        We are in continuous negotiations with our existing distributors to increase our subscriber base, by having our Networks placed in packages with a greater number of subscribers, in order to enhance our advertising revenue. We have been subject to requests by major distributors to pay promotion and placement fees and to help fund the distributors' efforts to market our Networks.

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        Fees that we pay to distributors are capitalized and amortized over the contractual term of the applicable distribution agreement as a reduction in subscriber fee revenue. At the time we sign a distribution agreement and periodically thereafter, we evaluate the recoverability of the costs we incur against the incremental revenue directly and indirectly associated with each agreement.

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

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

        For each of the years ended December 31, 2010, 2011 and 2012, revenue derived from subscriber fees for the Networks was approximately $68.8 million, $71.7 million and $78.0 million, respectively. For each of the years ended December 31, 2010, 2011 and 2012, revenue from the sale of advertising time on our Networks was approximately $218.2 million, $251.3 million and $271.2 million, respectively.

        Please see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for information regarding subscriber fees.

Programming

        Our Networks offer a range of high-quality entertainment programming for adults and families including lifestyle programming and talk shows, popular television series, movies, miniseries, theatricals, romances, literary classics, and contemporary stories. Sources for programming on our Networks include programming (both movies and series) licensed from Buena Vista Television, CBS Television Distribution, Hallmark Hall of Fame, MGM, Paramount Pictures, Sonar Entertainment, Sony Pictures Television, Twentieth Television, Warner Bros. and others. In recent years, we licensed from Hallmark Cards animated programming appropriate for children, such as hoops & yoyo and Jingle the Husky Pup.

        Examples of programming include Hallmark Channel original movies A Taste of Romance, Puppy Love, The Seven Year Hitch and Strawberry Summer. Examples of other third party programming shown on our Networks include the popular series Little House on the Prairie, I Love Lucy, The Golden Girls, The Waltons, Cheers, Frasier and Murder She Wrote. Examples of Twentieth Television family-friendly movies include Cheaper by the Dozen 2, Mr. Magorium's Wonder Emporium and Cocoon. Sony Pictures Television titles include theatricals such as Hook and Hachi: A Dog's Tale, plus additional titles in the Jesse Stone series. Other examples of our third party programming include acquired movies and miniseries such as Ever After: A Cinderella Story, Hope Floats, Jumanji, The Christmas Secret, and Flicka. Our license agreements with third parties typically provide for a license fee paid out over the term of the license for the right to exhibit a program in the United States within a specified period of time. Original movies can be exhibited an unlimited number of times.

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        Our Networks air, and benefit from, programming previously shown as Hallmark Hall of Fame such as Beyond the Blackboard, The Russell Girl, The Magic of Ordinary Days and Little John.

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

Distribution

    Hallmark Channel

        Hallmark Channel ended 2011 with 87.0 million subscribers and 2012 with approximately 86.9 million subscribers. We currently distribute Hallmark Channel to 84% of all United States pay television subscribers. The following table shows the approximate number of pay television households in the United States and Hallmark Channel subscribers for each of the nine largest pay television distributors and all other pay television distributors as a group, all as of December 31, 2012:

PAY TELEVISION DISTRIBUTOR
  TOTAL U.S.
PAY TV
HOUSEHOLDS(1)
  HALLMARK
CHANNEL
SUBSCRIBERS(1)
  HALLMARK
CHANNEL
% OF PAY TV
HOUSEHOLDS
 
 
  (In thousands, except percentages)
 

Comcast

    20,684     19,525     94.4 %

DIRECTV

    19,652     18,922     96.3 %

Dish Network

    14,383     11,462     79.7 %

Time Warner

    13,588     11,612     85.5 %

AT&T (U-verse)(2)

    5,007         0.0 %

Verizon Communications (FiOS)

    4,773     4,711     98.7 %

Cox

    4,151     2,465     59.4 %

Charter

    4,146     3,494     84.3 %

Cablevision

    3,408     2,917     85.6 %

NCTC and all others

    13,614     11,788     86.6 %
                 

Total

    103,406     86,896     84.0 %
                 

(1)
Source: Nielsen Focus and The Nielsen Public U.E. December 2012.

(2)
Our Networks have not been distributed by AT&T (U-verse) since our distribution agreement with them ended on August 31, 2010.

        Our subscribers in the United States have grown from approximately 16.0 million full time subscribers at January 1, 2001 to approximately 86.9 million at December 31, 2012. Our major distribution agreements have expiration terms with options from March 2013 through December 2032, inclusive of renewal options. Our Networks have not been distributed by AT&T (U-verse) since our distribution agreement with them ended on August 31, 2010.

    Hallmark Movie Channel

        We launched Hallmark Movie Channel in 2008. At December 31, 2012, Hallmark Movie Channel was distributed to 48.6 million subscribers, an increase of nearly 3.8 million subscribers from 44.8 million at December 31, 2011. As of December 31, 2012, Hallmark Movie Channel was distributed in the nation's top 30 demographic measurement areas. In February 2013, Hallmark Movie Channel's distribution increased to approximately 50 million subscribers.

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        The following table shows the approximate number of pay television households in the United States and Hallmark Movie Channel subscribers for each of the nine largest pay television distributors and all other pay television distributors as a group, as of December 31, 2012:

PAY TELEVISION DISTRIBUTOR
  TOTAL U.S.
PAY TV
HOUSEHOLDS(1)
  HALLMARK
MOVIE CHANNEL
SUBSCRIBERS(1)
  HALLMARK
MOVIE CHANNEL
% OF PAY TV
HOUSEHOLDS
 
 
  (In thousands, except percentages)
 

Comcast

    20,684     18,580     89.8 %

DIRECTV

    19,652     2,821     14.4 %

Dish Network

    14,383     6,387     44.4 %

Time Warner

    13,588     5,989     44.1 %

AT&T (U-verse)(2)

    5,007         0.0 %

Verizon Communications (FiOS)

    4,773     3,477     72.8 %

Cox

    4,151     1,847     44.5 %

Charter

    4,146     1,459     35.2 %

Cablevision

    3,408     2,911     85.4 %

NCTC and all others

    13,614     5,121     37.6 %
                 

Total

    103,406     48,592     47.0 %
                 

(1)
Source: Nielsen Focus and The Nielsen Public U.E. December 2012.

(2)
Our Networks have not been distributed by AT&T (U-verse) since our distribution agreement with them ended on August 31, 2010.

Sales and Marketing

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

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

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

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

    enhance our ability to attract advertising commitments and higher CPMs from the largest advertisers; and

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

        We currently and primarily use the websites www.hallmarkchannel.com and www.hallmarkmoviechannel.com to (i) promote the Networks and their programming and (ii) provide information to consumers. These websites promote major programming events, such as original movie premieres and program acquisitions, as well as provide information regarding the Networks' regular programs. Further, the sites provide a venue for viewer participation in the Networks' sweepstakes, promotions and community areas. The sites have advertiser imaging, including banner messages and

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video content. We also promote our programming and promotion activities on social networking sites, such as Facebook, Pinterest, Twitter and Tumblr.

Network Operations

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

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

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

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

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

Network Delivery

        We deliver the play list, electronic files and digital tapes of Hallmark Channel and Hallmark Movie Channel programming, commercials and promotional messages to a third party network operations center in Los Angeles, California, where the programming, advertising and promotional elements are combined and compressed. Each Network's broadcast stream is compiled in high definition, after which a standard definition version is created. The Los Angeles facility transmits the combined signals to a satellite transponder that covers the United States. Cable head-end facilities, Telcos and direct-to-home satellite services receive and decode our broadcast streams and transmit our Networks to their subscribers.

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

Primary Distribution
Platforms
  Primary
Pay TV
Distributors
  Network
Origination
and Uplink
Providers/Locations
  Satellites

      Encompass Digital Media   Hallmark Channel and Hallmark Movie Channel:

Cable

  Cablevision   Los Angeles, CA   SES AMC 11/T5

  Charter        

  Comcast        

  Cox        

  NCTC        

  Time Warner        

  Verizon Communications (FiOS)        

Satellite

 

DirecTV

       

  Dish Network        

        The contracts with the parties providing origination, uplink, satellite and other services for the delivery of our Networks in the United States expire from 2015 through 2019. Such contracts may be terminated by the vendors prior to the expiration of the contracts under conditions that are customary to contracts of this type. Amounts payable under these contracts are reflected in "Operating Leases" and "Capital Leases" in the schedule of contractual commitments as of December 31, 2012, as shown in Item 7 below.

Competition

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

        There are several sources of competition within our industry, each of which affects our business strategy. Our Networks compete with other general entertainment programming from broadcast networks including, TNT, TCM, USA Network, HGTV, TV Land, Lifetime, Lifetime Movie Network, OWN, ABC Family and other similarly targeted networks. We compete with these networks for viewers and advertising dollars based upon quality of programming, number of subscribers, ratings and subscriber demographics. We compete with all networks for carriage on cable, satellite and telephone systems that may have limited capacity.

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

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    Competitive strengths

        We believe that our primary competitive strengths include the following:

    Programming.  We have established a track record of providing high-quality family programming. Our programming includes high-quality original movies, original lifestyle programming, as well as popular television series such as Frasier and Golden Girls.

    Pay television networks branded with the well-known Hallmark name.  Our Networks are branded with the Hallmark name. We believe that viewers and distributors associate the Hallmark brand with family values and high-quality content. Our association with this brand facilitates our efforts to achieve increased distribution and to attract additional viewers, which in turn affects ratings and advertising revenue.

    Dual revenue stream.  We generate our revenue through subscriber fees under long-term distribution agreements and robust advertising sales driven by our attractive audience demographic and trusted content and brand association.

    Broad distribution.  Our Networks are widely distributed throughout the United States, with Hallmark Channel reaching 84% of the United States pay television audience, which provides us with the necessary reach to attract advertisers.

    Experienced management.  Members of our senior management team have experience promoting and operating networks. They have held senior positions at such companies as ABC, Fox Family, Discovery Channel, and Twentieth Television.

    Competitive risks

        We believe that our primary competitive risks include the following:

    Two networks distributed domestically.  We operate only two networks. Many of our competitors have more than two networks and are also diversified entertainment companies, giving them an advantage in dealing with distributors and advertisers. These companies are also able to leverage costs across multiple networks.

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

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

Research

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

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

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

        The performance of our Networks is tracked daily, weekly, monthly, and quarterly through an internal tracking system using the Nielsen ratings service and a number of other services useful in obtaining information on viewers of our Networks.

Available Information

        Our principal executive offices are located at 12700 Ventura Boulevard, Studio City, California 91604 and our telephone number is (818) 755-2400. We will make available free of charge through our website, www.hallmarkchannel.com, this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission.

        The public may read and copy any materials that Crown Media Holdings, Inc. files with the SEC at the SEC's Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

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

ITEM 1A.    Risk Factors

Risk Factors and Forward-Looking Statements

        The discussion set forth in this Form 10-K contains statements concerning potential future events. Such forward-looking statements are based on assumptions by our management, as of the date of this Form 10-K, including, without limitation, assumptions about risks and uncertainties faced by us. Readers can identify these forward-looking statements by their use of such verbs as "expects," "anticipates," "believes," "plans" or similar verbs or conjugations of such verbs. If any of management's assumptions prove incorrect or should unanticipated circumstances arise, our actual results, levels of activity, performance, or achievements could materially differ from those anticipated by such forward-looking statements. Among the factors that could cause actual results to differ materially are those discussed below in this Form 10-K. We will not update any forward-looking statements contained in this Form 10-K to reflect future events or developments.

        If we do not successfully address the risks described below, our business, prospects, financial condition, results of operations or cash flow could be materially adversely affected. The trading price of our Common Stock and publicly traded debt could decline because of any of these risks.

Risks Relating to Our Business

Our business incurred net losses from inception through September 30, 2010, and may incur losses in the future.

        Our business has a history of net losses. As of December 31, 2012, we had an accumulated deficit of approximately $1.7 billion, total stockholders' equity of approximately $331.4 million, and goodwill of

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approximately $314.0 million. We cannot provide assurance that we will sustain an operating profit or a positive cash flow. If we are not able to do so, the trading price of our Common Stock and publicly traded debt may fall significantly. To continue to be profitable before interest expense and to continue to generate a positive cash flow, we must maintain or increase the positive margin of our advertising and subscriber revenue over our (i) programming expenses, (ii) selling, general and administrative expenses and (iii) marketing expenses. This will require, among other things, maintaining or increasing the distribution of our Networks, attracting younger viewers to our Networks, attracting more advertisers, increasing our ratings and maintaining or increasing our subscriber and advertising rates.

Our indebtedness may affect our ability to operate our business, and may have a material adverse effect on our financial condition and results of operations. We and the guarantors of our Notes may incur additional indebtedness, including secured indebtedness.

        As of December 31, 2012, we had total debt outstanding of approximately $498.8 million, of which $198.8 million was secured, and borrowing availability of approximately $30.0 million under our senior secured credit facilities.

        Our indebtedness could have important consequences, such as:

    limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt;

    limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes;

    limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;

    restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;

    restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our and our subsidiaries' existing and future indebtedness, including, in the case of certain indebtedness of subsidiaries, certain covenants that restrict the ability of subsidiaries to pay dividends or make other distributions to us;

    exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries' debt instruments that could have a material adverse effect on our business, financial condition and operating results;

    increasing our vulnerability to a downturn in general economic conditions or in pricing of our products; and

    limiting our ability to react to changing market conditions in our industry and in our customers' industries.

        In addition to our debt service obligations, our operations require substantial investments on a continuing basis. Our ability to make scheduled debt payments and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors.

        Subject to the restrictions in our senior secured credit facilities and the indenture governing the Notes, we and the guarantors may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our senior secured credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications

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and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. If new debt is added to our and the guarantors' current debt levels, the risks described above could increase.

Our liquidity could be dependent on external funds.

        Unanticipated significant expenses or any developments that hamper our growth in revenue or decreases any of our revenue may result in the need for additional external funds in order to continue operations. Any new debt financing would require the cooperation and agreement of existing lenders.

We may not be able to generate sufficient cash to service all of our indebtedness, including the Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

        Our ability to satisfy our debt obligations will depend upon, among other things:

    our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and

    our future ability to borrow under our senior secured credit facilities, the availability of which depends on, among other things, our complying with the covenants in the indenture governing the Notes.

We cannot provide assurance that our business will generate sufficient cash flow from operations or that we will be able to draw under our senior secured credit facilities in an amount sufficient to fund our liquidity needs.

        If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations, sell equity, and/or negotiate with our lenders to restructure the applicable debt, in order to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Our senior secured credit facilities and the indenture governing the Notes may restrict, or market or business conditions may limit, our ability to avail ourselves of some or all of these options. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

        Our senior secured credit facilities and the indenture governing the Notes contain a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:

    incur additional debt or issue certain preferred shares;

    pay dividends on or make distributions in respect of our capital stock or make other restricted payments;

    make certain payments on debt that is subordinated or secured on a junior basis;

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    make certain investments;

    sell certain assets;

    create liens on certain assets;

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

    enter into certain transactions with our affiliates; and

    designate our subsidiaries as unrestricted subsidiaries.

        Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict corporate activities. Any failure to comply with these covenants could result in a default under our senior secured credit facilities and the indenture governing the Notes. Upon a default, unless waived, the lenders under our senior secured credit facilities could elect to terminate their commitments, cease making further loans, foreclose on our assets pledged to such lenders to secure our obligations under the senior secured credit facilities and force us into bankruptcy or liquidation. Holders of the Notes would also have the ability ultimately to force us into bankruptcy or liquidation, subject to the indenture governing the Notes. In addition, a default under either our senior secured credit facilities or the indenture governing the Notes would trigger a cross default under our other agreements and could trigger a cross default under any agreements governing our future indebtedness. Our operating results may not be sufficient to service our indebtedness or to fund our other expenditures and we may not be able to obtain financing to meet these requirements.

We depend on distributions from our direct and indirect subsidiaries to fulfill certain of our obligations, including our obligations under our senior secured credit facilities and Notes. The creditors of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or distributions to us.

        Substantially all of our assets are held through our subsidiaries. We depend on these subsidiaries for substantially all of our cash flow. The creditors of each of our direct and indirect subsidiaries are entitled to payment of that subsidiary's obligations to them, when due and payable, before distributions may be made by that subsidiary to us. Thus, our ability to service our debt obligations, including our ability to pay the interest on and principal of the Notes when due, depends on our subsidiaries' ability first to satisfy their obligations to their creditors and then to make distributions to us. Our subsidiaries are separate and distinct legal entities and have no obligations, other than under the guarantee of the Notes, to make any funds available to us.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

        Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities, that is not waived by the required holders of such indebtedness, could leave us unable to pay principal, premium, if any, or interest on the Notes and could substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on such indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, including our senior secured credit facilities, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with any accrued and unpaid interest, the lenders under our senior secured credit facilities could elect to terminate their commitments, cease making further loans, foreclose on our assets pledged to such lenders to secure our obligations under the senior secured credit facilities and we could be forced into bankruptcy or liquidation. If our

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operating performance declines, we may in the future need to seek waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek waivers, we may not be able to obtain waivers from the required lenders thereunder.

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

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

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

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

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

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

        In addition, our delivery of the Networks continues to be impacted by industry developments. One potentially significant factor is the continued growth of time-shifting digital video recording devices ("DVRs"). DVRs heighten the impact of competition as viewers are able to increase their access to what they consider to be new, compelling content.

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

        If we fail to significantly increase our advertising revenue, we may be unable to achieve or sustain improved results or to expand our business. A failure to increase advertising revenue may be a result of any or all of the following: (i) a continued decline in viewer ratings mentioned above; (ii) the current economic environment that presents uncertainty regarding the condition of the advertising marketplace and the financial health of many industry segments and individual companies, including those which advertise on our Networks; (iii) we may be unable to reduce our average viewer age to be within our

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target audience of viewers between the ages of 25 and 54; (iv) we may be unable to identify, attract and retain experienced sales and marketing personnel with relevant experience; (v) our sales and marketing organization may be unable to successfully compete against the significantly more extensive and well-funded sales and marketing operations of our current or potential competitors; (vi) the advancement of technologies such as DVRs may cause advertisers to shift their expenditures to media in which their commercial messages are not circumvented by the technology; and (vii) we will not be able to increase our advertising sales rate-card or may be required to run additional advertising spots to fulfill guaranteed delivery numbers which affect the availability of advertising inventory for future sales. Success in increasing our advertising revenue also depends upon the number and coverage of the distributors who carry our Networks and our number of subscribers.

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

        Hallmark Cards, through its wholly-owned subsidiaries, HCC and Hallmark Cards GmbH, beneficially owns an aggregate of approximately 90.3% of the outstanding shares of our Common Stock. This control could discourage others from initiating potential merger, takeover or other change of control transactions that may otherwise be beneficial to our business or holders of Common Stock and publicly traded debt. As a result, the market price of our Common Stock and publicly traded debt could suffer, and our business could suffer. In addition, the control that Hallmark Cards and/or these specific wholly-owned affiliates may exert over us, either directly or indirectly, could give rise to conflicts of interest in certain situations.

We could lose the right to use the name "Hallmark," which could harm our business.

        Pursuant to license agreements, we license the name "Hallmark" from Hallmark Licensing, LLC, a subsidiary of Hallmark Cards, for use in the names of our Networks. Hallmark Licensing, LLC extended the term of the license agreements for an additional period that terminates on the earlier of (i) July 14, 2019 and (ii) the later of (x) the expiration or termination of the Credit Agreement and (y) the redemption of all of the Notes, subject to any earlier termination of such license agreements pursuant to the respective terms of such license agreements. We believe that the use of this trademark is critical for our Networks due to the substantial name recognition and favorable characteristics associated with the name in the United States.

        Despite Hallmark Licensing, LLC's efforts to protect its trademark in the name "Hallmark," third parties may infringe or misappropriate the name "Hallmark," which could harm our business. Further, in the event of bankruptcy proceedings relating to Hallmark Licensing, LLC or Hallmark Cards, a bankruptcy court could conclude that the license agreements are executory contracts and, subject to certain legal requirements, the bankruptcy trustee may either assume or reject the license agreements. Rejection of the license agreements could prevent us from continuing to use the "Hallmark" name. The loss of our license rights to use the name "Hallmark" could substantially harm our business.

If our Federal Tax Deconsolidation is challenged, the Company could owe substantial tax payments to Hallmark Cards.

        The Federal Tax Deconsolidation has had a significant impact on the Company's estimated future cash flows. Amounts previously budgeted for cash payments for taxable amounts due under the prior Tax Sharing Agreement are now available for the pay down of debt and other uses. Under the terms of the Federal Tax Deconsolidation, however, the Company agreed that if the Internal Revenue Service determines that the Federal Tax Deconsolidation did not result in the Company no longer being a member of the Hallmark Federal Tax Group, then the Tax Sharing Agreement will be deemed to have been continuously in effect. If, in the future, the Tax Sharing Agreement were deemed to have been

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continuously in effect, the Company would not be permitted to access its NOLs and could owe substantial tax payments to Hallmark Cards.

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

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

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

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

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

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

Our stock price may be volatile and could decline substantially.

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

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

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

    material announcements by us or our competitors;

    governmental regulatory action;

    technological innovations by competitors or competing technologies;

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

    changes in general market conditions or economic trends; and

    failure by us to renew major distribution agreements.

        Additionally, of the approximately 359.7 million shares of the Company's outstanding Common Stock, only 34.8 million shares (approximately 9.7%), are held by non-affiliates of the Company. The Company's stock ownership structure may also be a cause of volatility in the market price of the Company's Common Stock.

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Risks Relating to Our Industry

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

        Our domestic advertising revenue is partially dependent on television ratings provided by Nielsen. Nielsen continually modifies its ratings system to accommodate emerging technologies and ongoing changes in the U.S. population. As the impact of the changes take effect, our ratings could either be positively or negatively affected by these changes, depending on the demographic characteristics of the households added to the Nielsen sample and the nature of any changes to their measurement systems. We continue to factor the new rating information into our advertising rates as Nielsen continues modifying its ratings system to accommodate emerging technologies.

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

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

        A continuing trend towards business combinations and alliances in the entertainment industry may create significant new competitors for us or intensify existing competition. Many of these combined entities have more than one network and resources far greater than ours. These combined entities may provide bundled packages of programming, delivery and other services that compete directly with the products we offer.

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

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

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

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

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

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

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

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

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

ITEM 1B.    Unresolved Staff Comments

        Not applicable.

ITEM 2.    Properties

        The following table provides certain summary information with respect to the principal real properties leased by the Company. We do not own any real property. The leases for these offices and facilities expire between 2013 and 2016. The Company believes the facilities, office space and other real properties leased are adequate for its current operations.

Location
  Use   Approximate
Area in
Square Feet
 

12700 Ventura Blvd.
Studio City, California

  Executive and administrative office and post production and editing facilities     38,680  

1325 Avenue of the Americas
New York, New York

  Advertising sales and administrative office and advertising traffic     24,278  

6430 S. Fiddlers Green Circle
Greenwood Village, Colorado

  Administrative office     4,424  

205 N. Michigan Ave.
Chicago, Illinois

  Advertising sales office     3,066  

1170 Peachtree Street
Atlanta, Georgia

  Advertising sales office     193  

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

ITEM 3.    Legal Proceedings

        Not applicable.

ITEM 4.    Mine Safety Disclosures

        Not applicable.

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PART II

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

Market Information

        Our Common Stock is listed on the NASDAQ Global Market under the ticker symbol "CRWN." Set forth below are the high and low sales prices for our Common Stock for each quarterly period in 2011 and 2012, as reported on the NASDAQ Global Market.

 
  Price Range  
Common Stock
  High   Low  

2011

             

First Quarter

  $ 3.380   $ 1.850  

Second Quarter

  $ 2.420   $ 1.630  

Third Quarter

  $ 1.960   $ 1.120  

Fourth Quarter

  $ 1.690   $ 1.130  

2012

             

First Quarter

  $ 1.640   $ 1.150  

Second Quarter

  $ 1.750   $ 1.360  

Third Quarter

  $ 1.980   $ 1.630  

Fourth Quarter

  $ 1.950   $ 1.550  

Holders

        As of February 14, 2013, there were 51 record holders of our Common Stock.

Dividends

        We have not paid any cash dividends on our Common Stock since inception and there is no intention to do so in the future. In 2011 we paid cash dividends of $13.8 million on our redeemable Preferred Stock through July 14, 2011, at which time the Preferred Stock was redeemed.

Securities Authorized for Issuance under Equity Compensation Plans

        Our Amended and Restated 2000 Long Term Incentive Plan, our only equity compensation plan, expired during 2012. As of December 31, 2012, no stock options were outstanding or available for future use.

Stock Purchases

        We did not make any repurchases of our outstanding shares during the fourth quarter of 2012. None of our executive officers purchased shares of our Common Stock in open market transactions during the fourth quarter of 2012.

        There were no unregistered issuances of securities to any parties, including to employees.

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Performance Graph

        The following graph presents the total stockholder return of $100 invested in our Class A Common Stock for the period from December 31, 2007, through December 31, 2012. It also presents comparative results for (i) $100 invested in a peer group index comprising initially equal dollar investments in the common stocks of Comcast Corp. (CMCSA), The Walt Disney Company (DIS) and Time Warner Inc. (TWX) and (ii) the relative performance of the NASDAQ Composite index, also relative to an initial measure of $100. Dividends, if any, are assumed to have been reinvested in shares of the respective company's stock at the closing price on the related dividend payment date. The closing price of our stock on December 31, 2007, the last trading day of that year, was $6.50. The closing price of our stock on December 31, 2012, the last trading day of that year, was $1.85.

Relative Performance of Crown Media Holdings, Inc.
Class A Common Stock

GRAPHIC

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ITEM 6.    Selected Financial Data

Selected Historical Consolidated Financial Data of Crown Media Holdings

        In the table below, we provide you with selected historical consolidated financial and other data of Crown Media Holdings and its subsidiaries. The following selected consolidated statement of operations data for the years ended December 31, 2008, 2009, 2010, 2011 and 2012, and selected consolidated balance sheet data as of December 31, 2008, 2009, 2010, 2011 and 2012, are derived from the audited financial statements of Crown Media Holdings and its subsidiaries. This data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of

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Operations" and the consolidated financial statements and related notes for the years ended December 31, 2010, 2011 and 2012, included in this Annual Report on Form 10-K.

 
   
  Years Ended December 31,    
 
 
  2008   2009   2010   2011   2012  
 
  (In thousands, except per share amounts)
 

Revenue:

                               

Advertising

  $ 223,396   $ 214,545   $ 218,152   $ 251,325   $ 271,242  

Subscriber fees

    57,153     63,597     68,819     71,668     78,005  

Other revenue

    1,245     1,422     301     368     623  
                       

Total revenue, net

    281,794     279,564     287,272     323,361     349,870  

Cost of Services:

                               

Programming costs

    140,698     127,528     125,249     136,782     134,549  

Other costs of services

    13,081     20,051     11,929     12,266     13,704  
                       

Total cost of services

    153,779     147,579     137,178     149,048     148,253  

Selling, general and administrative expense

    48,638     49,016     51,783     55,679     60,633  

Marketing expense

    19,603     6,551     10,152     9,816     10,179  

Gain from extinguishment of indemnification

                (1,246 )    

Gain from sale of film assets

    (101 )   (682 )   (719 )        
                       

Income from continuing operations before interest and income tax expense

    59,875     77,100     88,878     110,064     130,805  

Interest expense, net

    (100,157 )   (100,539 )   (55,987 )   (25,857 )   (46,056 )
                       

(Loss) income before income tax expense and discontinued operations

    (40,282 )   (23,439 )   32,891     84,207     84,749  

Income tax (expense) benefit

            (8,810 )   234,589     22,604  
                       

(Loss) income before discontinued operations

    (40,282 )   (23,439 )   24,081     318,796     107,353  

Gain on sale of discontinued operations, net of tax

    3,064     847         189      
                       

Net (loss) income and comprehensive (loss) income

    (37,218 )   (22,592 )   24,081     318,985     107,353  

Income allocable to Preferred Stockholder

            (16,297 )   (69,974 )    
                       

Net (loss) income attributable to common stockholders

  $ (37,218 ) $ (22,592 ) $ 7,784   $ 249,011   $ 107,353  
                       

Weighted average number of common shares outstanding, basic and diluted

    104,776     104,788     234,676     359,676     359,676  
                       

(Loss) income per share before discontinued operations, net of income allocable to Preferred Stockholder, basic and diluted

  $ (0.39 ) $ (0.23 ) $ 0.03   $ 0.69   $ 0.30  

Gain per share from discontinued operations, basic and diluted

    0.03     0.01              
                       

Net (loss) income per common share, basic and diluted

  $ (0.36 ) $ (0.22 ) $ 0.03   $ 0.69   $ 0.30  
                       

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  As of December 31,  
 
  2008   2009   2010   2011   2012  
 
  (In thousands)
 

Balance Sheet Data:

                               

Cash and cash equivalents

  $ 2,714   $ 10,456   $ 30,565   $ 35,181   $ 43,705  

Goodwill

    314,033     314,033     314,033     314,033     314,033  

Total assets

    739,345     698,061     678,534     958,469     1,024,662  

Total long-term debt, excluding current maturities

    1,090,616     771,814     391,746     498,463     477,893  

Stockholders' (deficit) equity

    (666,933 )   (698,030 )   (150,965 )   243,496     331,359  

Other Data:

                               

Net cash provided by operating activities

  $ 48,078   $ 37,566   $ 67,111   $ 41,482   $ 30,680  

Capital expenditures

    (1,868 )   (507 )   (1,086 )   (957 )   (1,376 )

Net cash used in investing activities

    (5,437 )   (1,443 )   (2,047 )   (1,145 )   (1,376 )

Net cash used in financing activities

    (41,901 )   (28,381 )   (44,955 )   (35,721 )   (20,780 )

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

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

Current Challenges

        The Company faces numerous operating challenges. Among such challenges are increasing viewership ratings, maintaining and increasing advertising revenue, maintaining and expanding the distribution of the Networks, broadening viewership demographics to meet our target audience, and controlling costs and expenses.

    Ratings

        Ratings success plays a significant role in our ability to achieve our distribution and advertising goals. We believe our ratings are affected by our ability to (i) acquire and produce series and original movies that appeal to our target demographic and (ii) develop a programming schedule that attracts a high number of viewers. Original productions are our most high profile programs and generate Hallmark Channel's highest ratings. In the past, the Company has typically incurred additional marketing and promotional expenses surrounding original productions and certain acquired movies to drive higher ratings. Certain acquired series delivered historically strong ratings, but recently they have been part of the decline in viewer ratings. We plan to maintain or increase the number of our original productions and develop a programming schedule that attracts a greater number of viewers in our target demographic, all while controlling the costs and expenses relating to these actions.

    Advertising Revenue

        In the fourth quarter of 2012, our sales of inventory in the Scatter Market (2012/2013) were at rates 40% greater than the rates we realized for 2011/2012 upfront sales and were generally at rates 3% greater than those we realized in the 2011/2012 Scatter Market. Our direct response rates were 3% lower compared to that inventory sold in the same period of 2011/2012.

        In the 2012/2013 upfront process relating to the sale of advertising for the last quarter of 2012 and the first three quarters of 2013, we entered into agreements with major advertising firms covering approximately 39% of our advertising inventory. In the 2011/2012 upfront process relating to the sale of advertising for the last quarter of 2011 and the first three quarters of 2012, we entered into agreements

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with major advertising firms covering approximately 43% of our advertising inventory. The 2012/2013 inventory was sold at CPMs 4% higher than the inventory sold in the 2011/2012 upfront, including increases in rates related to our lifestyle programming block. We sold additional general rate inventory for the 2011/2012 broadcast season to advertisers that purchase upfront inventory on a calendar year basis, rather than an advertising year basis, and will sell the balance in the scatter marketplace. Additionally, we sold approximately 28% of Hallmark Movie Channel's available inventory in the 2012/2013 upfront, as compared to 32% in the 2011/2012 upfront.

        Following the upfront period, sales of our general rate and direct response inventory are made closer to the timing of the actual advertisement. Advertisers with upfront contracts have an option to terminate their contracts, as well as an option to expand the amount of inventory purchased under the contracts. No cancellation options were exercised during the fourth quarter of 2012.

    Distribution Agreements

        Distribution agreements with multiple systems operators are important because they affect our number of subscribers, which in turn has a major impact on our subscriber fees, the number of persons viewing our programming, and the rates charged for advertising. Our long-term distribution challenge will be obtaining favorable renewals of our major distribution agreements as they expire. Our major distribution agreements have terms which expire at various times from March 2013 through December 2032, inclusive of renewal options. Our Networks have not been distributed by AT&T (U-verse) since our distribution agreement with them ended on August 31, 2010.

        The universe of cable and satellite TV subscribers in the United States is approximately 104 million homes. The top 30 cable TV networks in the United States, measured by the number of subscribers, have 95 million or more subscribers. It is a mature market with relatively high penetration. According to Nielsen, Hallmark Channel had approximately 86.9 million subscribers at December 31, 2012, and Hallmark Movie Channel was distributed to 48.6 million subscribers.

    Demographics

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

        We believe that the key demographics for Hallmark Channel are the viewers in the groups adults aged 25 to 54 and women aged 25 to 54. However, the average median viewing age was 58.8 for Hallmark Channel and 63.7 for Hallmark Movie Channel for the year 2011. For the year 2012, the average median viewing age was 57.9 for Hallmark Channel and 62.7 for Hallmark Movie Channel. In order to achieve our revenue goals, we need to draw in our target audience.

Revenue from Continuing Operations

        Our revenue consists primarily of advertising fees and subscriber fees. For the years ended December 31, 2010, 2011 and 2012 revenue from the sale of advertising time on our Networks was approximately $218.2 million, $251.3 million and $271.2 million, respectively. For the years ended December 31, 2010, 2011 and 2012 revenue derived from subscriber fees for the Networks was approximately $68.8 million, $71.7 million and $78.0 million, respectively. Information relating to advertising fees and subscriber fees is presented above in "Item 1 Business—Sources of Revenue"

Cost of Services

        Our cost of services consists primarily of the amortization of programming rights, the cost of signal distribution and the cost of promotional segments that are aired between programs.

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Critical Accounting Policies, Judgments and Estimates

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

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

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

Programming Rights

        Programming rights principally consist of rights to off-network, theatrical and original movies; off-network and original scripted series; original unscripted series and specials. Original series and specials consist of lifestyle, dramatic and other entertainment programming. Programming aired on the Company's television Networks is primarily obtained from third-party production companies and distributors and is classified as acquired or original programming in the footnotes to these financial statements. Programming aired on the Company's television Networks obtained from subsidiaries of Hallmark Cards is classified as affiliate programming.

        Acquired programming consists of series, films and specials that have been previously produced and have often been previously exhibited by third parties for which the Company licenses limited broadcast rights for a specific time period. The licensed exhibitions can vary from a single broadcast to multiple broadcasts over several years, and the license typically requires payments during the term of the license. The cost of acquired programming is capitalized when the license period begins and the program is available for use. Original programming consists of movies, series and specials that are specifically produced for the Company's television Networks. The Company often funds the production of original programs prior to completion of production and initial broadcast; these payments are classified as prepaid programming rights until the program is available for use.

        Capitalized programming costs are stated at the lower of cost less accumulated amortization or net realizable value (fair value for owned programming). Amortization of programming rights is recognized over the contractual term on a straight-line basis or the estimated useful life, if shorter. Amortization of the capitalized costs of licensed programming commences when the license period begins and the program is available for use. Amortization of the capitalized costs of owned programming is amortized over the expected and likely broadcasts of the program. The portion of the unamortized programming rights that will be amortized within one year is classified as current programming rights on the condensed consolidated balance sheets. Although the Company estimates that all of the unamortized owned programming will be amortized within the next twelve months, it is classified as long-term programming rights on the condensed consolidated balance sheets in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "ASC") Topic 926, Entertainment—Films.

        The Company periodically evaluates the net realizable value of its programming rights by considering expected future revenue generation. Estimates of future revenue consider historical airing patterns and future plans for airing programming, including any changes in strategy. Estimated future revenue may differ from actual revenue based on changes in expectations related to market acceptance, advertising demand, the number of cable and satellite television subscribers receiving the Company's Networks, and program usage. Accordingly, the Company continually reviews revenue estimates and

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planned usage and revises its assumptions if necessary. Given the significant estimates and judgments involved, actual demand or market conditions may be less favorable than those projected, requiring a write-down to net realizable value.

Goodwill

        At December 31, 2012, we had a stockholders' equity of $331.4 million and a goodwill asset of $314.0 million. All of our goodwill relates to our Networks, which is also our only segment. In November 2012 we first assessed qualitatively whether it was necessary to perform the two-step goodwill impairment test. We did not believe, as a result of its qualitative assessment, that it was more likely than not that the fair value of a reporting period was less than its carrying amount, and, therefore, the quantitative two-step goodwill impairment test was not required. In order to further support our qualitative assessment, we also performed the first step of the goodwill impairment test. We note that if our fair value estimate was 50% lower, we would still not have failed the initial test and no impairment charge would be taken.

Deferred Tax Asset

        The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities, including related operating loss and tax credit carryforwards, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

        Net deferred tax assets are recognized to the extent that management believes these assets will more likely than not be realized. In making such determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event management subsequently determines that the Company would likely be able to realize deferred income tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded with a corresponding reduction in the provision for income taxes.

        Management periodically evaluates the sustainability of tax positions taken. Whenever management estimates the probability of sustaining a tax position is at least more likely than not (i.e., greater than 50%), the tax position is deemed warranted and is recognized at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized as income tax expense.

Revenue Recognition

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

        Subscriber revenue from pay television distributors is recognized as revenue when an agreement is executed, programming is provided, the price is fixed and determinable, and collectability is reasonably assured. Subscriber fees from pay television distributors are recorded net of amortization of promotion and placement costs.

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Audience Deficiency Liability

        ADUs are units of inventory that are made available to advertisers as compensation for a program's failure to deliver its guaranteed audience. An audience deficiency liability results when impressions delivered on guaranteed ratings are less than the impressions guaranteed to advertisers. The liability is reduced when we air the advertisement during another program to "make-good" on the under-delivery of impressions.

Selected Historical Consolidated Financial Data of Crown Media Holdings

        In the table below, we provide selected historical consolidated financial and other data (unaudited ratings and subscriber information) of Crown Media Holdings and its subsidiaries. The following selected consolidated statements of operations and cash flow data for the years ended December 31, 2010, 2011 and 2012, are derived from the audited financial statements of Crown Media Holdings and its subsidiaries. This data should be read together with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

 
   
   
   
  Percentage
Change
  Percentage
Change
 
 
  Years Ended December 31,  
 
  2011 vs.
2010
  2012 vs.
2011
 
 
  2010   2011   2012  

Revenue:

                               

Advertising

  $ 218,152   $ 251,325   $ 271,242     15 %   8 %

Subscriber fees

    68,819     71,668     78,005     4 %   9 %

Other revenue

    301     368     623     22 %   69 %
                           

Total revenue

    287,272     323,361     349,870     13 %   8 %

Cost of Services:

                               

Programming costs

    125,249     136,782     134,549     9 %   -2 %

Contract termination fee expense

    103             -100 %   0 %

Operating costs

    11,826     12,266     13,704     4 %   12 %
                           

Total cost of services

    137,178     149,048     148,253     9 %   -1 %

Selling, general and administrative expense

    51,783     55,679     60,633     8 %   9 %

Marketing expense

    10,152     9,816     10,179     -3 %   4 %

Gain from extinguishment of indemnification

        (1,246 )       100 %   -100 %

Gain from sale of film assets

    (719 )           -100 %   0 %
                           

Income before interest and income tax expense

    88,878     110,064     130,805     24 %   19 %

Interest expense

    (55,987 )   (25,857 )   (46,056 )   -54 %   78 %
                           

Income before income tax expense and gain from sale of discontinued operations

    32,891     84,207     84,749     156 %   1 %

Income tax (provision) benefit

    (8,810 )   234,589     22,604     -2763 %   -90 %
                           

Income before gain from sale of discontinued operations

    24,081     318,796     107,353     1224 %   -66 %

Gain from sale of discontinued operations

        189         100 %   -100 %
                           

Net income

  $ 24,081   $ 318,985   $ 107,353     1225 %   -66 %
                           

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  Percentage
Change
  Percentage
Change
 
 
  Years Ended December 31,  
 
  2011 vs.
2010
  2012 vs.
2011
 
 
  2010   2011   2012  

Cash Flow Data:

                               

Net cash provided by operating activities

  $ 67,111   $ 41,482   $ 30,680     -38 %   -26 %

Net cash used in investing activities

  $ (2,047 ) $ (1,145 ) $ (1,376 )   -44 %   20 %

Net cash used in financing activities

  $ (44,955 ) $ (35,721 ) $ (20,780 )   -21 %   -42 %

Other Data (Unaudited):

                               

HC day household ratings(1)(3)(4)

    0.5     0.5     0.5     2 %   5 %

HC primetime household ratings(2)(3)(4)

    0.8     0.7     0.7     -4 %   -6 %

HMC day household ratings(1)(3)(4)

    0.2     0.2     0.3     48 %   12 %

HMC primetime household ratings(2)(3)(4)

    0.3     0.4     0.3     44 %   -11 %

HC day W25-54 ratings(1)(3)(4)

    0.2     0.2     0.3     6 %   12 %

HC primetime W25-54 ratings(2)(3)(4)

    0.3     0.3     0.4     4 %   3 %

HMC day W25-54 ratings(1)(3)(4)

    0.1     0.1     0.1     55 %   28 %

HMC primetime W25-54 ratings(2)(3)(4)

    0.1     0.1     0.1     53 %   12 %

HC subscribers at period end(4)

    87,275     86,964     86,896     0 %   0 %

HMC subscribers at period end(4)

    37,564     44,821     48,592     19 %   8 %

(1)
Total day means the time period that Nielsen measures each individual day, 6 a.m. to 6 a.m.

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

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

(4)
"HC" represents Hallmark Channel and "HMC" represents Hallmark Movie Channel. Ratings and subscribers are reported by A.C. Nielsen.

Results of Operations

Year Ended December 31, 2011 Compared to Year Ended December 31, 2012

        Revenue.    Our revenue, comprised primarily of advertising and subscriber fees, increased $26.5 million or 8% in 2012 over 2011. The $19.9 million or 8% increase in advertising revenue is primarily due to the increase in ratings for certain of our key demographics. Due to growth in Hallmark Movie Channel subscribers, advertising revenue from Hallmark Movie Channel increased from $34.2 million in 2011 to $45.7 million in 2012. For 2012, Nielsen ranked Hallmark Channel 15th in total day viewership with a 0.5 household rating and 22nd in primetime with a 0.7 household rating among the 96 cable networks in the United States market.

        Our subscriber fee revenue increased $6.3 million or 9% in 2012 due to contractual rate increases. The amount of promotion and placement expense that was recorded as a reduction of subscriber fee revenue was approximately $1.2 million for both 2011 and 2012.

        Cost of services.    Cost of services as a percent of revenue decreased to 42% in 2012 as compared to 46% in 2011. This decrease results primarily from the 8% increase in total revenue discussed above.

        The Company's programming costs decreased $2.2 million or 2% from 2011 due to the expiration of a number of programming license agreements and the end of The Martha Stewart Show agreement. We believe that programming costs will likely increase in the future and that the decline we experienced is due to several programming rights expiring around the same time. Operating costs for 2012 increased $1.4 million over 2011 primarily due to the $2.0 million increase in residual expense offset, in part, by the $415,000 decrease in bad debt expense. The Company's bad debt expense was $454,000 for 2011 as compared to $39,000 for 2012.

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        Selling, general and administrative expense.    Our 2012 selling, general and administrative expense increased $5.0 million over 2011. Research costs increased $927,000 due to growth in Hallmark Movie Channel subscribers. Employee costs increased $4.0 million related to the Company's attainment of certain performance metrics while rent expense increased $293,000 due to additional space in both the Los Angeles and New York offices. Legal costs increased $1.7 million due to costs associated with the Federal Tax Deconsolidation and cost associated with the shareholder lawsuit no longer considered reimbursable from our insurer. Additionally, the Company recorded non-recurring banking fees attributable to the Recapitalization of $2.5 million in 2011.

        Marketing expense.    Our marketing expense increased $363,000 or 4% in 2012 versus 2011. During both 2011 and 2012 the Company allocated its marketing resources to promote its fourth quarter original holiday programming schedule.

        Gain on extinguishment of indemnification.    In December 2006, the Company sold its film library consisting of domestic rights and certain international ancillary rights to approximately 620 television movies, mini-series and series to RHI Entertainment LLC ("RHI"). As a condition of the sale, the Company agreed to pay up to $22.5 million for residuals and profit participations related to RHI's domestic exploitation of the Crown Library for a ten-year period ending December 14, 2016. In December 2011 the Company and RHI executed an agreement pursuant to which the Company acquired program licenses and was relieved of its remaining obligation under the indemnification agreement, all in exchange for concurrent and future fixed cash payments of $8.1 million. The program rights assets were recorded at their estimated fair values of approximately $3.8 million with corresponding recognition of license fees payable. The remainder of the payment obligations was recorded at its estimated fair value of approximately $4.1 million. The carrying amount of this liability as of December 31, 2011 was $3.5 million and is included among accrued liabilities in the accompanying consolidated balance sheet. Extinguishment of the indemnification obligation resulted in a gain of approximately $1.2 million which is reflected in the accompanying statement of operations for the year ended December 31, 2011.

        Interest expense.    Interest expense increased $20.2 million for 2012 as compared to 2011 due to the Recapitalization and the treatment of this transaction under troubled debt restructuring accounting. Interest expense on the Note was $14.8 million and interest expense on the Term Loan was $6.0 million for 2011. Interest expense on the Term A and Term B loans was $1.5 million for 2011. Interest expense on the Note was $32.2 million and interest expense on the Term Loan was $12.2 million for 2012. Other interest expense decreased from $3.6 million for 2011 to $1.7 million for 2012.

        Income tax benefit.    The Company recorded income tax benefit of $234.6 million during 2011 and $22.6 million during 2012. During 2011 and 2012 the Company released $236.0 million and $54.2 million, respectively, of the valuation allowance previously recorded against its deferred tax asset, resulting in an unreserved deferred tax asset of approximately $236.0 million and $259.3 million on its balance sheets as of December 31, 2011 and 2012, respectively. This also resulted in a non-cash reduction in income tax expense. Each of the releases of portions of the valuation allowance occurred when the Company, after evaluating positive and negative evidence, including recent earnings history, determined that it was more likely than not that it would utilize portions of its tax loss carryforwards and other deferred tax assets. During 2012, the valuation allowance decreased an additional $229.7 million, principally because of eliminating the deferred tax asset relating to losses incurred while the Company was included in the Hallmark Cards' consolidated federal return. Additionally, Colorado has suspended NOLs in excess of $250,000 for 2011 through 2013 and Illinois has suspended the use of NOLs for 2011 through 2013. Also, New York and New York City have taxes based on capital.

        Gain on sale of discontinued operations.    The terms of our April 2005 sale of the international business require that we reimburse the buyer for certain costs. At the time of the sale, we recorded an estimate of our liability for these obligations and considered the amount in our determination of our

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loss from the sale of discontinued operations as reported in 2005. During the second quarter of 2011, the Company adjusted its estimate for these amounts. This change in estimate was reflected as a $190,000 gain on sale of discontinued operations, net of $3,000 of tax.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2011

        Revenue.    Our revenue, comprised primarily of advertising and subscriber fees, increased $36.1 million or 13% in 2011 over 2010. The $33.2 million or 15% increase in advertising revenue is primarily due to higher advertising rates. Due to ratings information being provided for Hallmark Movie Channel from April 1, 2010, forward and growth in its subscribers, advertising revenue from Hallmark Movie Channel increased from $18.7 million in 2010 to $34.2 million in 2011. For 2011, Nielsen ranked Hallmark Channel 16th in total day viewership with a 0.5 household rating and 24th in primetime with a 0.7 household rating among the 86 cable networks in the United States market.

        Our subscriber fee revenue increased $2.8 million or 4% in 2011. The amount of promotion and placement expense that was recorded as a reduction of subscriber fee revenue was approximately $2.0 million and $1.2 million for 2010 and 2011, respectively. Increases in contractual rates have been offset, in part, during 2011 by the Company not having a contract with one multiple systems operator since September 2010.

        Cost of services.    Cost of services as a percent of revenue decreased to 46% in 2011 as compared to 48% in 2010. This decrease results primarily from the 13% increase in total revenue discussed above, offset in part by the effects of the $11.5 million or 9% increase in programming costs, discussed below.

        Operating costs for 2011 increased $337,000 over 2010 primarily due to the $271,000 increase in bad debt expense. The Company's bad debt expense was $183,000 for 2010, as compared to $454,000 for 2011.

        Programming costs for 2011 increased $11.5 million or 9% from 2010 due to additional expense incurred in conjunction with the acquisition of new programming such as Frasier and lifestyle programming. Additionally, the Company wrote off one series that is no longer aired on Hallmark Channel during 2011. Because The Martha Stewart Show was aired during all of 2011, but only during part of 2010, the programming expense associated with this show was significantly higher.

        Selling, general and administrative expense.    Our 2011 selling, general and administrative expense increased $3.9 million over 2010. Research costs increased $1.7 million due to the purchase of ratings information being provided for Hallmark Movie Channel from April 1, 2010 forward, and growth in its subscribers. Additionally, the Company recorded non-recurring debt issuance costs attributable to the Recapitalization of $1.0 million and banking fees of $2.5 million in 2010 and 2011, respectively. The remaining increase is due to an increase in employee costs.

        Marketing expense.    Our marketing expense decreased $336,000 or 3% in 2011 versus 2010. During the third quarter of 2010, the Company allocated significant marketing resources to the 2010 launch of The Martha Stewart Show. During 2011 the Company decided to allocate its marketing resources to promote its fourth quarter original holiday programming schedule resulting in increased advertising revenue.

        Gain on extinguishment of indemnification.    In December 2006, the Company sold its film library consisting of domestic rights and certain international ancillary rights to approximately 620 television movies, mini-series and series to RHI. As a condition of the sale, the Company agreed to pay up to $22.5 million for residuals and profit participations related to RHI's domestic exploitation of the Crown Library for a ten-year period ending December 14, 2016. In December 2011 the Company and RHI executed an agreement pursuant to which the Company acquired program licenses and was relieved of

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its remaining obligation under the indemnification agreement, all in exchange for concurrent and future fixed cash payments of $8.1 million. The program rights assets were recorded at their estimated fair values of approximately $3.8 million with corresponding recognition of license fees payable. The remainder of the payment obligations was recorded at its estimated fair value of approximately $4.1 million. The carrying amount of this liability as of December 31, 2011 was $3.5 million and is included among accrued liabilities in the accompanying consolidated balance sheet. Extinguishment of the indemnification obligation resulted in a gain of approximately $1.2 million which is reflected in the accompanying statement of operations for the year ended December 31, 2011.

        Gain from sale of film assets.    In July 2010, the Company received notification of pending requests for payments of approximately $8.0 million related to exploitation of the film assets through mid-2010. Accordingly, the Company increased the carrying amount of the liability by $155,000 and recognized a corresponding loss from sale of film assets in the second quarter of 2010. At December 31, 2010, management believed that fulfillment of its indemnification obligation would occur over a period longer than previously estimated. Accordingly, in the fourth quarter of 2010, the Company decreased the carrying amount of the liability by $874,000 and recognized a corresponding gain from sale of film assets in the accompanying statement of operations.

        Interest expense.    Interest expense decreased $30.1 million for 2011 as compared to 2010. Interest expense on the old debt prior to the Recapitalization was $47.7 million, interest expense on the Term A and Term B loans was $1.9 million, and interest expense on the Company obligated mandatorily redeemable preferred interest was $2.1 million for 2010. Interest on the Term A and Term B loans was $1.5 million for 2011. Interest on the Notes and the Term Loan was $14.8 million and $6.0 million for 2011, respectively. At December 31, 2010, the balance of our Term A and Term B loans was $417.7 million, with an effective interest rate of less than 1%. At December 31, 2011, the balance of our Term Loan and Notes was $507.0 million.

        Income tax (expense) benefit.    During 2011 the Company released $236.0 million of the valuation allowance previously recorded against its deferred tax asset, resulting in an unreserved deferred tax asset of approximately $236.0 million on its balance sheet as of December 31, 2011. This also resulted in a non-cash reduction in income tax expense. During 2011, after evaluating positive and negative evidence, including recent earnings history, the Company has determined that it is more likely than not that it will utilize a portion of its tax loss carry forwards, as if separate returns were filed. Additionally, Colorado has suspended NOLs in excess of $250,000 for 2011-2013 and Illinois has suspended the use of NOLs for 2011-2013. Also, New York and New York City have taxes based on capital.

        For tax purposes, the Recapitalization generated cancellation of debt income of $147.0 million. Accordingly, the Company generated federal and state taxable income for both regular tax and alternative minimum tax ("AMT") purposes. For regular tax purposes, this income was fully offset by net operating loss carryforwards. However, for federal AMT purposes, loss carryforwards were used against AMT income but were limited to 90% of AMT income. As a result, the Company recorded income tax expense of $3.3 million for the AMT in its consolidated statements of operations for 2010. The total federal and state income tax provision for 2010 was $8.8 million.

        Gain on sale of discontinued operations.    The terms of our April 2005 sale of the international business require that we reimburse the buyer for certain costs. At the time of the sale, we recorded an estimate of our liability for these obligations and considered the amount in our determination of our loss from the sale of discontinued operations as reported in 2005. During the second quarter of 2011, the Company adjusted its estimate for these amounts. This change in estimate was reflected as a $190,000 gain on sale of discontinued operations, net of $3,000 of tax.

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Liquidity and Capital Resources

Year Ended December 31, 2011 Compared to Year Ended December 31, 2012

        In 2011, our cash provided by operating activities was $41.5 million as compared to $30.7 million for 2012. The Company's net income for 2012 decreased $211.6 million to net income of $107.4 million from $319.0 million for 2011, as the Company released $236.0 million of its valuation allowance during 2011 and $54.2 million during 2012. Our depreciation and amortization expense for 2012 increased $3.1 million to $133.2 million from $130.1 million in 2011. The Company made programming payments of $140.3 million and $150.8 million during 2011 and 2012, respectively.

        Cash used in investing activities was $1.1 million and $1.4 million during 2011 and 2012, respectively. During 2011 and 2012, we purchased property and equipment of $957,000 and $1.4 million, respectively. During 2011, the Company paid $188,000 to the buyer of our international business for amounts due under the terms of the sale agreement, primarily for reimbursement of transponder lease payments. The related liability was recognized in 2005 as part of the sale of our international business.

        Cash used in financing activities was $35.7 million and $20.8 million for 2011 and 2012, respectively. During 2011 the Company redeemed its Preferred Stock for $185.0 million and repaid its Term A and Term B loans, all in connection with the 2011 Refinancing. The Company made dividend payments of $13.8 million to the Preferred Stockholder during 2011. The Company made principal payments under its Term Loan of $1.1 million and $19.6 million in 2011 and 2012, respectively. In conjunction with the 2011 Refinancing, the Company paid $12.3 million of debt issuance costs and received proceeds of $300.0 million and $207.9 million from the issuance of the Notes and the Term Loan, respectively.

        The Company made cash payments to Hallmark Cards during 2011 of $10.5 million under the federal tax sharing agreement and $771,000 of cash payments under the state tax agreements. The Company made cash payments to Hallmark Cards during 2012 of $21.8 million under the federal tax sharing agreement and $584,000 of cash payments under the state tax agreements. Effective November 1, 2012, the Company is no longer a part of Hallmark Cards' consolidated federal tax group.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2011

        In 2010, our cash provided by operating activities was $67.1 million as compared to $41.5 million for 2011. The Company's net income for 2011 increased $294.9 million to net income of $319.0 million from $24.1 million for 2010, as the Company released $236.0 million of its valuation allowance during 2011. Our depreciation and amortization expense for 2011 increased $6.7 million to $130.1 million from $123.4 million in 2010. The Company made programming payments of $114.6 million and $140.3 million during 2010 and 2011, respectively.

        Cash used in investing activities was $2.0 million and $1.1 million during 2010 and 2011, respectively. During 2010 and 2011, we purchased property and equipment of $1.1 million and $957,000, respectively. During 2010 and 2011, the Company paid $961,000 and $188,000, respectively, to the buyer of the international business for amounts due under the terms of the sale agreement, primarily for reimbursement of transponder lease payments. The related liability was recognized in 2005 as part of the sale of our international business.

        Cash used in financing activities was $45.0 million and $35.7 million for 2010 and 2011, respectively. We repaid principal of $1.0 million and $0 under our bank credit facility during 2010 and 2011, respectively. The Company redeemed the $25.0 million preferred interest in December 2010. The Company made principal payments on its Term A and Term B loans of $14.4 million and $330.4 million for 2010 and 2011, respectively. The Company made dividend payments of $13.8 million to the Preferred Stockholder during 2011. The Company redeemed its Preferred Stock for $185.0 million on

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July 14, 2011. The Company made principal payments under its Term Loan of $1.1 million in 2011. In conjunction with the 2011 Refinancing, the Company paid $12.3 million of debt issuance costs and received proceeds of $300.0 million and $207.9 million from the issuance of the Notes and the Term Loan, respectively. In conjunction with the Recapitalization, the company paid $3.6 million of debt issuance costs.

        In December 2010 the Company paid $12.9 million for tax liabilities incurred under the tax sharing agreement. The Company made cash payments to Hallmark Cards during 2011 of $10.5 million under the federal tax sharing agreement and $771,000 of cash payments under the state tax agreements.

Cash Flows

        As of December 31, 2012, the Company had $43.7 million in cash on hand and no outstanding borrowings under its $30.0 million bank credit facility. One letter of credit in the amount of $202,000 was outstanding as of December 31, 2012. Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts supplemented with the borrowing capacity available under the bank credit facility and, prior to the Recapitalization, forbearance, with respect to outstanding indebtedness, by Hallmark Cards and its affiliates.

        On July 14, 2011 the Company used the proceeds from a $210.0 million Term Loan and $300.0 million Notes to repay the Term A Loan and the Term B Loan and redeem all of the outstanding Preferred Stock. These instruments are described further below.

        The Company's management anticipates that the principal uses of cash during the twelve month period ending December 31, 2013, will include the payment of operating expenses, accounts payable and accrued expenses, programming costs, and interest and principal payments of approximately $61.3 million under the Term Loan and Notes. The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility, will be sufficient to fund the Company's operations and enable the Company to meet its liquidity needs through December 31, 2013.

        The Deconsolidation Transaction had a significant impact on the Company's future estimated cash flows. Amounts previously budgeted for cash payments for taxable amounts due under the federal tax sharing agreement are now available for the pay down of debt and other uses.

Recapitalization and 2011 Refinancing

    Recapitalization

        On June 29, 2010 the Company consummated the Recapitalization pursuant to a Master Recapitalization Agreement dated February 26, 2010, by and among the Company, Hallmark Cards, HCC and related entities.

        Among other things, the Recapitalization included the following:

    Exchange of approximately $1.162 billion of debt (the "HCC Debt") for new debt, Preferred Stock and Common Stock;

    Mergers of two intermediate holding companies, HEIC and Hallmark Entertainment Holdings, Inc., with and into the Company (collectively, the "Mergers");

    Reclassification of shares of Class B Common Stock into shares of Class A Common Stock upon the filing of the Second Amended and Restated Certificate of Incorporation; and

    Approval and authorization for the future filing of the Third Amended and Restated Certificate of Incorporation, the principal effect of which would be a reverse split of shares of Common Stock at such time as authorized by the Company's Board of Directors.

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        The following were issued in exchange for HCC Debt:

    $315.0 million principal amount of new debt issued pursuant to the terms of the credit agreement between the Company and HCC in two tranches: (i) the $200.0 million Term A Loan bearing interest at 9.5% per annum through December 31, 2011, and 12% thereafter and (ii) the $115.0 million Term B Loan bearing interest at 11.5% through December 31, 2011, and 14.0% thereafter (collectively, the "New Debt");

    185,000 shares of the Company's Series A Convertible Preferred Stock, $0.01 par value, with the terms summarized under "Preferred Stock Terms" below; and

    254,887,860 shares of the Company's Class A Common Stock in exchange for the residual amount of HCC Debt converted at $2.5969 per share.

        In addition, the transactions resulted in the following:

    The increase of the authorized shares of Class A Common Stock to 500,000,000 shares; the decrease of the authorized Preferred Stock to 1,000,000 shares; and the elimination of the Class B Common Stock;

    Amendment No. 2 to the Tax Sharing Agreement between the Company and Hallmark Cards, to among other things, (i) permit Hallmark Cards to defer any future tax benefit payable to the Company for application against future tax liabilities of the Company (ii) allow the Company to deduct interest accrued on the 10.25% senior secured note from January 1, 2010, through June 29, 2010; and (iii) provide for the treatment of the Recapitalization under the Tax Sharing Agreement;

    Execution of the registration rights agreement, by and among the Company, HCC and certain HEIC stockholders;

    Extension of the Company's $30.0 million revolving line of credit with JP Morgan Chase Bank to June 30, 2011, and Hallmark Card's agreement to guarantee up to $30.0 million for such revolving line of credit; and

    A Stockholders Agreement, by and among the Company, HCC and Hallmark Cards, pursuant to which, among other things, Hallmark Cards entities agreed not to acquire, through December 31, 2013, additional shares of Class A Common Stock, subject to certain exceptions, and agreed to certain restrictions on their ability to sell or transfer shares of Class A Common Stock until December 31, 2013 and, subject to lesser restrictions, until December 31, 2020.

        Immediately after consummation of the Mergers and issuance of Common Stock in partial exchange for HCC Debt, HCC owned approximately 90.3% of the Company's Class A Common Stock and all of the outstanding Preferred Stock.

        In connection with the 2011 Refinancing, the Company paid off the New Debt and used the proceeds of the outstanding notes to redeem all outstanding shares of Preferred Stock. Hallmark Cards, through its subsidiaries HCC and Hallmark Cards GmbH, continues to maintain voting and investment control with beneficial ownership of more than 90.3% of the Company's Class A Common Stock.

    2011 Refinancing

        Credit Facilities and Term Loan.    On July 14, 2011, in connection with the 2011 Refinancing, the Company entered into a new $240.0 million credit agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The agreement provides for a seven year $210.0 million senior secured term loan facility and a five year $30.0 million senior secured super-priority revolving credit facility. The Term Loan was issued at a discount of 1.0% or $2.1 million.

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        The Term Loan was drawn on July 14, 2011, at LIBOR at the Company's election. All LIBOR term loans will bear interest at the LIBOR Rate (subject to a minimum rate of 1.25%) plus 4.50%. The interest rate at both December 31, 2011 and 2012, was 5.75%. Commitment fees on the revolving credit facility are payable on the unused revolving credit commitment at the rate of 0.50% per annum, payable quarterly.

        The provisions of the Term Loan require Crown Media Holdings to make principal payments of $525,000 at each quarter's end, commencing September 30, 2011, until maturity on July 14, 2018. The Company is required to make additional principal payments in amounts equal to (1) 50% of excess cash flow (as defined in the agreement) of Crown Media Holdings for the remainder of 2011, and each year thereafter, which percentage will be reduced to 25% if the Consolidated Leverage Ratio (as defined in the agreement) is equal to or less than 4.25 to 1 but greater than 3.25 to 1, and 0% if the Consolidated Leverage ratio is equal to or less than 3.25 to 1, respectively; (2) 100% of net cash proceeds of dispositions or casualty events if Crown Media Holdings has not invested such proceeds within one year after the occurrence of the disposition or casualty event; and (3) 100% of net cash proceeds from issuance of debt or preferred stock not otherwise permitted by the agreement.

        The covenants in the agreement limit the ability of Crown Media Holdings and certain of its subsidiaries to: (1) incur indebtedness; (2) create or permit liens on assets; (3) make certain dividends, stock repurchases and redemptions and other restricted payments; (4) make certain investments; (5) prepay indebtedness; (6) enter into certain transactions with Crown Media Holdings' affiliates; (7) dispose of substantially all of the assets of Crown Media Holdings; (8) merge or consolidate; (9) enter into new unrelated lines of businesses; and (10) enter into sale and leaseback transactions. The Credit Agreement also requires compliance with a maximum total leverage ratio test and a maximum total secured leverage ratio test, but permits, with certain limitations, certain equity contributions to be made to Crown Media Holdings to enhance its ability to comply with such ratio tests.

        The agreement contains a number of affirmative and negative covenants. The Company was in compliance with these covenants as of December 31, 2012.

        The Company made principal payments of $1.1 million and $19.6 million under the Term Loan during the years ended December 31, 2011 and 2012, respectively. Interest expense under the Term Loan was $6.0 million and $12.2 million for years ended December 31, 2011 and 2012, respectively. After giving effect to the amortization of associated debt issuance costs and original issue discount, the effective interest rate of the Term Loan was approximately 6.3% during both the years ended December 31, 2011 and 2012.

        Senior Notes.    On July 14, 2011, also as part of the 2011 Refinancing, the Company issued $300.0 million in aggregate principal amount of 10.5% Senior Notes, at par, due July 15, 2019 in a private placement conducted pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Notes are guaranteed on a senior basis by each of Crown Media Holdings' subsidiaries (the "Guarantors"). Pursuant to the Registration Rights Agreement dated July 14, 2011, by and among Crown Media Holdings, the Guarantors and the initial purchaser, Crown Media Holdings and the Guarantors filed a registration statement with the Securities and Exchange Commission and exchanged the Notes for a new issuance of substantially identical notes registered under the Securities Act.

        Commencing January 15, 2012, interest is payable each January 15th and July 15th. The Company is not required to make mandatory sinking fund payments with respect to the Notes.

        The covenants in the related indenture limit the ability of the Company to, among other things: (1) incur additional debt; (2) pay dividends or make other restricted payments; (3) purchase, redeem or retire capital stock or subordinated debt; (4) make asset sales, including by way of sale leaseback

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transactions; (5) provide subsidiary guarantees; (6) enter into transactions with affiliates; (7) incur liens; (8) make investments; and (9) merge or consolidate with any other person.

        During any period in which the Notes have an investment grade rating from both Moody's and S&P (at least Baa3 by Moody's and BBB- by S&P), and no default has occurred and is continuing under the Indenture, Crown Media Holdings and its restricted subsidiaries will not be required to comply with the covenants in the Indenture that limit their ability to: (1) incur additional debt; (2) pay dividends or make other restricted payments; (3) purchase, redeem or retire capital stock or subordinated debt; (4) make asset sales; (5) provide subsidiary guarantees; and (6) enter into transactions with affiliates.

        Interest expense under the Notes was $14.8 million and $32.2 million for the years ended December 31, 2011 and 2012, respectively. After giving effect to the amortization of associated debt issuance costs, the effective interest rate of the Notes was approximately 11.0% during both the years ended December 31, 2011 and 2012.

        At the time of the 2011 Refinancing, the carrying amounts of the Term A Loan, the Term B Loan and Preferred Stock exceeded the respective reacquisition and redemption prices by approximately $87.3 million and $15.7 million, respectively. In consideration of these carrying amounts having been derived from the provisions of the Recapitalization in which HCC was a significant participant, the benefits arising from the extinguishments and redemption, $103.0 million in the aggregate, have been deemed capital contributions by HCC. Accordingly, such benefits have been credited to additional paid-in capital in the accompanying balance sheet.

        Guarantees.    Because Crown Media Holdings has no independent assets or operations, the guarantees by the subsidiary guarantors are full and unconditional, joint and several, and there are no subsidiaries of Crown Media Holdings that are not subsidiary guarantors. With certain exceptions described above, the Notes and the Credit Facilities impose restrictions on the payment of dividends by Crown Media Holdings and the subsidiary guarantors.

Contractual Obligations

        The following table summarizes the future cash disbursements to which we are contractually committed as of December 31, 2012:

 
  Scheduled Payments by Period in Millions (unaudited)  
Contractual Obligations
  Total   Less than
1 Year
  1 - 3
Years
  3 - 5
Years
  More than
5 Years
 

The Notes(1)

  $ 520.5   $ 31.5   $ 63.0   $ 63.0   $ 363.0  

Term Loan(1)

    243.3     29.8     23.8     23.3     166.4  

Capital lease obligations(1)

    15.1     2.3     4.3     4.3     4.2  

Operating leases

    15.7     5.6     9.3     0.8      

Other obligations

                               

Programming rights payable for current and future windows(2)(3)

    308.5     143.3     105.6     35.1     24.5  

Executory contracts

    0.5     0.4     0.1          

Promotion and placement fees

    6.0     1.1     2.1     1.4     1.4  

Deferred compensation and interest

    2.0     0.4     1.1     0.2     0.3  

Other payables to buyer of international business

    0.5     0.4     0.1          

Other payables to buyer of film assets

    3.3     3.3              
                       

Total Contractual Cash Obligations

  $ 1,115.4   $ 218.1   $ 209.4   $ 128.1   $ 559.8  
                       

(1)
Includes estimated future interest.

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(2)
The amounts and timing for certain of these commitments are contingent upon the future delivery date and type of programming produced, and, as such, the estimated amount and timing may change.

(3)
Contains airing windows that open subsequent to December 31, 2012. Therefore, the additional liability is not included on the balance sheet as of December 31, 2012.

        The Company owes an amount on a quarterly basis under a program license agreement that is subject to fluctuation. The Company owed $2.1 million at December 31, 2011, and $0 at December 31, 2012, under this agreement. The Company had the obligation to remit these quarterly payments through the 2011/2012 broadcast season.

Impact of Related Party Agreements

        We have entered into a number of material transactions with Hallmark Cards and certain of its subsidiaries. Payments made in connection with such agreements in place during the year ended December 31, 2012 are presented in the table below and the terms of these transactions are summarized below the table.

 
  In Thousands  
Related Party Transactions
  2010   2011   2012  

Federal Tax Sharing Agreement(1)

  $ 4,838   $ 11,926   $ 19,490  

Cash payments under Federal Tax Sharing Agreement

    12,890     10,525     21,754  

Cash payments under State Tax Sharing Agreement

        771     584  

Intercompany services agreement

    387     448     457  

Lease guarantee fees—California

    9     8     4  

Lease guarantee fees—New York

    36     30     24  

Hallmark Hall of Fame Agreements

    1,380     2,518     3,000  

hoops & yoyo

        85     87  

Jingle Pup

        750     800  

Assignment of receivables

        1,250     1,478  

Advertising by Hallmark Cards on the Networks

    496     1,437     2,990  

(1)
Any payments received from Hallmark Cards or credited against amounts owed by the Company to any member of the Hallmark Cards consolidated group under the tax sharing agreements have been recorded as additions to paid-in capital in the accompanying consolidated statements of stockholders' (deficit) equity. Any amounts owed or payments made to Hallmark Cards or to any member of the Hallmark Cards consolidated group under the tax sharing agreement in excess of current tax expense have been recorded as reductions to paid-in capital.

    Tax Sharing Agreements

        On March 11, 2003, the Company became a member of Hallmark Cards consolidated federal tax group and entered into a federal tax sharing agreement with Hallmark Cards (the "Tax Sharing Agreement"). Until the Federal Tax Deconsolidation described below, Hallmark Cards included the Company in its consolidated federal income tax return. Accordingly, Hallmark Cards benefited from past tax losses. Based on the original Tax Sharing Agreement, Hallmark Cards paid the Company all of the benefits realized by Hallmark Cards as a result of consolidation, 75% in cash on a quarterly basis and the balance when the Company became a taxpayer. Under that Tax Sharing Agreement, at Hallmark Cards' option, this 25% balance could be applied as an offset against any amounts owed by the Company to any member of the Hallmark Cards consolidated group under any loan, line of credit

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or other payable, subject to any limitations under any loan indentures or contracts restricting such offsets.

        In connection with the Recapitalization, the Tax Sharing Agreement was amended, effective as of January 1, 2010. The amendment provided, among other things, that:

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

    the Company was allowed to deduct both cash-pay and pay-in-kind, or PIK, interest due to Hallmark Cards in calculating tax-sharing payments;

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

    cancellation of indebtedness income resulting from the Recapitalization was excluded from the calculation of tax sharing payments for the 2010 tax year; and

    any amounts related to taxes owed to Hallmark Cards prior to December 31, 2009, was included in the HCC Debt.

        Hallmark Cards agreed to waive the state tax liability associated with the cancellation of debt income in those states in which Hallmark Cards files a combined return.

        Since May 9, 2000, the Company has been included in certain combined state income tax returns of Hallmark Cards or Hallmark Entertainment Holdings. Consequently, Hallmark Entertainment Holdings and the Company entered into a state tax sharing agreement. Under the state tax sharing agreement, Hallmark Cards (as successor to Hallmark Entertainment Holdings) and the Company file consolidated, combined or unitary state tax returns. The Company makes tax-sharing payments to (or receives payments from) Hallmark Cards equal to the taxes (or tax refunds) that the Company would pay (or receive) if it filed on a stand-alone basis. Such payments are computed based on the Company's taxable income (loss) and other tax items beginning the day following the May 9, 2000, reorganization.

    Federal Tax Deconsolidation

        On October 31, 2012, pursuant to an agreement dated October 29, 2012, Hallmark Cards caused 40 million shares of the Company's Common Stock to be transferred from HCC to a German subsidiary of Hallmark Cards which is not part of Hallmark Cards' consolidated federal tax group, reducing the ownership of Hallmark Cards' consolidated federal tax group from 90.3% to 79.2%. As a result of such transfer, the Company is no longer part of the Hallmark Cards' consolidated federal tax group for federal income tax purposes.

        As required pursuant to the stockholder agreement dated June 29, 2010 (the Stockholder Agreement"), the German subsidiary executed a joinder agreement thereby becoming a party to the Stockholder Agreement. As a condition of the Federal Tax Deconsolidation, the Company agreed that consistent with the terms of the Stockholder Agreement, the Company will not impede future transfers of the 40 million shares back to an affiliate of Hallmark Cards. Further, the Company agreed that if any taxing authority determines that the Federal Tax Deconsolidation did not result in the Company no longer being a member of the Hallmark Cards' consolidated federal tax group, then the Tax Sharing Agreement will be deemed to have been continuously in effect.

        The purpose of the Federal Tax Deconsolidation was to enable the Company to access $692.0 million of net operating losses incurred by the Company prior to March 11, 2003 (the "NOLs"), the date it became part of Hallmark Cards' consolidated federal tax group. Because of limitations in the Internal Revenue Code, Hallmark Cards' consolidated federal tax group was restricted in its ability

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to utilize these NOLs. As a separate company taxpayer, the Company will be limited in the use of the NOLs only by its ability to generate sufficient future taxable income.

        In September 2012, the Company obtained a private letter ruling from the Internal Revenue Service in support of its position that as a result of the Federal Tax Deconsolidation, it will no longer be part of Hallmark Cards' consolidated federal tax group and the restrictions on its ability to utilize the NOLs will no longer apply.

    Intercompany Services Agreement with Hallmark Cards

        Hallmark Cards provides Crown Media Holdings with tax, risk management, health safety, environmental, insurance, legal, treasury, human resources, cash management and real estate consulting services. In exchange, the Company is obligated to pay Hallmark Cards a fee, plus out-of-pocket expenses and third party fees, in arrears on the last business day of each quarter.

    Lease Guarantees with Hallmark Cards

        Lease Guarantee—California.    On February 24, 2010, the Company executed a letter of credit/guaranty commitment with respect to a certain lease agreement with 12700 Investments, Ltd. for the office space at 12700 Ventura Boulevard, Studio City, California. The landlord required that Crown Media United States, the entity which executed the lease, provide a letter of credit of $1.6 million securing certain obligations of Crown Media United States. Consequently, Hallmark Cards agreed to guarantee the issuer of such letter of credit against any loss thereon pursuant to the guaranty. As an inducement for Hallmark Cards to issue the guaranty, Crown Media United States agreed to pay Hallmark Cards a fee which equals 0.75% per annum of the outstanding letter of credit obligation. Additionally, in the event that Hallmark Cards is required to pay any amount under the guaranty, Crown Media United States must reimburse Hallmark Cards for any such amount plus any fees and charges associated with making such payment, any interest applicable to such amount and any costs and expenses of Hallmark Cards in connection with protecting its rights under the guaranty.

        Lease Guarantee—New York.    On September 2, 2008, Hallmark Cards issued a guaranty for the benefit of Crown Media United States, which guaranty pertains to a lease agreement with Paramount Group, Inc. for the office space at 1325 Avenue of the Americas, New York, New York. As a condition to executing the lease agreement, the landlord required Hallmark Cards to guaranty all obligations of Crown Media United States under the lease agreement. As an inducement for Hallmark Cards to issue the guaranty, Crown Media United States paid Hallmark Cards a fee which equals 0.28% per annum of the outstanding obligation under the lease agreement. Additionally, in the event that Hallmark Cards is required to pay any amount under the guaranty, Crown Media United States must reimburse Hallmark Cards for any such amount plus any fees and charges associated with making such payment, any interest applicable to such amount and any costs and expenses of Hallmark Cards in connection with protecting its rights under the guaranty.

    Hallmark Hall of Fame Agreements

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

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        In 2011 Crown Media United States entered into an additional agreement with Hallmark Hall of Fame Productions, LLC for the exclusive television license of 16 "Hallmark Hall of Fame" movies produced from 2009 through 2014, for exhibition on Hallmark Channel and Hallmark Movie Channel. These titles are licensed for ten year windows, with windows commencing at various times between 2011 and 2014, depending on availability. The total license fee for these movies is $10.0 million and is payable in equal monthly installments over the various ten-year exhibition windows.

    Hallmark Hall of Fame Production and License Agreement

        On July 6, 2011, the Company and Hallmark Cards entered into an agreement whereby Hallmark Cards will provide the Company one-week, limited play licenses for each of six new "Hallmark Hall of Fame" two-hour movies to be produced by Hallmark Cards over the two-year contract term. In exchange for approximately two-thirds of the advertising units otherwise available during each airing of the movies, Hallmark Cards will pay the Company $3.4 million of cash ratably as the individual licenses open. The Company has estimated the fair value of the program licenses to be approximately $1.0 million. The Company will recognize total advertising revenue of approximately $4.4 million as it fulfills its advertising obligation to Hallmark Cards. As of the date of this Report, four of such movies aired on Hallmark Channel.

    hoops & yoyo and Jingle Pup

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

        During the holiday season in 2011, Jingle Pup and hoops & yoyo animated specials, each of which is 30-minutes in length, aired on Hallmark Channel. The license term for Jingle Pup is from November 2011 through December 2020 and the term for hoops & yoyo is from December 2011 through December 2016. We entered into license agreements with Hallmark Cards for two new animated specials, hoops & yoyo Haunted Halloween and Jingle & Bell's Christmas Star, which aired in 2012. The license term for hoops & yoyo Haunted Halloween and Jingle & Bell's Christmas Star is from 2012 through 2016 and from 2012 through 2021, respectively.

    Stockholders Agreement

        Pursuant to the Recapitalization, the Company, Hallmark Cards and HCC entered into the Stockholders Agreement which provides for, among other things, the following.

    Standstill provisions:

        Hallmark Cards will not, and will cause its controlled affiliates not to, acquire any additional shares of Common Stock (including pursuant to a short form merger) until December 31, 2013 except:

              (i)  acquisitions that are effected with the prior approval of a special committee of the Board of Directors comprised solely of independent and disinterested directors;

             (ii)  acquisitions in connection with the conversion of Preferred Stock;

            (iii)  in the event that the Company issues additional shares of capital stock, such additional shares as are necessary to ensure that Hallmark Cards continues to hold at least the same percentage of the shares of all classes of the Company's capital stock as Hallmark Cards owned immediately prior to such issuance; and

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            (iv)  acquisitions effected between January 1, 2012 and December 31, 2013 and either (x) in connection with certain Premium Transactions (as defined below) or (y) pursuant to a tender offer by Hallmark Cards or its affiliates for all of the outstanding shares of Common Stock, provided the holders of Common Stock not affiliated with Hallmark Cards tender, in the aggregate, at least a majority of the shares of Common Stock held by all such stockholders at such time.

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

    Co-sale provisions:

        Until December 31, 2013, HCC will not sell or transfer its Common Stock to a third party except:

              (i)  to an affiliate of Hallmark Cards or pursuant to a bona fide pledge of the shares to a lender that is not an affiliate of Hallmark Cards (collectively, a "Permitted Transfer");

             (ii)  with the prior approval of a special committee of the Board of Directors comprised solely of independent and disinterested directors; or

            (iii)  after January 1, 2012 until December 31, 2013 (x) in a Premium Transaction or (y) pursuant to a public offering or block trade in which to the knowledge of HCC, no purchaser (together with its affiliates and associates) acquires beneficial ownership of a block of shares of the Company in such transaction in excess of 5% (in the case of a public offering) or 2% (in the case of any block trade) of the outstanding Common Stock.

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

    Subscription rights:

        Except as otherwise set forth below, any time the Company proposes to issue equity securities of any kind, including any warrants, options or other rights to acquire equity securities and debt securities convertible into equity securities ("Proposed Securities"), the Company will:

              (i)  give written notice setting forth in reasonable detail (w) the designation and all of the terms and provisions of the Proposed Securities, including the voting powers, preferences and relative participating, optional or other special rights, and the qualification, limitations or

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    restrictions thereof and interest rate and maturity, (x) the price and other terms of the proposed sale of such securities, (y) the amount of such securities proposed to be issued, and (z) such other information as HCC reasonably requests in order to evaluate the proposed issuance; and

             (ii)  offer to issue to HCC or its affiliate a portion of the Proposed Securities equal to a percentage (the "Fully Diluted Ownership Percentage") determined by dividing (x) the number of shares owned by HCC and its affiliates immediately prior to the issuance of the Proposed Securities by (y) the total number of shares of Common Stock then outstanding, including for purposes of this calculation all shares outstanding on a fully diluted basis.

        If the Proposed Securities are to be issued to employees of the Company or its affiliates as compensation with the approval of the Board of Directors (the 'Employee Proposed Securities"), the Company must comply with the following:

              (i)  If the Employee Proposed Securities are shares of capital stock, subject to vesting or other similar conditions ("Restricted Stock"), then HCC and, if applicable, its affiliates have the right to purchase capital stock of the same class as the Restricted Stock but which is not subject to vesting or other similar conditions. HCC or its affiliates may purchase up to the number of shares of capital stock equal to the number of shares of Restricted Stock to be issued multiplied by a fraction, the numerator of which is the Fully Diluted Ownership Percentage and the denominator of which is 100% minus the Fully Diluted Ownership Percentage. The purchase price for such securities will be the fair market value of the Restricted Stock on the date of issuance.

             (ii)  If the Employee Proposed Securities are options to acquire capital stock of the Company, then the issuance of the Proposed Securities will be deemed to occur upon the exercise of the options and not upon the issuance of the options, and HCC and, if applicable, its affiliates, will have the right to purchase, prior to the expiration of ten (10) business days after receipt of notice of such exercise from the Company, capital stock of the same class as the underlying security. HCC or its affiliates may purchase up to the number of shares of capital stock equal to the number of shares of the underlying security to be issued upon the exercise of such Employee Proposed Securities multiplied by a fraction, the numerator of which is the Fully Diluted Ownership Percentage and the denominator of which is the quantity 100% minus the Fully Diluted Ownership Percentage. The issuance price will be deemed to be the fair market value of the underlying security on the date of exercise and not the exercise price of the option or right.

        If the Proposed Securities are options or rights to acquire capital stock of the Company but are not Employee Proposed Securities, then the issuance of the Proposed Securities will be deemed to occur upon the exercise of the options or rights and not upon the issuance of the options or rights, and HCC and, if applicable, its affiliates have the right to purchase capital stock of the same class as the underlying security. HCC or its affiliates may purchase up to the number of shares of capital stock equal to the number of shares of the underlying security to be issued upon the exercise of such Proposed Securities multiplied by a fraction, the numerator of which is the Fully Diluted Ownership Percentage and the denominator of which is the quantity 100% minus the Fully Diluted Ownership Percentage. The issuance price will be deemed to be the sum of the purchase price for such options or rights, plus any additional consideration paid upon exercise of such options or rights.

        HCC and, if applicable, its affiliates, must exercise their purchase rights within ten (10) business days after receipt of such notice from the Company. Upon the expiration of the offering period, the Company will be free to sell such Proposed Securities that HCC and its affiliates have not elected to purchase during the ninety (90) days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered HCC and its affiliates. The majority of the obligations of Hallmark Cards set forth in the Stockholders Agreement will terminate upon a payment default on the New Debt, subject to a 60-day cure period. The Stockholders Agreement also terminates on the earliest of (i) such time as Hallmark Cards and its controlled affiliates cease to hold a majority of the Common Stock, (ii) such time as Hallmark Cards and its affiliates own all of the outstanding Common Stock and (iii) December 31, 2020.

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    Registration Rights Agreement

        In connection with the Recapitalization, the Company and HCC are parties to a Registration Rights Agreement (the "HCC Registration Rights Agreement") relating to the shares of Common Stock (i) issued to HCC or any joined party in connection with the Mergers, (ii) issuable to HCC upon conversion of the HCC Debt and upon conversion of the Preferred Stock, (iii) acquired by HCC pursuant to its subscription rights as set forth in the Stockholders Agreement and (iv) issued as a dividend or other distribution with respect to, or in exchange for or in replacement of the shares of Common Stock referred to in clauses (i)—(iii) (the shares described in clauses (i)—(iv) collectively, the "Registrable Securities"). The HCC Registration Rights Agreement grants (i) three demand registration rights exercisable by the holders of a majority of the Registrable Securities, (ii) three resale shelf demand rights exercisable by holders of a majority of the Registrable Securities and (iii) unlimited piggyback rights. The expenses of any of these registrations will be borne by the Company.

    Trademark Agreement with Hallmark Cards

        Crown Media United States operates under the benefit of a limited trademark license agreement with Hallmark Licensing, LLC, dated March 27, 2001, which has been extended through the earlier of (i) July 14, 2019 and (ii) the later of (x) the expiration or termination of the Credit Agreement and (y) the redemption of all of the Notes, subject to any earlier termination of such license agreement pursuant to the respective terms of such license agreement. The amended and restated Crown Media United States trademark agreement permits Crown Media United States to name its network service as the "Hallmark Channel." The agreement contains usage standards, which limit certain types of programming and programming content aired on Crown Media United States' network. Crown Media United States also has a similar trademark license agreement with Hallmark Licensing, LLC, which is effective January 1, 2004, and has been extended through the earlier of (i) July 14, 2019 and (ii) the later of (x) the expiration or termination of the Credit Agreement and (y) the redemption of all of the Notes, subject to any earlier termination of such license agreement pursuant to the respective terms of such license agreement, to permit the use of the Hallmark trademark in the name of the "Hallmark Movie Channel."

        Under the agreement, if Hallmark Cards notifies us in writing that it has determined that we have failed to comply with the usage standards set forth in the agreement or have otherwise breached our obligations under the agreement, we are required to stop activity in non-compliance within ten days of that notice or we may be in default of the agreement. We also may be in default if Hallmark Cards delivers such a written notice to us with respect to its standards three or more times in any 12-month period. In addition, there may be a default under the agreement if we fail to make any payments due under loan agreements within five days of the due date, or if we receive an opinion from our auditors that shows that we no longer are a going concern.

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

        The Company has accounted for the agreement pursuant to the contractual terms of the arrangement, which is royalty free. Accordingly, no amounts have been reflected in the consolidated balance sheets or consolidated statements of operations and of the Company.

    Certain Business Relationships and Conflicts of Interest

        Hallmark Cards, through its wholly-owned subsidiaries HCC and Hallmark Cards GmbH holds approximately 90.3% of our outstanding shares of Common Stock. Hallmark Cards' control could discourage others from initiating potential merger, takeover or other change of control transactions that

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may otherwise be beneficial to our businesses or holders of Common Stock. As a result, the market price of our Common Stock or our business could suffer.

        Hallmark Cards' control relationship with us also could give rise to conflicts of interest, including:

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

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

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

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

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

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

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

    a business opportunity offered to any person who is one of our directors but not one of our officers, and who is also a director or officer of Hallmark Cards, will belong to us if that opportunity is expressly offered to that person in his or her capacity as one of our directors, and otherwise will belong to Hallmark Cards;

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

    a corporate transaction opportunity will belong to Hallmark cards and any person who is an officer or director of us and an officer or director of Hallmark Cards shall have no duty to communicate such corporate transaction opportunity to us.

        For purposes of the policy:

    a "business opportunity" is any corporate opportunity relating to the operation of a multichannel video programming provider, other than a corporate transaction opportunity;

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    a "corporate transaction opportunity" is any corporate opportunity relating to the acquisition by a third party unaffiliated with Hallmark Cards of the Company or of all or a material portion of its equity, debt, assets or voting power; and

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

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

ITEM 7A.    Quantitative and Qualitative Disclosures about Market Risk

        When we invest, we only invest in instruments that meet high credit and quality standards, as specified in our investment policy guidelines. These instruments, like all fixed income instruments, are subject to interest rate risk. The fixed income portfolio will decline in value if interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 2012, the decline of the fair value of the fixed income portfolio would not be material.

        As of December 31, 2012, our cash balance was $43.7 million. We did not have any cash equivalents or short term investments. The primary purpose of these investing activities, when we invest, has been to preserve principal until the cash is required to fund operations. Consequently, the size of this portfolio fluctuates significantly as cash is provided by and used in our business.

        The value of certain investments in this portfolio can be impacted by the risk of adverse changes in securities and economic markets and interest rate fluctuations. For the year ended December 31, 2012, the impact of interest rate fluctuations, changed business prospects and all other factors did not have a material impact on the fair value of this portfolio, or on our income derived from this portfolio.

        We have not used derivative financial instruments for speculative purposes. As of December 31, 2012, we are not hedged or otherwise protected against risks associated with any of our investing or financing activities.

We are exposed to market risk.

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

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

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

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

        Our material interest bearing assets consisted of cash, which was $43.7 million, or 4% of total assets, as of December 31, 2012. Our material liability subject to interest rate risk consisted of our Term Loan. The balance of this liability was $187.6 million, or 27% of total liabilities, as of

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December 31, 2012. Net interest expense for the year ended December 31, 2012, was $46.1 million, 13%, of our total revenue. Our net interest expense for this liability is sensitive to changes in the general level of interest rates, primarily U.S. and LIBOR interest rates. In this regard, changes in U.S. and LIBOR ("Eurodollar") interest rates affect the fair value of interest bearing liabilities.

        Our variable rate Term Loan was subject to an interest rate floor from issuance during the year ended December 31, 2012. Accordingly, if the relevant market interest rate had been 1% greater or lower, the effect on the Term Loan's effective interest rate and resulting interest expense for the period would have been negligible.

ITEM 8.    Financial Statements and Supplementary Data

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

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

        None.

ITEM 9A.    Controls and Procedures

Disclosure Controls and Procedures

        The Company, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2012. In performing its assessment of the Company's internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of that date for purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports that the Company files under the Securities Exchange Act of 1934.

Management's Report on Internal Control over Financial Reporting

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

        Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2012, based on the criteria for effective internal control described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2012.

        This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to

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rules of the SEC that permit us to provide only management's report in this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

        There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2012, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

ITEM 9B.    Other Information

        Not applicable.


PART III

        The information required by this Part III is incorporated by reference to information in the definitive proxy statement for our 2013 annual meeting of stockholders (the "Proxy Statement") under the headings "Election of Directors," "The Board of Directors," "Corporate Governance," "Compensation Committee Report," "Compensation of Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance," "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions." We intend to file the Proxy Statement with the Securities and Exchange Commission on or prior to April 30, 2013.

ITEM 10.    Directors, Executive Officers and Corporate Governance

        The information required by this Item 10 is set forth in the Proxy Statement under the headings "Election of Directors," "Board of Directors," "Corporate Governance," and "Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated by reference herein.

ITEM 11.    Executive Compensation

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

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

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

51


Table of Contents


ITEM 13.    Certain Relationships and Related Transactions and Director Independence

        The information required by this Item 13 is set forth in the Proxy Statement under the headings "Certain Relationships and Related Transactions" and is incorporated by reference herein.

ITEM 14.    Principal Accountant Fees and Services

        The information required by this Item 14 is set forth in the Proxy Statement under the headings "Audit Committee" and is incorporated by reference herein.


PART IV

ITEM 15.    Exhibits, Financial Statement Schedules

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

(1)
Consolidated Financial Statements

Report of KPMG LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2012
Consolidated Statements of Operations for the
Years Ended December 31, 2010, 2011, and 2012
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 2010, 2011, and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31,
2010, 2011, and 2012

    (2)
    Notes to Consolidated Financial Statements

    (3)
    Exhibits

52


Table of Contents

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).

 

2.3

 

Agreement and Plan of Merger of Crown Media Holdings, Inc. and Hallmark Entertainment Investments Co., dated as of February 26, 2010 (previously filed as Exhibit 2.1 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

2.4

 

Agreement and Plan of Merger of Crown Media Holdings, Inc. and Hallmark Entertainment Holdings, Inc., dated as of February 26, 2010 (previously filed as Exhibit 2.2 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

3.1

 

Amended and Restated By-Laws of Crown Media Holdings, Inc. (previously filed as Exhibit 3.2 to our Registration Statement on Form S-1/A (Amendment No. 3), Commission File No. 333-95573, and incorporated herein by reference).

 

3.2

 

Second Amended and Restated Certificate of Incorporation of Crown Media Holdings (previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

3.3

 

Certificate of Designation, Powers, Preferences, Qualifications, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock of Crown Media Holdings, Inc. (previously filed as Exhibit 3.2 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

3.4

 

Third Amended and Restated Certificate of Incorporation of Crown Media Holdings, Inc. (previously filed as Exhibit 3.3 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

4.1

 

Form of Specimen Certificate for our Class A Common Stock (previously filed as Exhibit 4.1 to our Registration Statement on Form S-1/A (Amendment No. 1), Commission File No. 333-95573, and incorporated herein by reference).

 

4.2

 

Indenture and Form of 10.5% Note, dated July 14, 2011, by and among Crown Media Holdings, Inc., the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (previously filed as Exhibit 4.1 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.1

 

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 17, 2005, and incorporated herein by reference).

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Exhibit Number   Exhibit Title
  10.2   Amended and Restated Trademark License Agreement, dated as of March 27, 2001, by and between Hallmark Licensing, Inc. and Odyssey Holdings, LLC (now known as Crown Media United States, LLC) (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 7, 2001 (Commission File No. 000-30700 and Film No. 1623520), and incorporated herein by reference).

 

10.3

 

Trademark License Extension Agreement, dated as of November 30, 2002, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.32 to our Annual Report on Form 10-K filed on March 28, 2003 (Commission File No. 000-30700 and Film No. 03626484) and incorporated by reference herein).

 

10.4

 

Trademark License Amendment and Extension Agreement, dated as of August 28, 2003, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on November 10, 2003 (Commission File No. 000-30700 and Film No. 03988106) and incorporated by reference herein).

 

10.5

 

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).

 

10.6

 

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).

 

10.7

 

Trademark License Extension Agreement (Hallmark Channel), dated as of April 10, 2006, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC. (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed May 10, 2006, and incorporated herein by reference.)

 

10.8

 

Trademark License Extension Agreement (Hallmark Channel), dated as of August 1, 2007, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.11 to our Quarterly Report on Form 10-Q, filed August 8, 2007, and incorporated herein by reference).

 

10.9

 

Trademark License Agreement (Hallmark Channel), dated as of August 1, 2008, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated herein by reference).

 

10.10

 

Trademark License Extension Agreement (Hallmark Channel) dated August 15, 2009 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed November 5, 2009, and incorporated herein by reference).

 

10.11

 

Trademark License Extension Agreement (Hallmark Channel) dated June 29, 2010 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.13 to our Quarter Report on Form 10-Q filed on August 12, 2010, and incorporated herein by reference).

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Exhibit Number   Exhibit Title
  10.12   Trademark License Extension Agreement (Hallmark Channel) dated as of July 14, 2011 by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.13

 

Movie Channel Trademark License Agreement (Hallmark Movie Channel), dated as of January 1, 2004, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.33 to our Annual Report on Form 10-K, filed March 12, 2008, and incorporated herein by reference).

 

10.14

 

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).

 

10.15

 

Trademark License Extension Agreement (Hallmark Movie Channel), dated as of April 10, 2006, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.98 to our Annual Report on Form 10-K, filed March 8, 2007, and incorporated herein by reference).

 

10.16

 

Trademark License Extension Agreement (Hallmark Movie Channel), dated as of August 1, 2007, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed August 8, 2007, and incorporated herein by reference).

 

10.17

 

Trademark License Agreement (Hallmark Movie Channel), dated as of August 1, 2008, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated herein by reference).

 

10.18

 

Trademark License Extension Agreement (Hallmark Movie Channel) dated August 15, 2009 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed November 5, 2009, and incorporated herein by reference).

 

10.19

 

Trademark License Extension Agreement (Hallmark Movie Channel) dated June 29, 2010 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.14 to our Quarter Report on Form 10-Q filed on August 12, 2010, and incorporated herein by reference).

 

10.20

 

Trademark License Extension Agreement (Hallmark Movie Channel) dated as of July 14, 2011 by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.21

 

Trademark License Waiver Agreement (Hallmark Channel and Hallmark Movie Channel) dated March 3, 2010, by and between Hallmark Licensing Inc. and Crown Media United States, LLC. (previously filed as Exhibit 10.46 to our Annual Report on Form 10-K filed on March 4, 2010, and incorporated herein by reference).

 

10.22

 

Amended and Restated Company Agreement of Odyssey Holdings, L.L.C. (now known as Crown Media United States, LLC), dated November 13, 1998 (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).

55


Table of Contents

Exhibit Number   Exhibit Title
  10.23   Amendment to the Amended and Restated Company Agreement of Odyssey Holdings, LLC, dated March 15, 2001 (previously filed as Exhibit 10.22 to our Annual Report on Form 10-K, filed on March 29, 2002 (Commission File No. 000-30700 and Film No. 02594577) and incorporated herein by reference).

 

10.24

 

Agreement, dated as of February 22, 2001, by and among Odyssey Holdings, LLC, National Interfaith Cable Coalition, Inc. and VISN Management Corp. (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 7, 2001 (Commission File No. 000-30700 and Film No. 1623520) and incorporated herein by reference).

 

10.25

 

Agreement, dated as of March 5, 2003, by and among Odyssey Holdings, LLC, National Interfaith Cable Coalition, Inc. and VISN Management Corp. (previously filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on May 15, 2003 (Commission File No. 000-30700 and Film No. 03701984), and incorporated herein by reference).

 

10.26

 

Company Agreement for Citi TeeVee, LLC (previously filed as Exhibit 3.4 to our Registration Statement on Form S-4 filed on September 26, 2011and incorporated herein by reference).

 

10.27

 

Company Agreement for Doone City Pictures, LLC (previously filed as Exhibit 3.5 to our Registration Statement on Form S-4 filed on September 26, 2011and incorporated herein by reference).

 

10.28

 

CM Intermediary, LLC Operating Agreement (previously filed as Exhibit 3.6 to our Registration Statement on Form S-4 filed on September 26, 2011and incorporated herein by reference).

 

10.29

 

Intercompany Services Agreement, made as of December 23, 2002, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.38 to our Annual Report on Form 10-K filed on March 28, 2003 (Commission File No. 000-30700 and Film No. 03626484) and incorporated herein by reference).

 

10.30

 

Intercompany Services Extension Agreement, dated as of January 1, 2006, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.42 to our Annual Report on Form 10-K filed on March 29, 2006, and incorporated herein by reference.)

 

10.31

 

Intercompany Services Extension Agreement, dated as of January 1, 2007, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.99 to our Annual Report on Form 10-K, filed March 8, 2007, and incorporated herein by reference).

 

10.32

 

Intercompany Services Extension Agreement, dated as of January 1, 2008, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.45 to our Annual Report on Form 10-K, filed March 12, 2008, and incorporated herein by reference).

 

10.33

 

Intercompany Services Extension Agreement, dated as of January 1, 2009, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.53 to our Annual Report on Form 10-K filed March 5, 2009, and incorporated herein by reference).

56


Table of Contents

Exhibit Number   Exhibit Title
  10.34   Intercompany Services Extension Agreement, dated as of January 1, 2010, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.58 to our Annual Report on Form 10-K filed on March 4, 2010 and incorporated herein by reference).

 

10.35

 

Intercompany Services Extension Agreement, dated as of January 1, 2011, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.50 to our Annual Report on Form 10-K filed on March 3, 2011 and incorporated herein by reference.)

 

10.36

 

Intercompany Services Extension Agreement, dated as of January 1, 2012, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.36 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.37

 

Federal Income Tax Sharing Agreement, dated March 11, 2003, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.45 to our Annual Report on Form 10-K filed on March 28, 2003 (Commission File No. 000-30700 and Film No. 03626484) and incorporated by reference herein).

 

10.38

 

State Tax Sharing Agreement, dated as of May 9, 2000, by and among Hallmark Entertainment, Inc., Crown Media Holdings, Inc. and certain other parties thereto. (previously filed as Exhibit 10.38 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.39

 

Amendment No. 1 to Federal Income Tax Sharing Agreement, dated August 5, 2003, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on August 14, 2003 (Commission File No. 000-30700 and Film No. 03846439) and incorporated by reference herein).

 

10.40

 

Amendment No. 2 to Federal Income Tax Sharing Agreement between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit I to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

 

10.41

 

Stock Purchase Agreement, dated as of August 20, 2001, by and between Crown Media Holdings, Inc. and DIRECTV Enterprises, Inc. (previously filed as Exhibit 10.7.1 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

 

10.42

 

Affiliation Agreement for DBS Satellite Exhibition of Cable Network Programming, dated as of August 20, 2001, by and between Crown Media United States, LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.2 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

 

10.43

 

Affiliation Agreement for DBS Satellite Exhibition of Cable Network Programming, dated as of March 6, 2000, by and between Crown Media United States, LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.3 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

57


Table of Contents

Exhibit Number   Exhibit Title
  10.44   Letter, dated August 30, 2001, by and between DIRECTV, Inc. and Crown Media Holdings, Inc. (previously filed as Exhibit 10.7.4 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

 

10.45

*

Amended and Restated Crown Media Holdings, Inc. 2000 Long Term Incentive Plan (previously filed as Exhibit 10.13 to Our Annual Report on Form 10-K filed on March 27, 2001 (Commission File No. 000-30700 and Film No. 1580885), and incorporated herein by reference).

 

10.46

*

2008 Deferred Compensation Plan of Crown Media Holdings, Inc. (previously filed as Exhibit 10.76 to our Annual Report on Form 10-K filed March 5, 2009, and incorporated herein by reference).

 

10.47

*

Employment Agreement dated as of May 7, 2009 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on May 6, 2009 and incorporated herein by reference).

 

10.48

*

Amendment to Employment Agreement, dated May 11, 2010 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on May 13, 2010 and incorporated herein by reference).

 

10.49

*

Amendment to Employment Agreement, dated March 1, 2012 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 3, 2012 and incorporated herein by reference).

 

10.50

*

Amendment to Employment Agreement, dated June 27, 2012 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on July 27, 2012 and incorporated herein by reference).

 

10.51

*

Employment Agreement dated August 8, 2006, between Crown Media Holdings, Inc. and Charles Stanford (previously filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed August 9, 2006, and incorporated herein by reference.)

 

10.52

*

Employment Agreement Amendment dated January 29, 2008 between Crown Media Holdings, Inc. and Charles Stanford (previously filed as Exhibit 10.85 to our Annual Report on Form 10-K, filed March 12, 2008, and incorporated herein by reference).

 

10.53

*

Amendment to Employment Agreement, dated May 3, 2010 between Crown Media Holdings, Inc. and Charles Stanford (previously filed as Exhibit 10.2 to our Current Report on Form 8-K filed on May 13, 2010 and incorporated herein by reference).

 

10.54

*

Amendment to Employment Agreement, dated January 1, 2012, by and between the Company and Charles Stanford (previously filed as Exhibit 10.52 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.55

 

Purchase Agreement, dated as of October 3, 2006, by and among Crown Media Holdings, Inc., CM Intermediary, LLC, Crown Media Distribution, LLC and RHI Enterprises, LLC. (previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed on October 6, 2006, and incorporated herein by reference).

 

10.56

 

Amendment No. 1 to Purchase Agreement, dated as of December 15, 2006, by and among Crown Media Holdings, Inc., CM Intermediary, LLC, Crown Media Distribution, LLC and RHI Enterprises, LLC (previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed on December 21, 2006, and incorporated herein by reference).

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Table of Contents

Exhibit Number   Exhibit Title
  10.57 ** Television License Agreement, dated as of January 1, 2008 between Hallmark Hall of Fame Productions, Inc. and Crown Media United States, LLC.** (previously filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated herein by reference).

 

10.58

 

Lease Agreement, dated September 8, 2008, by and between Paramount Group, Inc., 1325 Avenue of the Americas, L.P., and Crown Media United States, LLC (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed November 6, 2008, and incorporated herein by reference).

 

10.59

 

Guaranty Commitment, dated as of September 2, 2008, by and between Hallmark Cards, Incorporated and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed November 6, 2008, and incorporated herein by reference).

 

10.60

*

Employment Agreement, dated as of June 15, 2009, by and between Crown Media Holdings, Inc. and Edward Georger (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q filed November 5, 2009, and incorporated herein by reference).

 

10.61

*

Employment Agreement, dated as of January 1, 2012, by and between Crown Media Holdings, Inc. and Annie Howell.

 

10.62

*

Employment Agreement, dated March 7, 2011, by and between Crown Media Holdings, Inc. and Andrew Rooke (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 5, 2011 and incorporated herein by reference).

 

10.63

*

Amendment to Employment Agreement, effective January 1, 2013 between Crown Media Holdings, Inc. and Andrew Rooke (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on January 9, 2013 and incorporated herein by reference).

 

10.64

*

Employment Agreement, dated as of January 1, 2012, by and between Crown Media Holdings, Inc. and Michelle Vicary (previously filed as Exhibit 10.60 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.65

*

Form of 2009 Long Term Incentive Compensation Agreement effective as of January 1, 2009 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 7, 2009 and incorporated herein by reference).

 

10.66

*

Form of 2010 Long Term Incentive Compensation Agreement effective as of January 1, 2010 (previously filed as Exhibit 10.82 to our Annual Report on Form 10-K, filed on March 3, 2011, and incorporated herein by reference).

 

10.67

 

Master Recapitalization Agreement by and among Hallmark Cards, Incorporated, H C Crown Corp., Hallmark Entertainment Holdings, Inc., Crown Media Holdings, Inc., Crown Media United States, LLC, and The Subsidiaries of Crown Media Holdings, Inc. Listed as Guarantors on the Credit Facility, dated as of February 26, 2010 (previously filed as Appendix A to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

 

10.68

 

Stockholders Agreement by and among H C Crown Corp., Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit D to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

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Table of Contents

Exhibit Number   Exhibit Title
  10.69   Registration Rights Agreement among H C Crown Corp., any Other HEIC Stockholder and Crown Media Holdings, Inc. (previously filed as Exhibit H to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

 

10.70

 

Amendment by letter dated March 19, 2010 to Master Recapitalization Agreement (previously filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed August 12, 2010, and incorporated herein by reference).

 

10.71

 

Credit Agreement, dated as of July 14, 2011, among Crown Media Holdings, Inc., as Borrower, the lenders named therein, and JPMorgan Chase Bank, N.A., as Administrative Agent (previously filed as Exhibit 10.2 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.72

 

Registration Rights Agreement, dated July 14, 2011, by and among Crown Media Holdings, Inc., the Guarantors named therein and J.P. Morgan Securities LLC (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.73

*

Employment Agreement, dated January 1, 2012, between Crown Media Holdings, Inc. and Susanne McAvoy (previously filed as Exhibit 10.2 1 to our Quarterly Report on Form 10-Q filed on July 27, 2012 and incorporated herein by reference).

 

10.74

 

Acknowledgment and Agreement, dated October 29, 2012, between HC Crown, LLC, Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on October 29, 2012 and incorporated herein by reference).

 

21.1

 

List of Subsidiaries.

 

23.2

 

Consent of Independent Registered Public Accounting Firm

 

31.1

 

Rule 13a-14(a) Certification executed by the Company's President and Chief Executive Officer.

 

31.2

 

Rule 13a-14(a) Certification executed by the Company's Executive Vice President and Chief Financial Officer.

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

 

XBRL Instance Document

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.PRE

 

XBRL Taxonomy Extension Definition Linkbase Document

*
Management contract or compensating plan or arrangement.

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

60


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SIGNATURES

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

    CROWN MEDIA HOLDINGS, INC.

 

 

By:

 

/s/ WILLIAM J. ABBOTT

William J. Abbott
President and Chief Executive Officer

February 22, 2013

 

 

 

 

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

Signature
 
Title
 
Date

 

 

 

 

 
/s/ WILLIAM J. ABBOTT

William J. Abbott
  Director and Principal Executive Officer   February 22, 2013

/s/ ANDREW ROOKE

Andrew Rooke

 

Principal Financial and Accounting Officer

 

February 22, 2013

/s/ DWIGHT C. ARN

Dwight C. Arn

 

Director

 

February 22, 2013

/s/ ROBERT BLOSS

Robert Bloss

 

Director

 

February 22, 2013

/s/ WILLIAM CELLA

William Cella

 

Director

 

February 22, 2013

/s/ GLENN CURTIS

Glenn Curtis

 

Director

 

February 22, 2013

/s/ STEVE DOYAL

Steve Doyal

 

Director

 

February 22, 2013

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Table of Contents

Signature
 
Title
 
Date

 

 

 

 

 
/s/ BRIAN GARDNER

Brian Gardner
  Director   February 22, 2013

/s/ HERBERT A. GRANATH

Herbert A. Granath

 

Director

 

February 22, 2013

/s/ TIMOTHY GRIFFITH

Timothy Griffith

 

Director

 

February 22, 2013

/s/ DONALD J. HALL, JR.

Donald J. Hall, Jr.

 

Director

 

February 22, 2013

/s/ A. DRUE JENNINGS

A. Drue Jennings

 

Director

 

February 22, 2013

/s/ PETER A. LUND

Peter A. Lund

 

Director

 

February 22, 2013

/s/ BRAD R. MOORE

Brad R. Moore

 

Director

 

February 22, 2013

/s/ DEANNE R. STEDEM

Deanne R. Stedem

 

Director

 

February 22, 2013

62


Table of Contents

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).

 

2.3

 

Agreement and Plan of Merger of Crown Media Holdings, Inc. and Hallmark Entertainment Investments Co., dated as of February 26, 2010 (previously filed as Exhibit 2.1 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

2.4

 

Agreement and Plan of Merger of Crown Media Holdings, Inc. and Hallmark Entertainment Holdings, Inc., dated as of February 26, 2010 (previously filed as Exhibit 2.2 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

3.1

 

Amended and Restated By-Laws of Crown Media Holdings, Inc. (previously filed as Exhibit 3.2 to our Registration Statement on Form S-1/A (Amendment No. 3), Commission File No. 333-95573, and incorporated herein by reference).

 

3.2

 

Second Amended and Restated Certificate of Incorporation of Crown Media Holdings (previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

3.3

 

Certificate of Designation, Powers, Preferences, Qualifications, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock of Crown Media Holdings, Inc. (previously filed as Exhibit 3.2 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

3.4

 

Third Amended and Restated Certificate of Incorporation of Crown Media Holdings, Inc. (previously filed as Exhibit 3.3 to our Current Report on Form 8-K filed on March 1, 2010 and incorporated herein by reference).

 

4.1

 

Form of Specimen Certificate for our Class A Common Stock (previously filed as Exhibit 4.1 to our Registration Statement on Form S-1/A (Amendment No. 1), Commission File No. 333-95573, and incorporated herein by reference).

 

4.2

 

Indenture and Form of 10.5% Note, dated July 14, 2011, by and among Crown Media Holdings, Inc., the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (previously filed as Exhibit 4.1 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.1

 

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 17, 2005, and incorporated herein by reference).

63


Table of Contents

Exhibit Number   Exhibit Title
  10.2   Amended and Restated Trademark License Agreement, dated as of March 27, 2001, by and between Hallmark Licensing, Inc. and Odyssey Holdings, LLC (now known as Crown Media United States, LLC) (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 7, 2001 (Commission File No. 000-30700 and Film No. 1623520), and incorporated herein by reference).

 

10.3

 

Trademark License Extension Agreement, dated as of November 30, 2002, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.32 to our Annual Report on Form 10-K filed on March 28, 2003 (Commission File No. 000-30700 and Film No. 03626484) and incorporated by reference herein).

 

10.4

 

Trademark License Amendment and Extension Agreement, dated as of August 28, 2003, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on November 10, 2003 (Commission File No. 000-30700 and Film No. 03988106) and incorporated by reference herein).

 

10.5

 

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).

 

10.6

 

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).

 

10.7

 

Trademark License Extension Agreement (Hallmark Channel), dated as of April 10, 2006, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC. (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed May 10, 2006, and incorporated herein by reference.)

 

10.8

 

Trademark License Extension Agreement (Hallmark Channel), dated as of August 1, 2007, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.11 to our Quarterly Report on Form 10-Q, filed August 8, 2007, and incorporated herein by reference).

 

10.9

 

Trademark License Agreement (Hallmark Channel), dated as of August 1, 2008, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated herein by reference).

 

10.10

 

Trademark License Extension Agreement (Hallmark Channel) dated August 15, 2009 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed November 5, 2009, and incorporated herein by reference).

 

10.11

 

Trademark License Extension Agreement (Hallmark Channel) dated June 29, 2010 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.13 to our Quarter Report on Form 10-Q filed on August 12, 2010, and incorporated herein by reference).

64


Table of Contents

Exhibit Number   Exhibit Title
  10.12   Trademark License Extension Agreement (Hallmark Channel) dated as of July 14, 2011 by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.13

 

Movie Channel Trademark License Agreement (Hallmark Movie Channel), dated as of January 1, 2004, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.33 to our Annual Report on Form 10-K, filed March 12, 2008, and incorporated herein by reference).

 

10.14

 

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).

 

10.15

 

Trademark License Extension Agreement (Hallmark Movie Channel), dated as of April 10, 2006, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.98 to our Annual Report on Form 10-K, filed March 8, 2007, and incorporated herein by reference).

 

10.16

 

Trademark License Extension Agreement (Hallmark Movie Channel), dated as of August 1, 2007, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed August 8, 2007, and incorporated herein by reference).

 

10.17

 

Trademark License Agreement (Hallmark Movie Channel), dated as of August 1, 2008, by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated herein by reference).

 

10.18

 

Trademark License Extension Agreement (Hallmark Movie Channel) dated August 15, 2009 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed November 5, 2009, and incorporated herein by reference).

 

10.19

 

Trademark License Extension Agreement (Hallmark Movie Channel) dated June 29, 2010 by and between Hallmark Licensing Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.14 to our Quarter Report on Form 10-Q filed on August 12, 2010, and incorporated herein by reference).

 

10.20

 

Trademark License Extension Agreement (Hallmark Movie Channel) dated as of July 14, 2011 by and between Hallmark Licensing, Inc. and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.21

 

Trademark License Waiver Agreement (Hallmark Channel and Hallmark Movie Channel) dated March 3, 2010, by and between Hallmark Licensing Inc. and Crown Media United States, LLC. (previously filed as Exhibit 10.46 to our Annual Report on Form 10-K filed on March 4, 2010, and incorporated herein by reference).

 

10.22

 

Amended and Restated Company Agreement of Odyssey Holdings, L.L.C. (now known as Crown Media United States, LLC), dated November 13, 1998 (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).

65


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Exhibit Number   Exhibit Title
  10.23   Amendment to the Amended and Restated Company Agreement of Odyssey Holdings, LLC, dated March 15, 2001 (previously filed as Exhibit 10.22 to our Annual Report on Form 10-K, filed on March 29, 2002 (Commission File No. 000-30700 and Film No. 02594577) and incorporated herein by reference).

 

10.24

 

Agreement, dated as of February 22, 2001, by and among Odyssey Holdings, LLC, National Interfaith Cable Coalition, Inc. and VISN Management Corp. (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 7, 2001 (Commission File No. 000-30700 and Film No. 1623520) and incorporated herein by reference).

 

10.25

 

Agreement, dated as of March 5, 2003, by and among Odyssey Holdings, LLC, National Interfaith Cable Coalition, Inc. and VISN Management Corp. (previously filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on May 15, 2003 (Commission File No. 000-30700 and Film No. 03701984), and incorporated herein by reference).

 

10.26

 

Company Agreement for Citi TeeVee, LLC (previously filed as Exhibit 3.4 to our Registration Statement on Form S-4 filed on September 26, 2011and incorporated herein by reference).

 

10.27

 

Company Agreement for Doone City Pictures, LLC (previously filed as Exhibit 3.5 to our Registration Statement on Form S-4 filed on September 26, 2011and incorporated herein by reference).

 

10.28

 

CM Intermediary, LLC Operating Agreement (previously filed as Exhibit 3.6 to our Registration Statement on Form S-4 filed on September 26, 2011and incorporated herein by reference).

 

10.29

 

Intercompany Services Agreement, made as of December 23, 2002, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.38 to our Annual Report on Form 10-K filed on March 28, 2003 (Commission File No. 000-30700 and Film No. 03626484) and incorporated herein by reference).

 

10.30

 

Intercompany Services Extension Agreement, dated as of January 1, 2006, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.42 to our Annual Report on Form 10-K filed on March 29, 2006, and incorporated herein by reference.)

 

10.31

 

Intercompany Services Extension Agreement, dated as of January 1, 2007, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.99 to our Annual Report on Form 10-K, filed March 8, 2007, and incorporated herein by reference).

 

10.32

 

Intercompany Services Extension Agreement, dated as of January 1, 2008, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.45 to our Annual Report on Form 10-K, filed March 12, 2008, and incorporated herein by reference).

 

10.33

 

Intercompany Services Extension Agreement, dated as of January 1, 2009, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.53 to our Annual Report on Form 10-K filed March 5, 2009, and incorporated herein by reference).

66


Table of Contents

Exhibit Number   Exhibit Title
  10.34   Intercompany Services Extension Agreement, dated as of January 1, 2010, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.58 to our Annual Report on Form 10-K filed on March 4, 2010 and incorporated herein by reference).

 

10.35

 

Intercompany Services Extension Agreement, dated as of January 1, 2011, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.50 to our Annual Report on Form 10-K filed on March 3, 2011 and incorporated herein by reference.)

 

10.36

 

Intercompany Services Extension Agreement, dated as of January 1, 2012, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.36 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.37

 

Federal Income Tax Sharing Agreement, dated March 11, 2003, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.45 to our Annual Report on Form 10-K filed on March 28, 2003 (Commission File No. 000-30700 and Film No. 03626484) and incorporated by reference herein).

 

10.38

 

State Tax Sharing Agreement, dated as of May 9, 2000, by and among Hallmark Entertainment, Inc., Crown Media Holdings, Inc. and certain other parties thereto. (previously filed as Exhibit 10.38 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.39

 

Amendment No. 1 to Federal Income Tax Sharing Agreement, dated August 5, 2003, by and between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on August 14, 2003 (Commission File No. 000-30700 and Film No. 03846439) and incorporated by reference herein).

 

10.40

 

Amendment No. 2 to Federal Income Tax Sharing Agreement between Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit I to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

 

10.41

 

Stock Purchase Agreement, dated as of August 20, 2001, by and between Crown Media Holdings, Inc. and DIRECTV Enterprises, Inc. (previously filed as Exhibit 10.7.1 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

 

10.42

 

Affiliation Agreement for DBS Satellite Exhibition of Cable Network Programming, dated as of August 20, 2001, by and between Crown Media United States, LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.2 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

 

10.43

 

Affiliation Agreement for DBS Satellite Exhibition of Cable Network Programming, dated as of March 6, 2000, by and between Crown Media United States, LLC, and DIRECTV, Inc. (previously filed as Exhibit 10.7.3 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

67


Table of Contents

Exhibit Number   Exhibit Title
  10.44   Letter, dated August 30, 2001, by and between DIRECTV, Inc. and Crown Media Holdings, Inc. (previously filed as Exhibit 10.7.4 to our Amendment No.1 to our Quarterly Report on Form 10-Q/A filed on January 10, 2002 (Commission File No. 000-30700 and Film No. 2506612) and incorporated herein by reference).

 

10.45

*

Amended and Restated Crown Media Holdings, Inc. 2000 Long Term Incentive Plan (previously filed as Exhibit 10.13 to Our Annual Report on Form 10-K filed on March 27, 2001 (Commission File No. 000-30700 and Film No. 1580885), and incorporated herein by reference).

 

10.46

*

2008 Deferred Compensation Plan of Crown Media Holdings, Inc. (previously filed as Exhibit 10.76 to our Annual Report on Form 10-K filed March 5, 2009, and incorporated herein by reference).

 

10.47

*

Employment Agreement dated as of May 7, 2009 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on May 6, 2009 and incorporated herein by reference).

 

10.48

*

Amendment to Employment Agreement, dated May 11, 2010 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on May 13, 2010 and incorporated herein by reference).

 

10.49

*

Amendment to Employment Agreement, dated March 1, 2012 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 3, 2012 and incorporated herein by reference).

 

10.50

*

Amendment to Employment Agreement, dated June 27, 2012 between Crown Media Holdings, Inc. and William Abbott (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on July 27, 2012 and incorporated herein by reference).

 

10.51

*

Employment Agreement dated August 8, 2006, between Crown Media Holdings, Inc. and Charles Stanford (previously filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed August 9, 2006, and incorporated herein by reference.)

 

10.52

*

Employment Agreement Amendment dated January 29, 2008 between Crown Media Holdings, Inc. and Charles Stanford (previously filed as Exhibit 10.85 to our Annual Report on Form 10-K, filed March 12, 2008, and incorporated herein by reference).

 

10.53

*

Amendment to Employment Agreement, dated May 3, 2010 between Crown Media Holdings, Inc. and Charles Stanford (previously filed as Exhibit 10.2 to our Current Report on Form 8-K filed on May 13, 2010 and incorporated herein by reference).

 

10.54

*

Amendment to Employment Agreement, dated January 1, 2012, by and between the Company and Charles Stanford (previously filed as Exhibit 10.52 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.55

 

Purchase Agreement, dated as of October 3, 2006, by and among Crown Media Holdings, Inc., CM Intermediary, LLC, Crown Media Distribution, LLC and RHI Enterprises, LLC. (previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed on October 6, 2006, and incorporated herein by reference).

 

10.56

 

Amendment No. 1 to Purchase Agreement, dated as of December 15, 2006, by and among Crown Media Holdings, Inc., CM Intermediary, LLC, Crown Media Distribution, LLC and RHI Enterprises, LLC (previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed on December 21, 2006, and incorporated herein by reference).

68


Table of Contents

Exhibit Number   Exhibit Title
  10.57 ** Television License Agreement, dated as of January 1, 2008 between Hallmark Hall of Fame Productions, Inc. and Crown Media United States, LLC.** (previously filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated herein by reference).

 

10.58

 

Lease Agreement, dated September 8, 2008, by and between Paramount Group, Inc., 1325 Avenue of the Americas, L.P., and Crown Media United States, LLC (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed November 6, 2008, and incorporated herein by reference).

 

10.59

 

Guaranty Commitment, dated as of September 2, 2008, by and between Hallmark Cards, Incorporated and Crown Media United States, LLC (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed November 6, 2008, and incorporated herein by reference).

 

10.60

*

Employment Agreement, dated as of June 15, 2009, by and between Crown Media Holdings, Inc. and Edward Georger (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q filed November 5, 2009, and incorporated herein by reference).

 

10.61

*

Employment Agreement, dated as of January 1, 2012, by and between Crown Media Holdings, Inc. and Annie Howell.

 

10.62

*

Employment Agreement, dated March 7, 2011, by and between Crown Media Holdings, Inc. and Andrew Rooke (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 5, 2011 and incorporated herein by reference).

 

10.63

*

Amendment to Employment Agreement, effective January 1, 2013 between Crown Media Holdings, Inc. and Andrew Rooke (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on January 9, 2013 and incorporated herein by reference).

 

10.64

*

Employment Agreement, dated as of January 1, 2012, by and between Crown Media Holdings, Inc. and Michelle Vicary (previously filed as Exhibit 10.60 to our Annual Report on Form 10-K filed on March 1, 2012 and incorporated by reference herein).

 

10.65

*

Form of 2009 Long Term Incentive Compensation Agreement effective as of January 1, 2009 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 7, 2009 and incorporated herein by reference).

 

10.66

*

Form of 2010 Long Term Incentive Compensation Agreement effective as of January 1, 2010 (previously filed as Exhibit 10.82 to our Annual Report on Form 10-K, filed on March 3, 2011, and incorporated herein by reference).

 

10.67

 

Master Recapitalization Agreement by and among Hallmark Cards, Incorporated, H C Crown Corp., Hallmark Entertainment Holdings, Inc., Crown Media Holdings, Inc., Crown Media United States, LLC, and The Subsidiaries of Crown Media Holdings, Inc. Listed as Guarantors on the Credit Facility, dated as of February 26, 2010 (previously filed as Appendix A to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

 

10.68

 

Stockholders Agreement by and among H C Crown Corp., Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit D to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

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Exhibit Number   Exhibit Title
  10.69   Registration Rights Agreement among H C Crown Corp., any Other HEIC Stockholder and Crown Media Holdings, Inc. (previously filed as Exhibit H to our Schedule 14C Information Statement filed on May 21, 2010 and incorporated herein by reference).

 

10.70

 

Amendment by letter dated March 19, 2010 to Master Recapitalization Agreement (previously filed as Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed August 12, 2010, and incorporated herein by reference).

 

10.71

 

Credit Agreement, dated as of July 14, 2011, among Crown Media Holdings, Inc., as Borrower, the lenders named therein, and JPMorgan Chase Bank, N.A., as Administrative Agent (previously filed as Exhibit 10.2 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.72

 

Registration Rights Agreement, dated July 14, 2011, by and among Crown Media Holdings, Inc., the Guarantors named therein and J.P. Morgan Securities LLC (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on July 14, 2011, and incorporated herein by reference).

 

10.73

*

Employment Agreement, dated January 1, 2012, between Crown Media Holdings, Inc. and Susanne McAvoy (previously filed as Exhibit 10.2 1 to our Quarterly Report on Form 10-Q filed on July 27, 2012 and incorporated herein by reference).

 

10.74

 

Acknowledgment and Agreement, dated October 29, 2012, between HC Crown, LLC, Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed on October 29, 2012 and incorporated herein by reference).

 

21.1

 

List of Subsidiaries.

 

23.2

 

Consent of Independent Registered Public Accounting Firm

 

31.1

 

Rule 13a-14(a) Certification executed by the Company's President and Chief Executive Officer.

 

31.2

 

Rule 13a-14(a) Certification executed by the Company's Executive Vice President and Chief Financial Officer.

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

 

XBRL Instance Document

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.PRE

 

XBRL Taxonomy Extension Definition Linkbase Document

*
Management contract or compensating plan or arrangement.

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

70


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1


Table of Contents

(This page intentionally left blank)

F-2


Table of Contents


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Crown Media Holdings, Inc.:

        We have audited the accompanying consolidated balance sheets of Crown Media Holdings, Inc. and subsidiaries (the Company) as of December 31, 2011 and 2012, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crown Media Holdings, Inc. and subsidiaries as of December 31, 2011 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

    /s/ KPMG LLP

Denver, Colorado
February 22, 2013

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and number of shares)

 
  As of December 31,  
 
  2011   2012  

ASSETS

             

Cash and cash equivalents

  $ 35,181   $ 43,705  

Accounts receivable, less allowance for doubtful accounts of $181 and $245, respectively

    83,798     92,062  

Programming rights

    98,158     85,946  

Prepaid programming rights

    11,533     13,820  

Deferred tax assets, net

    14,200     34,200  

Prepaid and other assets

    1,174     2,326  
           

Total current assets

    244,044     272,059  

Programming rights

   
154,428
   
174,971
 

Prepaid programming rights

        13,748  

Property and equipment, net

    11,236     10,455  

Deferred tax assets, net

    221,800     225,149  

Debt issuance costs, net

    11,711     10,421  

Prepaid and other assets

    1,217     3,826  

Goodwill

    314,033     314,033  
           

Total assets

  $ 958,469   $ 1,024,662  
           

   

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

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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,  
 
  2011   2012  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

LIABILITIES:

             

Accounts payable and accrued liabilities

  $ 15,391   $ 25,801  

Audience deficiency reserve liability

    10,256     5,679  

Programming rights payable

    135,768     112,503  

Payables to Hallmark Cards affiliates

    4,051     1,239  

Interest payable

    17,135     14,468  

Current maturities of long-term debt

    19,600     19,600  
           

Total current liabilities

    202,201     179,290  

Accrued liabilities

   
16,667
   
15,852
 

Programming rights payable

    8,737     30,121  

Long-term debt, net of current maturities

    487,368     468,040  
           

Total liabilities

    714,973     693,303  

COMMITMENTS AND CONTINGENCIES

             

STOCKHOLDERS' EQUITY:

             

Class A common stock, $.01 par value; 500,000,000 shares authorized; 359,675,936 shares issued and outstanding as of both December 31, 2011 and 2012

    3,597     3,597  

Paid-in capital

    2,082,241     2,062,751  

Accumulated deficit

    (1,842,342 )   (1,734,989 )
           

Total stockholders' equity

    243,496     331,359  
           

Total liabilities and stockholders' equity

  $ 958,469   $ 1,024,662  
           

   

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 
  Years Ended December 31,  
 
  2010   2011   2012  

Revenue:

                   

Advertising

  $ 217,656   $ 249,888   $ 268,252  

Advertising by Hallmark Cards

    496     1,437     2,990  

Subscriber fees

    68,819     71,668     78,005  

Other revenue (including $0, $0 and $161 from Hallmark Cards for 2010, 2011 and 2012)

    301     368     623  
               

Total revenue, net

    287,272     323,361     349,870  

Cost of Services:

                   

Programming costs

                   

Non-affiliates

    123,321     134,742     131,186  

Hallmark Cards affiliates

    1,928     2,040     3,363  

Amortization of capital lease

    1,158     1,158     1,158  

Contract termination expense

    103          

Other costs of services

    10,668     11,108     12,546  
               

Total cost of services

    137,178     149,048     148,253  

Selling, general and administrative expense (exclusive of depreciation and amortization expense shown separately below)

    50,324     54,224     59,156  

Marketing expense

    10,152     9,816     10,179  

Depreciation and amortization expense

    1,459     1,455     1,477  

Gain from extinguishment of indemnification

        (1,246 )    

Gain from sale of film assets

    (719 )        
               

Income from operations before interest, income tax expense and discontinued operations

    88,878     110,064     130,805  

Interest income

    45          

Interest expense

    (56,032 )   (25,857 )   (46,056 )
               

Income before income tax expense and discontinued operations

    32,891     84,207     84,749  

Income tax (expense) benefit

    (8,810 )   234,589     22,604  
               

Income before discontinued operations

    24,081     318,796     107,353  

Gain from sale of discontinued operations, net of tax

        189      
               

Net income and comprehensive income

    24,081     318,985     107,353  

Income allocable to Preferred Stockholder

    (16,297 )   (69,974 )    
               

Net income attributable to common stockholders

  $ 7,784   $ 249,011   $ 107,353  
               

Weighted average number of common shares outstanding, basic and diluted

    234,676     359,676     359,676  
               

Income per share before discontinued operations, net of income allocable to Preferred Stockholder, basic and diluted

  $ 0.03   $ 0.69   $ 0.30  

Gain per share from discontinued operations, basic and diluted

             
               

Net income per common share, basic and diluted

  $ 0.03   $ 0.69   $ 0.30  
               

   

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

(In thousands)

 
  Class A
Shares
  Class A
Common
Stock
  Class B
Shares
  Class B
Common
Stock
  Paid-in
Capital
  Accumulated
Deficit
  Total
Stockholders'
(Deficit)
Equity
 

Balances, December 31, 2009

    74,118   $ 741     30,670   $ 307   $ 1,456,788   $ (2,155,866 ) $ (698,030 )

Conversion of HCC debt into equity

    254,888     2,549             539,207         541,756  

Conversion of predecessor Class B common stock into Class A common stock

    30,670     307     (30,670 )   (307 )            

Reduction of additional paid-in capital for obligation under tax sharing agreement

                    (4,838 )       (4,838 )

Imputed Preferred Stock dividends from amortization of discount on Preferred Stock

                        (13,934 )   (13,934 )

Net income

                        24,081     24,081  
                               

Balances, December 31, 2010

    359,676     3,597             1,991,157     (2,145,719 )   (150,965 )

Reduction of additional paid-in capital for obligation under tax sharing agreement

                    (11,926 )       (11,926 )

Imputed Preferred Stock dividends from amortization of discount on Preferred Stock

                        (1,771 )   (1,771 )

Preferred Stock dividends paid

                        (13,837 )   (13,837 )

Additional paid-in capital from early extinguishment of debt

                    87,305         87,305  

Additional paid-in capital from redemption of Preferred Stock

                    15,705         15,705  

Net income

                        318,985     318,985  
                               

Balances, December 31, 2011

    359,676     3,597             2,082,241     (1,842,342 )   243,496  

Reduction of additional paid-in capital for obligation under tax sharing agreement

                    (19,490 )       (19,490 )

Net income

                        107,353     107,353  
                               

Balances, December 31, 2012

    359,676   $ 3,597       $   $ 2,062,751   $ (1,734,989 ) $ 331,359  
                               

   

The accompanying notes are an integral part of these consolidated statements of stockholders'
(deficit) equity.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
  Years Ended December 31,  
 
  2010   2011   2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

                   

Net income

  $ 24,081   $ 318,985   $ 107,353  

Adjustments to reconcile net income to net cash

                   

provided by operating activities:

                   

Gain from extinguishment of indemnification

        (1,246 )    

Gain from sale of discontinued operations

        (189 )    

Gain from sale of film assets

    (719 )        

Depreciation and amortization

    123,374     130,079     133,171  

Accretion on company obligated mandatorily redeemable preferred interest

    2,098          

Provision for allowance for doubtful accounts

    183     454     39  

Loss on sale of property and equipment

    2          

Debt issuance costs

    1,049          

Income tax expense (benefit)

    8,810     (234,589 )   (22,604 )

Stock-based compensation

    324     67     237  

Changes in operating assets and liabilities:

                   

Increase in accounts receivable

    (9,050 )   (6,568 )   (8,303 )

Additions to programming rights

    (69,460 )   (140,464 )   (131,964 )

Increase in prepaid and other assets

    (4,212 )   (9,654 )   (25,479 )

Increase (decrease) in accounts payable, accrued and other liabilities

    13,582     (28,766 )   5,722  

Increase (decrease) in interest payable

    33,909     17,266     (2,831 )

Decrease in amounts payable to Hallmark Cards affiliates

    (12,588 )   (12,842 )   (23,628 )

(Decrease) increase in programming rights payable

    (44,272 )   8,949     (1,033 )
               

Net cash provided by operating activities

    67,111     41,482     30,680  
               

CASH FLOWS FROM INVESTING ACTIVITIES:

                   

Purchases of property and equipment

    (1,086 )   (957 )   (1,376 )

Payments to buyer of international business

    (961 )   (188 )    
               

Net cash used in investing activities

    (2,047 )   (1,145 )   (1,376 )
               

CASH FLOWS FROM FINANCING ACTIVITIES:

                   

Principal payments on the credit facility

    (1,000 )        

Payments on notes payable to HCC

    (14,445 )   (330,390 )    

Redemption of Preferred Stock

        (185,000 )    

Dividends paid to Preferred Stockholder

        (13,837 )    

Issuance of the Notes

        300,000      

Issuance of the Term Loan, net of original issue discount

        207,900      

Principal payments on the Term Loan

        (1,050 )   (19,600 )

Redemption of company obligated mandatorily redeemable preferred interest

    (25,000 )        

Payments of transaction costs

    (3,596 )   (12,270 )    

Principal payments on capital lease obligations

    (914 )   (1,074 )   (1,180 )
               

Net cash used in financing activities

    (44,955 )   (35,721 )   (20,780 )
               

Net increase in cash and cash equivalents

    20,109     4,616     8,524  

Cash and cash equivalents, beginning of year

    10,456     30,565     35,181  
               

Cash and cash equivalents, end of year

  $ 30,565   $ 35,181   $ 43,705  
               

   

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

 
  Years Ended December 31,  
 
  2010   2011   2012  

Supplemental disclosure of cash and non-cash activities:

                   

Interest paid

  $ 17,005   $ 5,951   $ 46,909  

Reduction of additional paid-in capital for obligation under tax sharing agreement

  $ 4,838   $ 11,926   $ 19,490  

Additional paid-in capital from early extinguishment of debt

  $   $ 87,305   $  

Additional paid-in capital from redemption of Preferred Stock

  $   $ 15,705   $  

Assets acquired through capital lease obligations

  $ 248   $ 63   $ 25  

Non-cash activities related to the troubled debt restructuring:

                   

Elimination of deferred debt issuance costs related to old notes payable to HCC

  $ 475   $   $  

Satisfaction of payable to Hallmark Cards' affiliates

  $ (23,798 ) $   $  

Issuance of new notes payable to HCC

  $ 432,140   $   $  

Satisfaction of old notes payable to HCC

  $ (340,697 ) $   $  

Satisfaction of senior secured note payable to HCC, including accrued interest

  $ (797,423 ) $   $  

Issuance of redeemable Preferred Stock

  $ 185,000   $   $  

Issuance of common stock

  $ 2,549   $   $  

Additional paid-in capital from issuance of redeemable Preferred and common stock

  $ 541,754   $   $  

   

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

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2010, 2011 and 2012

1. Business and Organization

        Crown Media Holdings, Inc. ("Crown Media Holdings" or the "Company"), through its wholly-owned subsidiary Crown Media United States, owns and operates pay television networks (collectively, the "Networks" or the "networks") dedicated to high quality, entertainment programming for adults and families, in the United States. Significant investors in the Company are H C Crown, LLC ("HCC"), a subsidiary of Hallmark Cards, Incorporated ("Hallmark Cards") and Hallmark Cards GmbH, a German subsidiary of Hallmark Cards.

        The Company's continuing operations are currently organized into one operating segment, the Networks.

        On June 29, 2010, the Company consummated a series of recapitalization transactions in which approximately $1.2 billion owed to HCC and Hallmark Cards was extinguished upon issuance of (i) the $200.0 million Term A Loan (the "Term A Loan"), the $115.0 million Term B Loan (the "Term B Loan") and 185,000 shares of the Company's Series A Convertible Preferred Stock ("Preferred Stock") in the aggregate face amount of $185 million and (ii) Common Stock (collectively, the "Recapitalization"). On July 14, 2011 the Company used the proceeds from a new $210.0 million senior secured term loan (the "Term Loan") and $300.0 million of senior unsecured notes (the "Notes") to repay the Term A Loan and the Term B Loan and redeem all of the outstanding Preferred Stock (collectively, the "2011 Refinancing"). All of these instruments are described further below.

2. Summary of Significant Accounting Policies and Estimates

Basis of Presentation

        The consolidated financial statements include the accounts of Crown Media Holdings and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

        The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Such estimates include the collectibility of accounts receivable, the valuation of goodwill, intangible assets and other long-lived assets, the net realizable value of programming rights, legal contingencies, indemnifications, barter transactions, audience deficiency liability and assumptions used in the calculation of income taxes and related valuation allowance, among others. A significant non-recurring use of estimates occurred in the course of recording the Company's June 2010 troubled debt restructuring which required that the Company estimate the fair values of Preferred Stock and common stock issued in the Recapitalization.

        All of the estimates that are employed are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, and declines in consumer

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

2. Summary of Significant Accounting Policies and Estimates (Continued)

spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash and Cash Equivalents

        Cash and cash equivalents include highly liquid investments with original maturities of three months or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the carrying amount of cash and cash equivalents approximates fair value.

Allowance for Doubtful Accounts

        The allowance for doubtful accounts is based upon the Company's assessment of probable loss related to uncollectible accounts receivable. The Company uses a number of factors in determining the allowance, including, among other things, collection trends.

        The activity in the allowance for doubtful accounts for each of the three years ended December 31, 2010, 2011, and 2012, is as follows (in thousands):

 
  Balance at
Beginning of
Year
  Additions
Charged to
Expense
  (Deductions) /
Additions
  Balance at
End of Year
 

Allowance for doubtful accounts

                         

Year-ended December 31, 2010

  $ 476   $ 183   $ (518 ) $ 141  

Year-ended December 31, 2011

  $ 141   $ 454   $ (414 ) $ 181  

Year-ended December 31, 2012

  $ 181   $ 39   $ 25   $ 245  

Programming Rights

        Programming rights principally consist of rights to off-network, theatrical and original movies; off-network and original scripted series; original unscripted series and specials. Original series and specials consist of lifestyle, dramatic and other entertainment programming. Programming aired on the Company's television Networks is primarily obtained from third-party production companies and distributors and is classified as acquired or original programming in the footnotes to these financial statements. Programming aired on the Company's television Networks obtained from subsidiaries of Hallmark Cards is classified as affiliate programming.

        Acquired programming consists of series, films and specials that have been previously produced and have often been previously exhibited by third parties for which the Company licenses limited broadcast rights for a specific time period. The licensed exhibitions can vary from a single broadcast to multiple broadcasts over several years, and the license typically requires payments during the term of the license. The cost of acquired programming is capitalized when the license period begins and the program is available for use. Original programming consists of movies, series and specials that are specifically produced for the Company's television Networks. The Company often funds the production

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

2. Summary of Significant Accounting Policies and Estimates (Continued)

of original programs prior to completion of production and initial broadcast; these payments are classified as prepaid programming rights until the program is available for use.

        Capitalized programming costs are stated at the lower of cost less accumulated amortization or net realizable value (fair value for owned programming). Amortization of programming rights is recognized over the contractual term on a straight-line basis or the estimated useful life, if shorter. Amortization of the capitalized costs of licensed programming commences when the license period begins and the program is available for use. Amortization of the capitalized costs of owned programming is amortized over the expected and likely broadcasts of the program. The portion of the unamortized programming rights that will be amortized within one year is classified as current programming rights on the condensed consolidated balance sheets. Although the Company estimates that all of the unamortized owned programming will be amortized within the next twelve months, it is classified as long-term programming rights on the condensed consolidated balance sheets in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "ASC") Topic 926, Entertainment—Films.

        The Company periodically evaluates the net realizable value of its programming rights by considering expected future revenue generation. Estimates of future revenue consider historical airing patterns and future plans for airing programming, including any changes in strategy. Estimated future revenue may differ from actual revenue based on changes in expectations related to market acceptance, advertising demand, the number of cable and satellite television subscribers receiving the Company's Networks, program usage and actual performance of the Company's programming. Accordingly, the Company continually reviews revenue estimates and planned usage and revises its assumptions if necessary. Given the significant estimates and judgments involved, actual demand or market conditions may be less favorable than those projected, requiring a write-down to net realizable value.

Property and Equipment

        Property and equipment is stated at historical cost, net of accumulated depreciation and amortization. Equipment under capital leases is initially recorded at the present value of the respective minimum lease payments.

        Depreciation on equipment is calculated using the straight-line method over the estimated useful lives of the assets. Equipment held under capital leases and leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset.

        When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. The costs of normal maintenance and repairs are charged to expense when incurred.

Long-Lived Assets

        The Company reviews long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. Recoverability of assets to be held and used is evaluated by comparing the carrying amount of an asset to the estimated undiscounted future net cash flows

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

2. Summary of Significant Accounting Policies and Estimates (Continued)

expected to be generated by the asset including its ultimate disposal. If the asset's carrying value was estimated to be not recoverable from future cash flows, an impairment charge would be recognized for the amount by which the carrying amount of the asset exceeds its fair value. The Company estimates fair values by using a combination of comparable market values and discounted cash flows, as appropriate.

        In September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Testing for Goodwill Impairment (Topic 350), (ASU 2011-08). ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test.

        Goodwill is reviewed for impairment annually as of November 30 and whenever the occurrence of an event or a change in circumstances would suggest that the carrying value of goodwill might be in excess of its fair value. All of the Company's goodwill relates to the Company's Networks, which is also the Company's only reporting unit. At November 30, 2012, the date of the Company's most recent assessment, the Company concluded that goodwill was not impaired.

Legal Costs and Contingencies

        In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company expenses these costs as the related services are received.

        If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. If the Company has the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss if recovery is also deemed probable.

Leases

        The Company recognizes rent expense on a straight line basis over the lease term.

        Assets subject to capital leases are capitalized as property and equipment at the inception of the lease. Capitalized lease assets are depreciated over their estimated useful lives; the related liabilities are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.

Barter Transactions

        The Company enters into transactions that involve the exchange of its on-air advertising spots, in part, for other products and services, such as programming rights. Programming rights and the related deferred advertising revenue that result from such transactions are recognized at the estimated fair value when the programming is available for telecast. Barter programming rights are amortized in the same manner as non-barter programming rights and advertising revenue is recognized when delivered.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

2. Summary of Significant Accounting Policies and Estimates (Continued)

The Company recognized $70,000, $258,000 and $794,000 in barter advertising revenue during the years ended December 31, 2010, 2011 and 2012, respectively.

Fair Value of Financial Instruments

        ASC Topic 820, Fair Value Measurements and Disclosures, provides guidance which defines fair value, establishes a framework for measuring fair value and specifies disclosures about fair value measurements. We determine fair value as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

        The Company does not have balance sheet items measured at fair value on a recurring basis. Significant balance sheet items which are subject to non-recurring fair value measurements consist of impairment valuations of goodwill, promotion and placement fees, property and equipment and owned programming. In the course of recording the Company's June 2010 troubled debt restructuring, the Company estimated the fair values of its preferred and common stock issued in the Recapitalization.

Revenue Recognition

        Subscriber revenue from pay television distributors is recognized as revenue when an agreement is executed, programming is provided, the price is fixed and determinable, and collectibility is reasonably assured. Subscriber fees from pay television distributors are recorded net of amortization of promotion and placement costs.

        Advertising revenue, net of agency commissions, is recognized in the period in which related commercial spots are aired and as ratings guarantees to advertisers are achieved. Agency commissions are calculated based on a stated percentage applied to gross billing revenue for the Company's broadcasting operations. Customers remit the gross billing amount to their agency and the agency remits gross billings less their commission to the Company. Payments received in advance of being earned are recorded as deferred revenue. Included in accounts payable and accrued liabilities as of December 31, 2011 and 2012, is $75,000 and $1.7 million, respectively, of deferred revenue.

Audience Deficiency Unit Liability

        Audience deficiency units ("ADUs") are units of inventory (rights to utilize future advertising timeframes) that are made available to advertisers as fulfillment for past advertisements in programs that under-delivered on the guaranteed viewership ratings. The related liability results when impressions delivered on guaranteed ratings are less than the impressions guaranteed to advertisers. The liability is reduced and revenue is recognized when the Company airs the advertisement during another program to "make-good" on the under-delivery of impressions or the obligation expires contractually.

Marketing Expense

        The Company expenses marketing costs as incurred.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

2. Summary of Significant Accounting Policies and Estimates (Continued)

Taxes on Income

        Income tax expense or benefit comprises (i) amounts estimated to be payable or receivable with respect to the Company's income or loss for the period pursuant to the statutory provisions of the various federal, state and local jurisdictions to which the Company is subject and (ii) the reported changes in deferred tax assets and liabilities during the period.

        The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities, including related operating loss and tax credit carryforwards, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

        Net deferred tax assets are recognized to the extent that management believes these assets will more likely than not be realized. In making such determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event management subsequently determines that the Company would likely be able to realize deferred income tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded with a corresponding reduction in the provision for income taxes.

        Management periodically evaluates the sustainability of tax positions taken. Whenever management estimates the probability of sustaining a tax position is at least more likely than not (i.e., greater than 50%), the tax position is deemed warranted and is recognized at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized as income tax expense.

Stock-Based Compensation

        Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the period during which the holder is required to provide services in exchange for the award, i.e., usually the vesting period. See Note 14 for further information regarding our stock-based compensation assumptions and expenses.

Net Income per Share

        Basic net income per share for each period is computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding during the period. Diluted net income per share for each period is computed by dividing net income attributable to common stock by the weighted average number of common shares plus potentially dilutive common shares outstanding except whenever any such effect would be antidilutive. Potential common shares consist of incremental common shares issuable upon the exercise of stock options and common shares issuable upon conversion of the Company's Preferred Stock. Approximately 87,000, 44,000 and 9,000 stock options for the years ended December 31, 2010, 2011 and 2012, respectively, and 71.2 million

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

2. Summary of Significant Accounting Policies and Estimates (Continued)

shares upon the conversion of the Preferred Stock for the years ended December 31, 2010 and 2011, have been excluded from the determination of diluted net income or loss per share because the individual effect in each instance was antidilutive.

        Net income attributable to common stockholders for 2010 and 2011, reflects the following allocations, stated respectively, in favor of Preferred Stockholders: (i) imputed Preferred Stock dividends for financial reporting purposes of $13.9 million and $1.8 million, (ii) cumulative Preferred Stock dividends of $0 and $13.8 million, and (iii) the potential participation in common stock dividends (equivalent to approximately 71.2 million shares of common stock) of $2.4 million and $54.4 million.

Concentration of Credit Risk

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

        Four, five and five of the Company's distributors each accounted for more than 10% of subscriber revenue for the years ended December 31, 2010, 2011 and 2012, respectively, and together accounted for a total of 66%, 83% and 86% of subscriber revenue during the years ended December 31, 2010, 2011 and 2012, respectively. Three, two and two of our distributors each accounted for approximately 15% or more of the Company's subscribers for the years ended December 31, 2010, 2011 and 2012, respectively, and together accounted for 60%, 46% and 44% of Hallmark Channel subscribers during the years ended December 31, 2010, 2011 and 2012, respectively. The loss of one of these distributors could have a significant impact on the Company's operations.

        Three of the Company's programming content providers each accounted for more than 10% of total programming rights payable as of both December 31, 2011 and 2012, and together accounted for a total of 56% and 53% of the programming rights payable, respectively.

Recently Issued Accounting Pronouncements

        In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in equity. Under either choice, items that are reclassified from other comprehensive income to net income are required to be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. This amendment was effective for the Company in 2012 and has been applied retrospectively. This amendment did not change the manner in which the Company presents comprehensive income, as the Company did not have comprehensive income during the periods presented.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

3. Sale of Membership Interest in Crown Media Distribution, Residual and Participation Liability and Third Party Indemnity

        In December 2006, the Company sold its film library consisting of domestic rights and certain international ancillary rights to approximately 620 television movies, mini-series and series (the "Crown Library") to RHI Entertainment LLC ("RHI"). As a condition of the sale, the Company agreed to pay up to $22.5 million for residuals and profit participations related to RHI's domestic exploitation of the Crown Library for a ten-year period ending December 14, 2016. The Company estimated the fair value of this obligation to be approximately $10.6 million at December 15, 2006, assuming the maximum payout.

        In July 2010, the Company received notification of pending requests for payments of approximately $8.0 million related to exploitation of the Crown Library through mid-2010. Accordingly, the Company increased the carrying amount of the liability by $155,000 and recognized a corresponding loss from sale of film assets in the second quarter of 2010. During the fourth quarter of 2010, the Company received requests for payments of an additional $2.0 million and expected to pay the total amount of approximately $10.0 million in March 2011. Notwithstanding the acceleration of payments ahead of the Company's prior expectations, in December 2010 management revised its estimated payment stream because of ongoing operating and financial difficulties being experienced by RHI, including reorganization in bankruptcy. As of December 31, 2010, management believed that fulfillment of its indemnification obligation would occur over a period longer than previously estimated. Accordingly, in the fourth quarter of 2010, the Company decreased the carrying amount of the liability by $874,000 and recognized a corresponding gain from sale of film assets in the accompanying statement of operations. The $14.2 million carrying amount of this liability as of December 31, 2010, was included in accrued liabilities on the accompanying consolidated balance sheet.

        In December 2011 the Company and RHI executed an agreement pursuant to which the Company acquired program licenses and was relieved of its remaining obligation under the indemnification agreement, all in exchange for concurrent and future fixed cash payments of $8.1 million. The programming rights assets were recorded at their estimated fair values of approximately $3.8 million with corresponding recognition of programming rights payable. The remainder of the payment obligations was recorded at its estimated fair value of approximately $4.1 million. The carrying amounts of this liability as of December 31, 2011 and 2012, were $3.5 million and $3.2 million, respectively, and are included among accrued liabilities in the accompanying consolidated balance sheets. Extinguishment of the indemnification obligation resulted in a gain of approximately $1.2 million which was reflected in the accompanying statement of operations for the year ended December 31, 2011.

        Accounts payable and accrued liabilities as of December 31, 2011 and 2012, also includes $406,000 and $420,000, respectively, for the estimated cost of residuals and participations that the buyer of our international business (which included the international rights to our film library) would otherwise be obligated to pay to third parties in connection with international film library sales between the April 2005 sale and April 2015. The Company's actual cost of this obligation will depend on the actual internal usage or sales of these films by the buyer.

        In both December 2011 and 2012, the Company concluded that payments for residuals and participations under its liability to the buyer of the international business would occur generally later than estimated. Accordingly, the Company reduced the carrying amount of the liability by $57,000 and $38,000, respectively, and recognized a corresponding decrease in interest expense in the accompanying

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

3. Sale of Membership Interest in Crown Media Distribution, Residual and Participation Liability and Third Party Indemnity (Continued)

statements of operations. Additionally, in 2011, the Company concluded that certain other estimated liabilities no longer represented obligations for cash payments. Accordingly, the Company reduced the carrying amount of the liability by $189,000 and recognized a corresponding gain from the sale of discontinued operations in the accompanying statement of operations.

4. Programming Rights

        Programming rights are comprised of the following:

 
  As of December 31,  
 
  2011   2012  
 
  (In thousands)
 

Programming rights—non-affiliates

             

Acquired programming

             

Licensed for less than 12 years

  $ 402,805   $ 294,272  

Original programming

             

Licensed for less than 12 years

    147,110     169,176  

Licensed for 12 years or longer

        4,440  

Owned

    1,622     5,772  

Programming rights—Hallmark Cards affiliates

             

Licensed for less than 12 years

    16,500     22,549  
           

Programming rights, at cost

    568,037     496,209  

Accumulated amortization

    (315,451 )   (235,292 )
           

Programming rights available for broadcast

    252,586     260,917  

Owned programming in development

         
           

Programming rights, net

  $ 252,586   $ 260,917  
           

        Programming costs included in the accompanying consolidated statements of operations for the years ended December 31, 2010, 2011 and 2012, were $125.2 million, $136.8 million and $134.5 million, respectively.

        In the regular course of evaluating the remaining usefulness of its various program licenses, the Company may determine that certain licenses may be of little future programming value. In such instances, the Company shortens the estimated remaining lives to zero, thereby accelerating amortization of the remaining net book values. During the years ended December 31, 2010, 2011 and 2012, such changes in estimates resulted in additional amortization of programming rights of $227,000, $600,000, and $4.0 million, respectively. Additionally, the Company evaluated the remaining usefulness of its owned programming and recognized $1.3 million of impairment expense during the year ended December 31, 2012. This expense is included as a component of non-affiliate programming costs in the accompanying consolidated statement of operations. The Company expects that the carrying amount of owned programming as of December 31, 2012, $807,000, will be fully amortized during the year ended December 31, 2013.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

4. Programming Rights (Continued)

        At December 31, 2011 and 2012, $11.5 million and $27.6 million, respectively, of programming rights were included in prepaid programming rights on the accompanying consolidated balance sheets. The various license periods associated with such amounts had not commenced as of the respective balance sheet dates.

        Programming rights payable are comprised of the following:

 
  As of December 31,  
 
  2011   2012  
 
  (In thousands)
 

Programming rights payable—non-affiliates

             

Acquired programming

  $ 114,989   $ 102,367  

Original programming

    18,223     25,085  

Programming rights payable—Hallmark Cards affiliates

    11,293     15,172  
           

Total programming rights payable

    144,505     142,624  

Less current maturities

    (135,768 )   (112,503 )
           

Long-term programming rights payable

  $ 8,737   $ 30,121  
           

        Under certain license agreements with RHI Entertainment Distribution, LLC ("RHIED," a subsidiary of RHI) the Company is obligated to pay $5.3 million through December 1, 2013. In connection with its reorganization in bankruptcy, RHIED assigned its right to receive these license payments to Hallmark Cards. During the year ended December 31, 2011, the Company reclassified $2.5 million from programming rights payable (to non-affiliates) to payables to Hallmark Cards affiliates. During the same period the Company remitted payment of $1.3 million to Hallmark Cards. At December 31, 2011, the payable to Hallmark Cards affiliates included $1.3 million related to this assignment. During the year ended December 31, 2012, the Company reclassified $848,000 from programming rights payable (to non-affiliates) to payables to Hallmark Cards affiliates. During the same period the Company remitted payment of $1.5 million to Hallmark Cards. At December 31, 2012, the payable to Hallmark Cards affiliates includes $620,000 related to this assignment. Obligations relating to license periods that had not commenced as of December 31, 2011 and 2012 were $2.7 million and $2.0 million, respectively; accordingly, such amounts are not reflected in the accompanying unaudited condensed consolidated balance sheet. See Commitments and Contingencies below.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

5. Property and Equipment

        Property and equipment are comprised of the following:

 
  As of December 31,    
 
  Depreciable Life
(In years)
 
  2011   2012
 
  (In thousands)
   

Technical equipment and computers

  $ 8,053   $ 7,093   3 - 5

Leased assets

    17,675     17,700   3 - 15

Furniture, fixtures and equipment

    571     788   5

Leasehold improvements

    258     530   3 - 7

Construction-in-progress

    77     187    
             

Property and equipment, at cost

    26,634     26,298    

Accumulated depreciation and amortization

    (15,398 )   (15,843 )  
             

Property and equipment, net

  $ 11,236   $ 10,455    
             

        Depreciation and amortization expense related to property and equipment was $2.2 million, $2.2 million and $2.3 million, for the years ended December 31, 2010, 2011 and 2012, respectively.

        Software and other intangible assets of $350,000 and $416,000 as of December 31, 2011 and 2012, respectively, have been included in prepaid and other assets on the accompanying consolidated balance sheets.

6. Leases

        The Company leases uplink and transponder capacity and copiers under long-term lease agreements that are accounted for as capital leases. The capital lease liabilities are included as components of both accounts payable and accrued liabilities and non-current accrued liabilities in the accompanying consolidated balance sheets. In addition, the Company leases uplink services and office facilities under operating leases that are generally non-cancelable. These leases expire at various dates

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

6. Leases (Continued)

through June 2019, and some contain escalation clauses and renewal options. Future minimum lease payments under the agreements as of December 31, 2012, are as follows:

Years Ending December 31,
  Capital
Leases
  Operating
Leases(1)
 
(in thousands)
   
   
 

2013

  $ 2,251   $ 5,553  

2014

    2,175     5,713  

2015

    2,167     3,615  

2016

    2,160     795  

2017

    2,160      

Thereafter

    4,230      
           

Total minimum lease payments

    15,143   $ 15,676  
             

Less amount representing interest (at implicit rates of 9.38%, 6.30% 3.91% and 3.31% )

    (4,024 )      
             

Present value of net minimum lease payments

    11,119        

Less current maturities

    (1,266 )      
             

Long term obligation

  $ 9,853        
             

(1)
Includes cancellable amounts related to parking spaces for our Los Angeles, California, office in the amounts of $119,000 for 2013 and 2014 and $89,000 for 2015.

        Rent expense under the operating leases was $3.2 million, $3.1 million and $3.4 million for the years ended December 31, 2010, 2011 and 2012, respectively. Amortization of the uplink and transponder asset held under a capital lease is recorded as amortization of capital lease on the accompanying statements of operations.

        The Company accrues and recognizes rent expense for operating leases on a straight line basis over the term of the lease, including rental holidays. The Company uses the initial lease term, including the free rent holiday period, to determine the lease term.

        Revenue associated with the Company's sale of excess digital network capacity on a transponder is included in other revenue. Such amounts were $126,000 in 2010 and $252,000 in both 2011 and 2012, respectively. The Company anticipates that is will recognize $252,000 in 2013 and $105,000 in 2014, after which the arrangement will have concluded.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

7. Revolving Credit Facilities, Term Loan, and the Notes

Credit Facilities and Term Loan

        At December 31, 2011 and 2012, the Company had no outstanding borrowings under a $30.0 million revolving credit facility issued by JP Morgan Chase Bank, N.A. on July 14, 2011. Interest expense on borrowings under the credit facilities for the years ended December 31, 2010, 2011 and 2012, was $4,000, $0, and $0, respectively. There were no letters of credit outstanding at December 31, 2011. One letter of credit was outstanding in the amount of $202,000 at December 31, 2012. Commitment fees on the Credit Facility are payable on the unused revolving credit commitment at the rate of 0.50% per annum, payable quarterly. Commitment fee expense for the years ended December 31, 2010, 2011 and 2021, was $123,000, $132,000 and $152,000, respectively.

        On July 14, 2011, in connection with the 2011 Refinancing, the Company entered into a new $240.0 million credit agreement (the "Credit Agreement") with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for the Term Loan, a seven year $210.0 million senior secured term loan facility, and the five year $30.0 million senior secured super-priority revolving credit facility referred to above. The Term Loan was issued at a discount of 1.0% or $2.1 million.

        The Term Loan was drawn on July 14, 2011, at LIBOR at the Company's election. All LIBOR term loans will bear interest at the LIBOR Rate (subject to a minimum rate of 1.25%) plus 4.50%. The interest rate at both December 31, 2011 and 2012 was 5.75%.

        The provisions of the Term Loan require Crown Media Holdings to make principal payments of $525,000 at each quarter's end, commencing September 30, 2011, until maturity on July 14, 2018. The Company is required to make additional principal payments in amounts equal to (1) 50% of excess cash flow (as defined in the Credit Agreement) of Crown Media Holdings for the remainder of 2011, and each year thereafter, which percentage will be reduced to 25% if the Consolidated Leverage Ratio (as defined in the Credit Agreement) is equal to or less than 4.25 to 1 but greater than 3.25 to 1, and 0% if the Consolidated Leverage ratio is equal to or less than 3.25 to 1, respectively; (2) 100% of net cash proceeds of dispositions or casualty events if Crown Media Holdings has not invested such proceeds within one year after the occurrence of the disposition or casualty event; and (3) 100% of net cash proceeds from issuance of debt or Preferred Stock not otherwise permitted by the Credit Agreement. The Company plans to make a combined mandatory and discretionary payment for 2012 of $17.5 million, which is included among current maturities of long-term debt in the accompanying consolidated balance sheet.

        The covenants in the Credit Agreement limit the ability of Crown Media Holdings and certain of its subsidiaries to (1) incur indebtedness; (2) create or permit liens on assets; (3) make certain dividends, stock repurchases and redemptions and other restricted payments; (4) make certain investments; (5) prepay indebtedness; (6) enter into certain transactions with Crown Media Holdings' affiliates; (7) dispose of substantially all of the assets of Crown Media Holdings; (8) merge or consolidate; (9) enter into new unrelated lines of businesses; and (10) enter into sale and leaseback transactions. The Credit Agreement also requires compliance with a maximum total leverage ratio test and a maximum total secured leverage ratio test, but permits, with certain limitations, certain equity contributions to be made to Crown Media Holdings to enhance its ability to comply with such ratio tests.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

7. Revolving Credit Facilities, Term Loan, and the Notes (Continued)

        The credit facility contains a number of affirmative and negative covenants. The Company was in compliance with these covenants as of December 31, 2012.

        The Company made principal payments of $1.1 million and $19.6 million under the Term Loan during the years ended December 31, 2011 and 2012, respectively. Interest expense under the Term Loan was $6.0 million and $12.2 million for years ended December 31, 2011 and 2012, respectively. After giving effect to the amortization of associated debt issuance costs and original issue discount, the effective interest rate of the Term Loan was approximately 6.3% during both the years ended December 31, 2011 and 2012.

The Notes

        On July 14, 2011, also as part of the 2011 Refinancing, the Company issued $300.0 million in aggregate principal amount of 10.5% Senior Notes, at par, due July 15, 2019 (the "Notes") in a private placement conducted pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Notes are guaranteed on a senior basis by each of Crown Media Holdings' subsidiaries (the "Guarantors").

        Commencing January 15, 2012, interest is payable each January 15th and July 15th. The Company is not required to make mandatory sinking fund payments with respect to the Notes.

        The covenants in the related indenture limit the ability of the Company to, among other things (1) incur additional debt; (2) pay dividends or make other restricted payments; (3) purchase, redeem or retire capital stock or subordinated debt; (4) make asset sales, including by way of sale leaseback transactions; (5) provide subsidiary guarantees; (6) enter into transactions with affiliates; (7) incur liens; (8) make investments; and (9) merge or consolidate with any other person.

        During any period in which the Notes have an investment grade rating from both Moody's and S&P (at least Baa3 by Moody's and BBB- by S&P), and no default has occurred and is continuing under the Indenture, Crown Media Holdings and its restricted subsidiaries will not be required to comply with the covenants in the Indenture that limit their ability to (1) incur additional debt; (2) pay dividends or make other restricted payments; (3) purchase, redeem or retire capital stock or subordinated debt; (4) make asset sales; (5) provide subsidiary guarantees; and (6) enter into transactions with affiliates.

        Interest expense under the Notes was $14.8 million and $32.2 million for the years ended December 31, 2011 and 2012, respectively. After giving effect to the amortization of associated debt issuance costs, the effective interest rate of the Notes was approximately 11.0% during both the years ended December 31, 2011 and 2012.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

7. Revolving Credit Facilities, Term Loan, and the Notes (Continued)

Maturities

        The aggregate maturities of long-term debt including estimated future interest for each of the five years subsequent to December 31, 2012, and the period thereafter, are as follows:

 
  Payments Due by Period  
 
  Total   Year 1   Year 2   Year 3   Year 4   Year 5   Thereafter  
 
  (In thousands)
 

The Notes, due July 15, 2019

  $ 520,500   $ 31,500   $ 31,500   $ 31,500   $ 31,500   $ 31,500   $ 363,000  

Term Loan, due July 14, 2018(1)

    243,276     29,818     11,950     11,828     11,732     11,583     166,365  
                               

  $ 763,776   $ 61,318   $ 43,450   $ 43,328   $ 43,232   $ 43,083   $ 529,365  
                               

(1)
The Company only estimated the excess cash flow payment for 2012, which will be paid in 2013. The Company did not estimate excess cash flow payments for the remaining periods. Excess cash flow payments made in future periods will affect amounts due in future periods.

Early Extinguishment of Debt and Redemption of Preferred Stock

        The proceeds of the Term Loan and the Notes were used by the Company to (i) repay borrowings under the Term A Loan and Term B Loan, both of which were payable to HCC and (ii) redeem all of the Company's outstanding Preferred Stock, all of which was held by HCC.

        At the time of the 2011 Refinancing, the carrying amounts of the Term A Loan, the Term B Loan and Preferred Stock exceeded the respective reacquisition and redemption prices by approximately $87.3 million and $15.7 million, respectively. In consideration of these carrying amounts having been derived from the provisions of the Recapitalization in which HCC was a significant participant, the benefits arising from the extinguishments and redemption, $103.0 million in the aggregate, have been deemed capital contributions by HCC. Accordingly, such benefits have been credited to additional paid-in capital, net of tax, in the accompanying balance sheet. The tax impact of these deemed capital contributions was $0, which is reflective of a reduction in the gross deferred tax assets related to the Term A and Term B loans of $32.5 million and offsetting reduction in the deferred tax valuation allowance of $32.5 million.

Guarantees

        Crown Media Holdings has no independent assets or operations, the guarantees by the subsidiary guarantors are full and unconditional, joint and several, and there are no subsidiaries of Crown Media Holdings that are not subsidiary guarantors. With certain exceptions described above, the Notes and the Credit Facilities impose restrictions on the payment of dividends by Crown Media Holdings and the subsidiary guarantors.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

8. Related Party Obligations

2011 Refinancing Transaction

        The proceeds of the Notes, the Term Loan and extensions of credit under the Credit Agreement were used to repay all borrowings under the Term A and Term B Loans and to redeem all the Preferred Stock, consisting of 185,000 shares held by HCC. On July 14, 2011, the Company (i) paid principal and interest of $191.4 million and $115.5 million under its Term A and Term B Loans, respectively, (ii) redeemed its Preferred Stock of $185.0 million and (iii) paid dividends on its Preferred Stock of $993,000.

Related Party Long-Term Obligations

        The Company paid principal of $330.4 million and interest of $1.5 million during the year ended December 31, 2011, on the Term A and Term B Loans. The Company paid principal of $14.4 million and interest of $1.9 million during the year ended December 31, 2010, on the Term A and Term B notes.

Recapitalization

        For financial reporting purposes, the Recapitalization has been accounted for as a troubled debt restructuring in accordance with the guidance of ASC Topic 470-60 Debt—Troubled Debt Restructurings. Identification of the Recapitalization as a troubled debt restructuring involved both qualitative and quantitative aspects. Among the qualitative aspects considered were (i) the Company's expectations that it would have been unable to fulfill the debt service requirements associated with approximately $342.2 million of principal and interest payable to HCC on May 1, 2010 upon the expiration of the waiver agreement (which was extended to August 31, 2010 pursuant to the master recapitalization agreement), along with an additional $784.6 million of principal and interest that would have become immediately due pursuant to cross-default provisions, and (ii) the going concern opinion rendered by the Company's independent registered public accounting firm in connection with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. Quantitatively, Hallmark Cards is deemed to have granted a "concession" within the meaning of ASC 470-60. Prior to consummation of the Recapitalization, the weighted average interest rate of HCC debt was approximately 8.3%. After consideration of (x) the estimated fair values of Preferred Stock and Common Stock issued in the Recapitalization and (y) the debt service requirements of New Debt, the overall effective interest rate on the New Debt resulting from the Recapitalization was less than 1%.

        Pursuant to the guidance in the ASC, we (1) recorded the issuance of Preferred Stock and Common Stock at their respective estimated fair values as of June 29, 2010 and (2) recorded New Debt in an amount equal to the residual of (i) the carrying value of HCC Debt less (ii) the estimated fair values of such Preferred Stock and Common Stock. New Debt was apportioned between the Term A and Term B Loans on the basis of their relative fair values. The amounts by which the apportioned Term Loans exceeded the respective stated amounts of principal were amortized over the terms of the loans as reductions of the interest expense that otherwise would have arisen from the stated cash interest rates. The resulting effective interest rates were approximately 0.789% and 1.002%, for the Term A Loan and Term B Loan, respectively.

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CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2011 and 2012

8. Related Party Obligations (Continued)

        The Recapitalization also provided for the mergers of Hallmark Entertainment Holdings, Inc. ("HEH") and Hallmark Entertainment Investments Co. ("HEI") into the Company. HEH and HEI, both intermediate parents of the Company, were non-substantive subsidiaries of Hallmark Cards. The mergers were recorded at carry-over basis pursuant to the guidance of ASC Topic 805-50 Business Combinat