DEFM14C 1 a2198710zdefm14c.htm DEFM14C

Use these links to rapidly review the document
TABLE OF CONTENTS

Table of Contents

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934

Check the appropriate box:
o   Preliminary Information Statement
o   Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
ý   Definitive Information Statement
 

 
CROWN MEDIA HOLDINGS, INC.

(Name of Registrant As Specified In Its Charter)

 

Payment of Filing Fee (Check the appropriate box):
o   No fee required
o   Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
    (1)   Title of each class of securities to which transaction applies:
        Class A Common Stock, $0.01 par value per share
 
    (2)   Aggregate number of securities to which transaction applies:
        153,746,296 shares of Class A Common Stock.
 
    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
        The price per share of Class A Common Stock using the average of the high and low prices on March 24, 2010 is $2.00, 83,817,071 shares of Class A Common Stock will be issued in the merger with Hallmark Entertainment Investments Co. ("HEIC Merger"), and the aggregate value of the shares issued in the HEIC Merger is $167,634,142. (An equal number of outstanding shares of Common Stock are cancelled in the HEIC Merger.)
        The price per share of Class A Common Stock using the average of the high and low prices on March 24, 2010 is $2.00, 69,929,225 shares of Class A Common Stock will be issued in the merger with Hallmark Entertainment Holdings, Inc. ("HEH Merger"), and the aggregate value of the shares issued in the HEH Merger is $139,858,450. (An equal number of outstanding shares of Common Stock are cancelled in the HEH Merger.)
 
    (4)   Proposed maximum aggregate value of transaction:
        The proposed maximum aggregate value of the shares issued in the Mergers for fee purposes is $307,492,592.
 
    (5)   Total fee paid:
        $21,924.23
 

ý

 

Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

 

Amount Previously Paid:
        
 
    (2)   Form, Schedule or Registration Statement No.:
        
 
    (3)   Filing Party:
        
 
    (4)   Date Filed:
        
 

Table of Contents

CROWN MEDIA HOLDINGS, INC.
12700 Ventura Boulevard
Studio City, California 91604

NOTICE OF ACTION BY WRITTEN CONSENT
May 21, 2010

To the Stockholders of Crown Media Holdings, Inc.:

        You are receiving this notice because stockholders of Crown Media Holdings, Inc., a Delaware corporation (the "Company"), representing the requisite voting power thereof, have approved and adopted by written consent the following matters that are explained below and in the Information Statement:

    1.
    The adoption and filing of the Second Amended and Restated Certificate of Incorporation of the Company to: increase the authorized shares of Class A Common Stock, reclassify each outstanding share of Class B Common Stock as one share of Class A Common Stock and eliminate Class B Common Stock; amend provisions on the handling of corporate and business opportunities between the Company and Hallmark Cards, Incorporated, a Missouri corporation ("Hallmark") and its affiliates; and provide a limited opt-out of the restrictions on business combinations under Section 203 of the Delaware General Corporation Law;

    2.
    The adoption and authority to file before December 31, 2013, at the recommendation of an independent Board committee, the Third Amended and Restated Certificate of Incorporation providing for a reverse stock split;

    3.
    The merger of Hallmark Entertainment Investments Co., a Delaware corporation ("HEIC"), with and into the Company;

    4.
    The merger of Hallmark Entertainment Holdings, Inc., a Delaware corporation ("HEH"), with and into the Company; and

    5.
    The issuance of shares contemplated by the Master Recapitalization Agreement, the HEIC Merger Agreement and the HEH Merger Agreement (each as defined below).

    Overview of Recapitalization Transactions

        On February 26, 2010, the Company entered into the Master Recapitalization Agreement (the "Master Recapitalization Agreement") with Hallmark, H C Crown Corp., a Delaware corporation ("HCC"), HEH, Crown Media United States,  LLC, a Delaware limited liability company ("CMUS") and certain subsidiaries of the Company (together with the Company and CMUS, the "Debtors") which provides for the recapitalization transactions described therein (the "Transactions"). The Transactions include the exchange of over $1.1 billion of debt (the "HCC Debt") for new debt, preferred stock and common stock, the Mergers, the Merger Agreements, the Second Amended Charter and the Third Amended Charter as described below. Under the terms of the Master Recapitalization Agreement:

    $315 million principal amount of the HCC Debt will be converted into new debt with an equal principal amount to be issued pursuant to the terms of the Credit Agreement included as Exhibit A to the Master Recapitalization Agreement;

    $185 million principal amount of the HCC Debt will be converted into shares of Series A Convertible Preferred Stock of the Company (the "Preferred Stock") to be issued pursuant to the Certificate of Designation included as Exhibit C to the Master Recapitalization Agreement; and

    the balance of the HCC Debt will be converted into Class A Common Stock of the Company (the "Class A Common Stock" or "Common Stock") based on the Conversion Price set forth in the Master Recapitalization Agreement.

Table of Contents

        The Company estimates that the Conversion Price (as defined in the Master Recapitalization Agreement) will be $2.5969, and that if the Transactions were to close on May 31, 2010, the Company would issue Preferred Stock and Class A Common Stock as follows:

    to HCC 185,000 shares of Preferred Stock with a liquidation preference of $1,000 per share and an initial estimated conversion price of $2.5969 (which is subject to future adjustments as provided in the Certificate of Designation), which shares would be convertible into an estimated 71,238,785 shares of Class A Common Stock at such Conversion Price;

    to HCC a number of shares of Class A Common Stock equal to the HCC Debt on the closing of the Recapitalization (which is expected to be approximately $1.2 billion) less $500.0 million divided by the estimated Conversion Price, or an estimated 252,451,757 shares of Class A Common Stock; and

    as a result of the mergers of each of HEIC and HEH with and into the Company, to HCC, Liberty Crown, Inc., VISN Management Corp. and JP Morgan Partners (BHCA), L.P., in the aggregate, 83,817,071 shares of Class A Common Stock and will cancel 83,817,071 shares of the Company's Class A and Class B Common Stock owned currently by HEIC.

The actual Conversion Price may differ from $2.5969 per share as a result of a number of factors, including the final determination of HCC Debt as of March 31, 2010. The actual number of shares of Class A Common Stock issued in exchange for HCC Debt may differ from the number stated above as a result of (a) an actual closing date other than May 31, 2010, (b) the final determination of HCC Debt as of the actual closing date, and (c) the difference, if any, in the actual Conversion Price and the estimated Conversion Price of $2.5969 per share.

        Immediately following the closing of the Transactions, assuming a closing date of May 31, 2010, and based on the assumptions set forth above, HCC will hold an estimated 322,449,413 shares of Class A Common Stock (including shares of Class A Common Stock currently held directly by HCC, but excluding shares of Class A Common Stock issuable upon conversion of the Preferred Stock).

        The Transactions include: the filing of the Company's Second Amended and Restated Certificate of Incorporation attached as Exhibit B to the Master Recapitalization Agreement (the "Second Amended Charter"); the filing of the Certificate of Designation, stating the rights, powers and preferences, and the qualifications, limitations and restrictions thereof, of the Preferred Stock, attached as Exhibit C to the Master Recapitalization Agreement; the merger of HEIC with and into the Company (the "HEIC Merger") pursuant to the Merger Agreement attached as Exhibit E to the Master Recapitalization Agreement (the "HEIC Merger Agreement"); and the merger of HEH with and into the Company (the "HEH Merger", and together with the HEIC Merger, the "Mergers") pursuant to the Merger Agreement attached as Exhibit F to the Master Recapitalization Agreement (the "HEH Merger Agreement," and together with the HEIC Merger Agreement, the "Merger Agreements"). In addition, the Master Recapitalization Agreement provides that, at the request of a special committee of the Company's Board of Directors comprised of independent directors at any time prior to December 31, 2013, the Company will file the Third Amended and Restated Certificate of Incorporation attached as Exhibit G to the Master Recapitalization Agreement (the "Third Amended Charter") to effect a reverse stock split of the Company's Common Stock.

        In addition, the Transactions provide for: each share of Class B Common Stock outstanding immediately prior to the effectiveness of the Second Amended Charter being reclassified, upon such effectiveness as one share of Class A Common Stock with Class A Common Stock becoming the only authorized and outstanding common stock of the Company; an amendment to the Tax Sharing Agreement with Hallmark; a registration rights agreement; efforts to extend or replace the Company's revolving line of credit; Hallmark agreeing to guarantee up to $30.0 million for a revolving line of credit; a standstill agreement of Hallmark entities pursuant to which Hallmark entities agree not to

ii


Table of Contents


acquire, through December 31, 2013, additional shares of Class A Common Stock, subject to certain exceptions, and agree 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.

        Upon execution of the Master Recapitalization Agreement, the automatic termination of the waiver under the existing Amended and Restated Waiver and Standby Purchase Agreement (the "Waiver Agreement") with Hallmark and HCC was extended until August 31, 2010. The Waiver Agreement defers payment dates on HCC Debt (excluding accounts payable).

    Corporate Actions on the Recapitalization

        A special committee of the Company's Board of Directors comprised of independent directors and formed to consider the Transactions (the "Special Committee") (i) determined that the terms of the Master Recapitalization Agreement and each of the documents attached as exhibits to the Master Recapitalization Agreement (collectively, the "Ancillary Documents") and the consummation of the Transactions are fair to, and in the best interests of, the Company and its stockholders (other than HCC and its affiliates) and (ii) recommended to the Company's Board of Directors that the Board (x) approve the execution, delivery, and performance of the Master Recapitalization Agreement and the Ancillary Documents and the consummation of the Transactions and (y) approve the Mergers, the Merger Agreements, and the Second Amended Charter and the Third Amended Charter.

        The Company's Board of Directors, subsequent to and in reliance on the unanimous recommendation of the Special Committee, (i) determined that the terms of the Master Recapitalization Agreement and the Ancillary Documents and the consummation of the Transactions are in the best interests of the Company and its stockholders, (ii) approved the execution, delivery and performance of the Master Recapitalization Agreement, the Ancillary Documents and the consummation of the Transactions, and (iii) resolved to direct that to the extent required by the DGCL, the Mergers, the Merger Agreements, the Second Amended Charter and the Third Amended Charter be submitted for consideration of the stockholders of the Company.

        Under Section 228 of the DGCL and Article X of the Company's Amended and Restated Certificate of Incorporation, stockholder action may be taken without a meeting and without prior notice by written consent of the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize the action at a meeting at which all shares entitled to vote thereon are present and voted. The Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances pursuant to the Transactions have been approved by the following holders of a majority in voting power of the outstanding shares of the Company's Class A Common Stock and all of the outstanding shares of the Company's Class B Common Stock, voting as a single class, and a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting as a separate class (collectively, the "Consenting Holders"):

    HEIC, as a current holder of 71.7% of the outstanding shares of the Company's Class A Common Stock, all of the outstanding shares of the Company's Class B Common Stock and approximately 94.5% in voting power of the Company's outstanding capital stock generally;

    HEH, as a holder of 83.4% of the stock currently held by HEIC immediately following the HEIC Merger; and

    HCC, as a current stockholder of the Company of 0.1% of the outstanding shares of the Company's Class A Common Stock and as a successor to HEH following the HEH Merger.

        Accordingly, the written consent executed by the Consenting Holders pursuant to Section 228 of the DGCL and delivered to the Company is sufficient to approve the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances

iii


Table of Contents


pursuant to the Transactions, and no further stockholder vote or other action is required in order to effect the foregoing.

    Purpose of Information Statement

        This Notice and the Information Statement are being furnished to you for your information to comply with the requirements of the Securities Exchange Act of 1934, as amended. This Notice and the Information Statement also constitute notice of corporate action without a meeting by less than unanimous consent of the Company's stockholders pursuant to Section 228(e) of the DGCL covering the items to which the Consenting Holders consented on or within 60 days prior to May 21, 2010. You are urged to read the Information Statement carefully in its entirety. However, no action is required on your part in connection with this document and the related actions. No meeting of our stockholders will be held or proxies requested for these matters because they have already been consented to by the Consenting Holders, acting by written consent in lieu of a meeting, in their capacity as the holders of a majority in voting power of the outstanding shares of the Company's Class A Common Stock and the Company's Class B Common Stock, acting as a single class, and a majority of the outstanding shares of the Class A Common Stock and the Class B Common Stock, each acting as a separate class.

        WE ARE NOT ASKING YOU FOR A PROXY OR CONSENT AND YOU ARE REQUESTED NOT TO SEND US A PROXY OR CONSENT.

        Under the rules of the Securities and Exchange Commission, the corporate actions that are described above may be effected no earlier than twenty (20) calendar days after we have provided this notice and mailed our Information Statement relating to the matters described above to our stockholders.


 

 

Sincerely,

 

 

By Order of the Board of Directors

 

 

/s/ BRIAN E. GARDNER


 

 

BRIAN E. GARDNER
Secretary

iv


Table of Contents

CROWN MEDIA HOLDINGS, INC.
12700 Ventura Boulevard
Studio City, California 91604

INFORMATION STATEMENT

Dated May 21, 2010

Filed and Delivered Pursuant to Section 14(c) of the
Securities Exchange Act of 1934 and Rule 14c-2 Thereof

THIS IS NOT A NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS AND NO STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED IN THIS INFORMATION STATEMENT. THE ACTIONS DESCRIBED IN THIS INFORMATION STATEMENT HAVE BEEN CONSENTED TO BY THE HOLDERS OF A MAJORITY IN VOTING POWER OF THE OUTSTANDING SHARES OF THE COMPANY'S CLASS A COMMON STOCK AND CLASS B COMMON STOCK, ACTING AS A SINGLE CLASS, AND A MAJORITY OF THE OUTSTANDING SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK, EACH ACTING AS A SEPARATE CLASS. WE ARE NOT ASKING YOU FOR A PROXY OR CONSENT AND YOU ARE REQUESTED NOT TO SEND US A PROXY OR CONSENT. THERE ARE NO APPRAISAL RIGHTS AVAILABLE TO HOLDERS OF CLASS A COMMON STOCK WITH RESPECT TO THE ACTIONS DESCRIBED IN THIS INFORMATION STATEMENT.


INTRODUCTION

        This Information Statement is furnished on behalf of Crown Media Holdings, Inc., a Delaware corporation (the "Company"), to the holders of record at the close of business on May 21, 2010 (the "Record Date") of the Company's shares of outstanding Class A common stock, par value $0.01 per share (the "Class A Common Stock" or "Common Stock"), in connection with action to be taken by the Company as a result of a written consent, dated May 21, 2010 (the "Written Consent"), executed and delivered by the holders of approximately 71.8% of the Class A Common Stock and 100% of the Class B common stock, par value $0.01 per share (the "Class B Common Stock"), representing approximately 94.5% of the voting power of the Company's capital stock. This Information Statement will first be available at our website on or about May 21, 2010.

        You are receiving this information statement because stockholders of the Company representing the requisite voting power thereof have approved by written consent the following matters that are explained below:

    1.
    The adoption and filing of the Second Amended Charter (as defined below);

    2.
    The adoption and authority to file before December 31, 2013, the Third Amended Charter (as defined below);

    3.
    The merger of Hallmark Entertainment Investments Co., a Delaware corporation ("HEIC"), with and into the Company;

    4.
    The merger of Hallmark Entertainment Holdings, Inc., a Delaware corporation ("HEH"), with and into the Company; and

    5.
    The issuance of shares contemplated by the Master Recapitalization Agreement, the HEIC Merger Agreement and the HEH Merger Agreement (each as defined below).

        On February 26, 2010, the Company entered into the Master Recapitalization Agreement (the "Master Recapitalization Agreement"), by and among the Company, Hallmark Cards, Incorporated, a Missouri corporation ("Hallmark"), H C Crown Corp., a Delaware corporation ("HCC"), HEH, Crown Media United States, LLC, a Delaware limited liability company ("CMUS"), and certain subsidiaries of

v


Table of Contents


the Company (together with the Company and CMUS, the "Debtors") providing for the recapitalization transactions described therein (the "Transactions"). The Transactions include the exchange of debt for new debt, preferred stock and common stock, the Mergers, the Merger Agreements, the Second Amended Charter and the Third Amended Charter as described below. A copy of the Master Recapitalization Agreement is attached hereto as Exhibit A.

        As explained in more detail in this Information Statement, the Transactions include the conversion of (x) $315 million principal amount of the HCC Debt into an equal principal amount of new debt to be issued pursuant to the terms of the Credit Agreement included as Exhibit A to the Master Recapitalization Agreement; (y) $185 million principal amount of HCC Debt into shares of Series A Convertible Preferred Stock of the Company (the "Preferred Stock"); and (z) the balance of the HCC Debt into Common Stock based on the Conversion Price set forth in the Master Recapitalization Agreement. The Transactions also include the filing of the Company's Second Amended and Restated Certificate of Incorporation attached as Exhibit B to the Master Recapitalization Agreement (the "Second Amended Charter") with the Secretary of State of the State of Delaware to authorize additional shares of Common Stock in an amount sufficient for the proposed issuance of Common Stock and the conversion of preferred stock into Common Stock and to decrease the authorized preferred stock to 1,000,000 shares from 10,000,000 shares. Upon filing of the Second Amended Charter, each share of Class B common stock, par value $0.01 per share (the "Class B Common Stock") outstanding immediately prior to the filing will be automatically reclassified as one share of Class A Common Stock. The rights, powers and preferences, and the qualifications, limitations and restrictions thereof, of the Preferred Stock that will be issued to HCC are provided in the certificate of designation attached as Exhibit C to the Master Recapitalization Agreement (the "Certificate of Designation") which will also be filed with the Secretary of State of the State of Delaware as part of the Transactions.

        The Transactions also include the merger of HEIC with and into the Company (the "HEIC Merger") pursuant to the Merger Agreement attached as Exhibit E to the Master Recapitalization Agreement (the "HEIC Merger Agreement") and the merger of HEH with and into the Company (the "HEH Merger", and together with the HEIC Merger, the "Mergers") pursuant to the Merger Agreement attached as Exhibit F to the Master Recapitalization Agreement (the "HEH Merger Agreement", and together with the HEIC Merger Agreement, the "Merger Agreements"). The Company will be the surviving corporation in each of the Mergers. In addition, the Master Recapitalization Agreement provides that, at the request of a special committee of independent directors at any time prior to December 31, 2013, the Company must file the Third Amended and Restated Certificate of Incorporation, attached as Exhibit G to the Master Recapitalization Agreement (the "Third Amended Charter") to effect a reverse stock split of the Common Stock (the "Reverse Split").

        Under Section 228 of the Delaware General Corporation Law (the "DGCL"), unless prohibited in a corporation's certificate of incorporation, any action required or permitted by the DGCL to be taken at an annual or special meeting of stockholders of a Delaware corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Article X of the Company's Amended and Restated Certificate of Incorporation allows for action by stockholders by written consent, without a meeting and without prior notice.

        HEIC currently owns and is entitled to vote 53,146,649 shares of Class A Common Stock and 30,670,422 shares of Class B Common Stock, representing a majority in voting power of the Company's outstanding capital stock generally and a majority of the outstanding shares of the Company's Class A Common Stock and all of the outstanding shares of the Company's Class B Common Stock. Subsequent to the approval and recommendation by our Board of Directors of the Master

vi


Table of Contents


Recapitalization Agreement and the Transactions, the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances pursuant to the Transactions were approved by the following holders of a majority in voting power of the outstanding shares of the Company's Class A Common Stock and all of the outstanding shares of the Company's Class B Common Stock (collectively, the "Consenting Holders"):

    HEIC, as a current holder of 71.7% of the outstanding shares of the Company's Class A Common Stock, all of the outstanding shares of the Company's Class B Common Stock and approximately 94.5% in voting power of the Company's outstanding capital stock generally;

    HEH, as a holder of 83.4% of the stock currently held by HEIC immediately following the HEIC Merger; and

    HCC, as a current stockholder of the Company of 0.1% of the outstanding shares of the Company's Class A Common Stock and as a successor to HEH following the HEH Merger.

        Accordingly, the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter, and the share issuances in the Transactions have been approved by the holder of a majority in voting power of the outstanding shares of the Company's Class A Common Stock and Class B Common Stock, voting as a single class, and a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting as a separate class. As such, no vote or further action of the stockholders of the Company is required to approve the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter or the share issuances in the Transactions.

        Under Section 228(e) of the DGCL, prompt notice of the taking of corporate action must be given to those stockholders who have not consented in writing to the actions and who, if the actions had been taken at a meeting, would otherwise have been entitled to notice of the meeting. You are hereby being provided with this notice of approval of the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances in the Transactions by less than unanimous written consent of the stockholders of the Company. However, the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances in the Transactions will not be effective until at least twenty (20) calendar days after this Information Statement has first been mailed to stockholders.

        Under rules adopted by the Securities and Exchange Commission (the "SEC"), we are also providing access to the Information Statement over the Internet. All stockholders will have the ability to access the Information Statement on the following website: www.hallmarkchannel.com/2010Schedule14C.html. In addition, stockholders may request to receive future information statements or similar mailings in printed form by mail or electronically by email on an ongoing basis.

        Under Section 262 of the DGCL, stockholders that do not consent to certain corporate actions may be entitled to appraisal rights. The Company's Class A Common Stock holders are not entitled to appraisal rights in connection with the Master Recapitalization Agreement or the Transactions under the DGCL, the Company's Certificate of Incorporation or By-laws.

        WE ARE NOT ASKING YOU FOR A PROXY OR CONSENT AND YOU ARE REQUESTED NOT TO SEND US A PROXY OR CONSENT.

The date of this Information Statement is May 21, 2010.

vii


Table of Contents


TABLE OF CONTENTS

 
  Page

INTRODUCTION

  v

SUMMARY

  1

BACKGROUND

  10
 

Previous Efforts to Sell the Company

  10
 

Background of the Recapitalization

  10
 

Indebtedness to Hallmark and Its Affiliates

  11
 

Original Proposal Regarding Recapitalization

  12
 

Special Committee

  13

THE RECAPITALIZATION

  18
 

Master Recapitalization Agreement

  18
 

New Debt

  20
 

Issuance of Preferred Stock

  23
 

Conversion of Class B Common Stock

  25
 

Issuance of Common Stock

  25
 

Stockholders Agreement

  27
 

The Mergers

  29
 

Additional Agreements

  29
 

Recommendation of the Special Committee and the Board of Directors

  30
 

Reasons for the Recommendation by the Special Committee

  31
 

Reasons for the Recommendation by the Board of Directors

  33
 

Recommendation of Morgan Stanley

  34
 

Opinion of Houlihan Lokey

  39
 

Internal Financial Forecasts

  48
 

Revolving Credit Facility

  50
 

Lawsuit

  50
 

Interests of the Company's Executive Officers and Directors

  51
 

Certain Fees and Expenses

  52
 

Regulatory Approvals

  53
 

Accounting Treatment of the Transactions

  53
 

Material U.S. Federal Income Tax Consequences of the Transactions

  54

SECOND AMENDED CHARTER

  57

THIRD AMENDED CHARTER

  58

THE MERGERS

  62
 

The Companies

  62
 

Past Contacts, Transactions or Negotiations Between the Companies

  63
 

Appraisal Rights

  63
 

Effective Time of the Mergers

  63
 

Reasons for the Mergers

  64

Table of Contents

 
  Page
 

Structure of the Mergers

  64
 

Surviving Corporation Officers and Directors

  65
 

Conditions to the Mergers

  65
 

Termination

  65
 

Modification, Amendment and Waiver

  65

FINANCIAL INFORMATION

  65
 

Pro Forma Financial Information

  65
 

Financial Statement Information

  71

INFORMATION ABOUT THE COMPANY

  72
 

Market Information

  72
 

Holders

  72
 

Dividends

  72
 

Securities Authorized for Issuance under Equity Compensation Plans

  73

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  73
 

Current Ownership

  73
 

Effect of Transactions on Beneficial Ownership

  75

OUTSTANDING VOTING SECURITIES; VOTING AND VOTE REQUIRED

  76

INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

  76

EFFECTIVE DATE

  78

NOTICE PURSUANT TO DGCL SECTION 228

  78

APPRAISAL RIGHTS

  78

FORWARD-LOOKING STATEMENTS

  78

STOCKHOLDERS SHARING AN ADDRESS

  79

INFORMATION INCORPORATED BY REFERENCE

  79

WHERE YOU CAN FIND MORE INFORMATION

  79

CONCLUSION

  79

Appendix A—Master Recapitalization Agreement and Exhibits

   
 

Exhibit A—Credit Agreement

   
 

Exhibit B—Second Amended and Restated Certificate of Incorporation

   
 

Exhibit C—Certificate of Designation

   
 

Exhibit D—Stockholders Agreement

   
 

Exhibit E—HEIC Merger Agreement

   
 

Exhibit F—HEH Merger Agreement

   
 

Exhibit G—Third Amended and Restated Certificate of Incorporation

   
 

Exhibit H—Registration Rights Agreement

   
 

Exhibit I—Tax Sharing Agreement Amendment

   

Appendix B—Annual Report on Form 10-K For the Year Ended December 31, 2009

   

Appendix C—Opinion of Houlihan Lokey

   

Appendix D—Quarterly Report For the Three Months Ended March 31, 2010

   

Table of Contents


SUMMARY

        The information provided in question-and-answer format below is for your convenience and highlights important and material information from this Information Statement, but does not purport to be complete. You should carefully read this entire Information Statement, including each of the exhibits attached to this Information Statement. We have included section references to direct you to a more complete description of the topics addressed in this summary.

Q:    Why did I receive this Information Statement?

A:
Delaware law and the federal securities law require us to provide you with information regarding the proposed Transactions. As explained more fully elsewhere in this Information Statement, because the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances in the transactions have been approved by the written consent of stockholders owning a majority of the outstanding shares of the Company's Class A Common Stock and all of the outstanding shares of the Company's Class B Common Stock, your consent will not be required and is not requested. Nevertheless, this Information Statement contains important information about the proposed transactions. We urge you to read the Information Statement carefully in its entirety.

Q:    Who sent me this Information Statement?

A:
The Information Statement was sent to you and paid for by the Company.

Q:    When was this Information Statement made available to stockholders?

        

A:
The Information Statement was filed with the SEC and posted on the Company's website on May 21, 2010, and will be mailed to stockholders on or about May 26, 2010.

Q:    What are the proposed transactions?

A:
The proposed transactions are set forth in the Master Recapitalization Agreement attached hereto as Exhibit A. Under the terms of the Master Recapitalization Agreement:

$315 million principal amount of the HCC Debt will be converted into an equal principal amount of new debt to be issued pursuant to the terms of the Credit Agreement included as Exhibit A to the Master Recapitalization Agreement;

$185 million principal amount of the HCC Debt will be converted into Preferred Stock to be issued pursuant to the Certificate of Designation included as Exhibit C to the Master Recapitalization Agreement; and

the balance of the HCC Debt will be converted into common stock based on the Conversion Price set forth in the Master Recapitalization Agreement.

    The Company estimates that the Conversion Price (as defined in the Master Recapitalization Agreement) will be $2.5969, and that if the Transactions were to close on May 31, 2010, the Company would issue Preferred Stock and Class A Common Stock as follows:

    to HCC 185,000 shares of Preferred Stock with a liquidation preference of $1,000 per share and an initial estimated conversion price of $2.5969 (which is subject to future adjustments as provided in the Certificate of Designation), which shares would be convertible into an estimated 71,238,785 shares of Class A Common Stock at such Conversion Price;

    to HCC a number of shares of Class A Common Stock equal to the HCC Debt on the closing of the Recapitalization (which is expected to be approximately $1.2 billion) less $500.0 million

1


Table of Contents

      divided by the estimated Conversion Price, or an estimated 252,451,757 shares of Class A Common Stock; and

    as a result of the mergers of each of HEIC and HEH with and into the Company, to HCC, Liberty Crown, Inc., VISN Management Corp. and JP Morgan Partners (BHCA), L.P., in the aggregate, 83,817,071 shares of Class A Common Stock and will cancel 83,817,071 shares of the Company's Class A and Class B Common Stock owned currently by HEIC.

    The actual Conversion Price may differ from $2.5969 per share as a result of a number of factors, including the final determination of HCC Debt as of March 31, 2010. The actual number of shares of Class A Common Stock issued in exchange for HCC Debt may differ from the number stated above as a result of (a) an actual closing date other than May 31, 2010, (b) the final determination of HCC Debt as of the actual closing date, and (c) the difference, if any, in the actual Conversion Price and the estimated Conversion Price of $2.5969 per share.

    Immediately following the closing of the Transactions, assuming a closing date of May 31, 2010, and based on the assumptions set forth above, HCC will hold an estimated 322,449,413 shares of Class A Common Stock (including shares of Class A Common Stock currently held directly by HCC, but excluding shares of Class A Common Stock issuable upon conversion of the Preferred Stock).

    The Transactions also include the filing of the Second Amended Charter, the filing of the Certificate of Designation, the HEIC Merger pursuant to the HEIC Merger Agreement and the HEH Merger pursuant to the HEH Merger Agreement. In addition, the Master Recapitalization Agreement provides that, at the request of a special committee of the Board of Directors at any time prior to December 31, 2013, the Company will file the Third Amended Charter to effect the Reverse Split.

Q.    How will the Transactions affect the rights of the holders of Company equity in connection with future transactions?

        

A.
As a result of the Transactions, subject to the limitations contained in the Stockholders Agreement, Hallmark will have the right to acquire the Company and/or force the sale of the Company to a third party without the requirement for the approval of the Company's board of directors, a majority of the Company's directors not affiliated with Hallmark, or the stockholders of the Company other than Hallmark.

    In negotiating the Transactions, Hallmark sought and obtained an increase in its equity ownership to not less than 90.1% of the Common Stock, with the stated intent that such ownership would, subject to the limitations provided for in the Stockholders Agreement, entitle Hallmark to effectuate a "short-form" merger under Section 253 of the DGCL. In general, under Section 253 of the DGCL, a stockholder that owns at least 90% of each class of another corporation's outstanding stock (a "90% Subsidiary") can merge itself into such 90% Subsidiary or merge such 90% Subsidiary into itself without the approval of the 90% Subsidiary's board of directors and without a vote of the 90% Subsidiary's minority stockholders. Minority stockholders would have appraisal rights with respect to the short-form merger under the DGCL.

    Subject to the limitations set forth below, Hallmark could use such a short-form merger to acquire the remaining equity of the Company or as part of transactions that result in the sale of the Company to another party. In addition, pursuant to the Stockholders Agreement, Hallmark has the right: (1) to explore the possibility of a sale of the equity of the Company to a third party, (2) to provide confidential information to third parties, subject to appropriate confidentiality restrictions, (3) to be provided management's cooperation, time and assistance (as reasonably requested) in

2


Table of Contents


    connection with the exploration and negotiation of such a transaction, and (4) to conduct any negotiations with respect to such a transaction.

    The Special Committee negotiated the terms of the Stockholders Agreement to place limitations on Hallmark's right to effect a short-form merger and to provide other protections to the Company's minority stockholders in connection with any short-form merger or transfer or sale of shares of the Company by Hallmark, in each case during specified periods following the consummation of the Transactions. These limitations are discussed in response to the next two questions.

Q.    What protections are provided to the Company's minority stockholders in connection with Hallmark's right to effect a short-form merger or otherwise acquire additional shares of the Company's Common Stock?

        

A.
In the event that Hallmark effects a short form merger, the Company's minority stockholders would have appraisal rights under the DGCL. Any required disclosures under the federal securities laws would also be available.

    In addition, the Special Committee negotiated limitations on the ability of Hallmark (including its controlled affiliates) to acquire additional shares of Common Stock (including the acquisition of the remaining equity through a short-form merger) from the period beginning on the closing date of the Recapitalization until December 31, 2013. These restrictions would permit the conversion of the Series A Preferred Stock to Common Stock and the exercise of the subscription rights contained in the Stockholders Agreement. The restrictions applicable to a short form merger or other "going private" transaction, are summarized in the following chart:

Time Period
  Limitation on Acquisition of Common Stock or Short Form
Merger not in connection with a Third Party Sale
Closing Date - December 31, 2011   Only with the prior approval of a special committee of the Company's Board of Directors comprised solely of independent, disinterested directors.

January 1, 2012 - December 31, 2013

 

Only in one of the following three methods:
    (1)   with the prior approval of a special committee of the Company's Board of Directors comprised solely of independent, disinterested directors;

 

 

(2)

 

In connection with a Premium Transaction (as defined below in the section titled "THE RECAPITALIZATION—Stockholders Agreement") in which minority shareholders receive consideration equal to the sum of (x) the greatest consideration received by Hallmark per share of Common Stock in connection with such transaction ("Equivalent Consideration"), and (y) $.50 per share of Common Stock (subject to adjustment for dilutive transactions); or

 

 

(3)

 

Pursuant to a tender offer by Hallmark or its affiliates for all of the outstanding shares of the Company's Common Stock in which the minority stockholders tender at least a majority of their shares.

Thereafter

 

No Limitation

Q.    What protections are provided to the Company's minority stockholders in connection with a sale by Hallmark of its controlling interest in the Company, with the use of a short form merger or otherwise?

        

A.
The Company's minority stockholders do not presently have any protection in connection with the sale by Hallmark of a controlling interest in the Company over and above those provided by

3


Table of Contents

    Delaware law. While Section 203 of the DGCL would generally restrict the ability of an "interested stockholder" to engage in a "business combination," as HEIC owns in excess of 85% of the voting stock of the Company, a purchase of all of such shares in a single transaction would exempt the purchaser from such restrictions. In addition, in connection with the Transactions, Hallmark required that the Company's Certificate of Incorporation be amended to have the Company "opt out" of Section 203 until such time as Hallmark's beneficial ownership is reduced to less than 50% of the outstanding shares of Common Stock.

    In connection with the Transactions, the Special Committee negotiated limitations on the ability of Hallmark (including its controlled affiliates) to transfer its shares of Common Stock. These restrictions would not limit the transfer of Common Stock to controlled affiliates of Hallmark who agreed to be bound by the Stockholders Agreement or pursuant to a bona fide pledge to a lender that is not an affiliate of Hallmark. The following table summarizes the additional restrictions on transfers of Common Stock by Hallmark:

Time Period
  Permitted Transfers and Sales
Closing Date - December 31, 2011   Only with the approval of a special committee of the Company's Board of Directors comprised solely of independent, disinterested directors.

January 1, 2012 - December 31, 2013

 

Only in one of the following three methods:

 

 

(1)

 

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

 

 

(2)

 

In a Premium Transaction (as defined below in the section titled "THE RECAPITALIZATION—Stockholders Agreement") in which minority shareholders receive consideration equal to the sum of (x) the greatest consideration received by Hallmark per share of Common Stock in connection with such transaction ("Equivalent Consideration"), and (y) $.50 per share of Common Stock (subject to adjustment for dilutive transactions); or

 

 

(3)

 

in a public offering or block transaction in which, to the actual knowledge of executive officers of HCC after reasonable inquiry, no single purchaser (together with affiliates and associates) acquires beneficial ownership, when combined with existing ownership, in excess of 5% of the outstanding Common Stock in the case of a public offering, or 2% of the outstanding Common Stock in the case of a block transaction.

January 1, 2014 - earlier of: (a) December 31, 2020, or (b) such time as Hallmark ceases to own at least a majority of the Common Stock

 

Hallmark 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, except (x) with the prior approval of a special committee of the Company's Board of Directors comprised solely of independent, disinterested directors or (y) if all stockholders unaffiliated with Hallmark are entitled to receive Equivalent Consideration in the transactions.

Thereafter

 

No Limitation

See "THE RECAPITALIZATION—Stockholders Agreement."

4


Table of Contents

Q:    What is the purpose of the transactions?

A:
The Recapitalization will significantly reduce the Company's outstanding indebtedness and result in a debt balance that management believes is more likely to be supported by the Company's operating cash flow as currently existing and projected by management. The Company's management and the special committee of the Company's Board of Directors comprised of independent directors and formed to consider the Transactions (the "Special Committee") believe the Transactions provide an appropriate capital structure for the Company's long-term health and future growth.

    If for any reason the Recapitalization is not consummated, the Company will likely be unable to meet its obligations that become due on August 31, 2010, which would create substantial doubt about the Company's ability to continue as a going concern. The independent registered public accounting firm's opinion on the consolidated financial statements of the Company for the year ended December 31, 2009 contains a going concern explanatory paragraph to this effect. The Special Committee that considered and negotiated the Recapitalization believes that it is unlikely that the Company could obtain, without a guaranty or other support of Hallmark, other equity or debt financing prior to August 31, 2010 in order to replace or refinance obligations becoming due on that date. In summary, the Company believes the ability of the Company to continue its operations depends upon completion of the Recapitalization. See also "THE RECAPITALIZATION—Reasons for the Recommendation by the Special Committee."

Q:    Am I being asked to vote on the proposed transactions?

A:
No. The Mergers, the Merger Agreements, the Second Amended Charter and the Third Amended Charter require the approval of a majority of the voting power of the outstanding capital stock of the Company (or consent in writing in lieu of a vote). The issuances of Common Stock and Preferred Stock in the Transactions may require stockholder approval under rules of the NASDAQ Global Market ("NASDAQ"). The Consenting Holders own a majority of the outstanding shares of the Company's Class A Common Stock and all of the outstanding shares of the Company's Class B Common Stock and have executed a written consent approving the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances pursuant to the Transactions. As a result, no other vote or consent of our stockholders will be required or requested. Please refer to the section of this Information Statement titled "INTRODUCTION."

Q:    What has our Board of Directors recommended?

A:
Subsequent to and in reliance on the unanimous recommendation of the Special Committee, the Board of Directors unanimously: (i) determined that the terms of the Master Recapitalization Agreement, each of the Ancillary Documents, and the consummation of the Transactions are in the best interests of, the Company and its stockholders, (ii) approved the execution, delivery and performance of the Master Recapitalization Agreement and the Ancillary Documents and the consummation of the Transactions, and (iii) resolved to direct that to the extent required by the DGCL, the Mergers, the Merger Agreements, the Second Amended Charter, and the Third Amended Charter be submitted for consideration of the stockholders of the Company.

Q:
Do you believe that the Master Recapitalization Agreement and Transactions are in the best interests of the Company's stockholders?

A:
Yes. The Board of Directors believes that the Transactions are in the best interests of the Company's stockholders.

5


Table of Contents

    Please refer to the sections of this Information Statement titled "THE RECAPITALIZATION—Reasons for the Recommendation by the Special Committee" and "THE RECAPITALIZATION—Reasons for the Recommendation by the Board of Directors".

Q:    Did the Special Committee receive advice from its financial advisors?

A:
The Special Committee received from its independent financial advisor, Morgan Stanley & Co. Incorporated ("Morgan Stanley"), the recommendation on February 25, 2010, from a financial point of view, of the Transactions based on the financial analyses undertaken by Morgan Stanley, a review of financial alternatives available to the Company and the facts, circumstances and conditions existing as of such date. The recommendation of Morgan Stanley and the related financial analyses are more fully described under "Recommendation of Morgan Stanley" in this Information Statement.

    On February 26, 2010, Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey") rendered its oral opinion to the Special Committee of the Board of Directors of the Company (which was subsequently confirmed in writing by delivery of Houlihan Lokey's written opinion dated the same date) to the effect that, as of February 26, 2010, the Aggregate Consideration (as defined below) to be issued or paid by the Company or its wholly owned subsidiary, CMUS, in exchange for the HCC Debt and the Intermediate Holdco Stock (as defined below) in the Exchange and Merger Transactions (as defined below) pursuant to the Master Recapitalization Agreement and Ancillary Documents was fair to the Company from a financial point of view.

    Houlihan Lokey's opinion was directed to the Special Committee and only addressed the fairness, from a financial point of view, of the Aggregate Consideration to be issued or paid by the Company or its wholly owned subsidiary CMUS in exchange for the HCC Debt and the Intermediate Holdco Stock in the Exchange and Merger Transactions pursuant to the Master Recapitalization Agreement and Ancillary Documents, and did not address any other aspect or implication of the proposed transactions. The summary of Houlihan Lokey's opinion in this Information Statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Appendix C to this Information Statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey's written opinion nor the summary of its opinion and the related analyses set forth in this Information Statement are intended to be, and do not constitute, advice or a recommendation to any stockholder of the Company with respect to any matter relating to the Transactions. See "Opinion of Houlihan Lokey."

Q:    What will I receive for my shares if the Transactions are completed?

A:
Upon completion of the Transactions, each share of Class A Common Stock will remain outstanding and unchanged, except as provided in the Second Amended Charter or the Third Amended Charter. Please refer to the sections of this Information Statement titled "THE RECAPITALIZATION—Reclassification of Class A Common Stock and Class B Common Stock."

Q:    Are there conditions to the completion of the Transactions or the Mergers?

        

A:
Yes. The completion of the Transactions is subject to conditions, including: (1) there being no injunction or action by any court or other governmental entity preventing the consummation of the Transactions which has not been vacated, dismissed or withdrawn prior to the completion of the Transactions, (2) the Company's obtaining a revolving credit agreement of at least $30 million and a term of at least 360 days from the closing, (3) Hallmark not having delivered a notice that

6


Table of Contents

    Hallmark, in its sole discretion (but after consultation with legal counsel), shall have determined that the status of any pending or threatened litigation (including, without limitation, the action styled S. Muoio & Co. LLC v. Abbott et al, C.A No. 4729-CC (Del. Ch.)) or regulatory proceeding relating to the Transactions is unsatisfactory to Hallmark, and (4) the satisfaction or waiver of the conditions to the effectiveness of a new credit agreement. Thus, so long as any litigation or regulatory proceeding is threatened or pending, Hallmark can unilaterally prevent the consummation of the Transactions. Please refer to the section of this Information Statement titled "THE RECAPITALIZATION—Master Recapitalization Agreement." For a description of the pending litigation challenging the Recapitalization; see "THE RECAPITALIZATION—Lawsuit."

    The completion of the Mergers is conditioned on the approval by the Company's stockholders (which has been obtained), the satisfaction or waiver of all conditions to the Closing Date (as defined in the Master Recapitalization Agreement), and the occurrence of the Closing (as defined in the Master Recapitalization Agreement) concurrent with the Effective Time (as defined in the HEIC Merger Agreement and the HEH Merger Agreement, as applicable) and HEIC or HEH, as applicable, having no material liabilities other than the guarantees of liabilities of the Company and its subsidiaries at the Effective Time. Please refer to the section of this Information Statement titled "THE MERGERS—Conditions to the Mergers." The "Closing Date" as defined in the Master Recapitalization Agreement is the date that is no later than 10 business days after each of the conditions in the Master Recapitalization Agreement have been satisfied or waived by the relevant parties or on such other date as the Company and HCC agree.

Q:
Can the Master Recapitalization Agreement and the Transactions be terminated prior to the Closing?

A:
Yes, the Master Recapitalization Agreement and the Transactions may be terminated in any of the following ways at any time before the Closing:

By mutual written consent of all of the parties;

By either HCC or the Company upon written notice if a governmental entity of competent jurisdiction shall have enacted, issued or entered any restraining order, preliminary or permanent injunction or similar order or legal restraint or prohibition that enjoins or otherwise prohibits consummation of all or any part of the Transactions; or

After the later of June 30, 2010 and 45 days following receipt of notice that the Information Statement will not be reviewed by the SEC or that the SEC staff has no further comments thereon (which date is June 18, 2010 and thus makes June 30, 2010 the applicable date), by HCC or the Company (if such terminating party or any of its Affiliates (as defined in the Master Recapitalization Agreement) is not then in default of any obligation under the Master Recapitalization Agreement), if the Closing has not occurred on or before such date.

    Please refer to the section of this Information Statement titled "THE RECAPITALIZATION—Master Recapitalization Agreement."

Q:    Are any regulatory approvals required for the Transactions?

A:
No. We believe there are no material federal, state, or foreign regulatory approvals, filings, or notices that are required in connection with the Master Recapitalization Agreement and the Transactions, including the Mergers, other than the filing of the Certificates of Merger and Certificate of Designation with the Secretary of State of the State of Delaware. Please refer to the section of this Information Statement titled "THE RECAPITALIZATION—Regulatory Approvals".

7


Table of Contents

Q:
What vote of stockholders is required to adopt the Master Recapitalization Agreement and the Transactions?

A:
Please refer to the answer to the question "Am I being asked to vote on the proposed transactions?" above.

Q:
Am I entitled to appraisal rights in connection with the Master Recapitalization Agreement or the Transactions?

A:
No. The Company's Class A Common stockholders are not entitled under the DGCL, the Company's Certificate of Incorporation, or By-laws to appraisal rights in connection with the Master Recapitalization Agreement or the Transactions. Please refer to the section of this Information Statement titled "APPRAISAL RIGHTS".

Q:    When are the Mergers and Transactions expected to be completed?

A:
The Mergers will become effective when the certificates of merger are duly filed with the Secretary of State of the State of Delaware under the DGCL or at such later time as set forth in such certificates of merger. The filing of the Certificates of Merger is expected to occur within ten business days following the satisfaction or waiver of the closing conditions set forth in the Master Recapitalization Agreement. Please refer to the section of this Information Statement titled "THE MERGER AGREEMENT—Effective Time of the Merger".

    Pursuant to a stipulation relating to the lawsuit which has challenged the Recapitalization, the Company agreed not to close the Recapitalization for a period of seven weeks from the date of providing copies of the definitive Recapitalization agreements to the plaintiff. The seven-week period expired on April 19, 2010. The Transactions may not be consummated until 20 calendar days from the date of mailing this Information Statement to the stockholders of the Company, which date is approximately June 16, 2010. The Transactions may be closed on that date or any later date if the conditions of the parties' obligations have been satisfied, including (1) there being no injunction or action by any court or other governmental entity preventing the consummation of the Transactions which has not been vacated, dismissed or withdrawn prior to the completion of the Transactions, (2) the Company's obtaining a revolving credit agreement of at least $30 million and a term of at least 360 days from the closing, (3) Hallmark not having delivered a notice that Hallmark, in its sole discretion (but after consultation with legal counsel), shall have determined that the status of any pending or threatened litigation (including, without limitation, the action styled S. Muoio & Co. LLC v. Abbott et al, C.A No. 4729-CC (Del. Ch.)) or regulatory proceeding relating to the Transactions is unsatisfactory to Hallmark, and (4) the satisfaction or waiver of the conditions to the effectiveness of a new credit agreement. The Company, with the approval of the Special Committee, or HCC may terminate the obligations under the Master Recapitalization Agreement at any time after June 30, 2010, if the Recapitalization Agreement has not been consummated prior to such date.

Q:    What is the purpose of the Mergers?

A:
The Mergers will provide greater liquidity to the minority stockholders of HEIC who, upon consummation of the Transactions, will hold publicly-traded Common Stock. The Mergers also serve to simplify Hallmark's ownership interest in the Company.

Q:
If the capital structure of the Company is modified and the Transactions are consummated, will the Company remain a public company and listed on NASDAQ ?

A:
Yes. Following the consummation of the Transactions, the Company will use its commercially reasonable efforts to maintain the listing of the Common Stock on NASDAQ through December 31, 2013. In addition, HCC will (i) in connection with the Transactions (and thereafter

8


Table of Contents

    at the request of a special committee), vote in favor of a reverse stock split with respect to the Common Stock if such committee determines that such reverse stock split is reasonably likely to prevent the delisting of the Common Stock from NASDAQ and (ii) reasonably cooperate with the Company in meeting with representatives of NASDAQ in support of a listing. Through December 31, 2013, HCC agrees not to cause the Company to voluntarily delist from NASDAQ or deregister the shares of Common Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Please refer to the section of this Information Statement titled "THE RECAPITALIZATION—Issuance of Common Stock".

Q:    Should I send in my stock certificates now?

A:
No. The completion of the Transactions will not affect your stock certificates.

Q:    Will I owe taxes as a result of the Transactions?

A:
The Transactions will not be taxable transactions for U.S. stockholders. Please refer to the section of this Information Statement titled "THE RECAPITALIZATION—Material U.S. Federal Tax Consequences" for a more detailed discussion of the tax consequences of the Transactions. However, you should consult your own tax advisor on the specific tax consequences of the Transactions to you.

Q:    Where can I find more information about the Company?

A:
We file periodic reports and other information with the SEC. You may read and copy this information at the SEC's public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. The Company makes these reports and other information available free of charge to stockholders through its website, www.hallmarkchannel.com, as soon as reasonably practicable after it electronically files or furnishes such material with the SEC. This information is also available on the Internet site maintained by the SEC at http://www.sec.gov. For further information, please refer to the section of this Information Statement titled "WHERE YOU CAN FIND ADDITIONAL INFORMATION."

9


Table of Contents


BACKGROUND

        

    Previous Efforts to Sell the Company

        Since August 2005, the Company's Board of Directors and management have made periodic efforts to locate potential strategic alternatives, including acquirors, potential strategic partners, persons interested in acquiring a portion of the Company's equity or in engaging in a strategic transaction with Hallmark and its affiliates regarding the Company, or sources of credit or other investors. On August 17, 2005, the Board appointed Peter Lund and Herbert Granath to a special committee of the Board of Directors (the "2005 Special Committee") to consider potential acquirors and other alternatives for the Company. The 2005 Special Committee retained Citigroup and Wachtell, Lipton, Rosen & Katz as its independent financial and legal advisors to review strategic alternatives for the Company. Citigroup contacted fifty parties and distributed materials regarding the Company to twenty-five of the initial fifty parties contacted. On February 8, 2006, Citigroup advised the Board of Directors that three potential strategic partners had conducted additional due diligence, which included receiving a management presentation, reviewing materials in the Company's data room and questioning management regarding specific topics. Two potential financial parties were in the process of conducting similar due diligence as of that meeting date. None of these parties made an offer for the Company. After the unsuccessful auction, the Special Committee authorized Hallmark to explore discussions with any parties who might subsequently show a renewed interest. No substantive proposals or offers were received by Hallmark or the Company, and on April 13, 2006, the Company's Board decided to terminate the strategic alternative process.

        In June 2006, the Board of Directors authorized Hallmark to enter into discussions with potential strategic partners or financing sources for the Company and to utilize confidential information of the Company and management's time in connection with such exploration and discussions. In October 2006, a new CEO was hired by the Company and his contract provided for a substantial transaction bonus in the event of a change of control. From June 2006 through March 2009, Hallmark and/or the then CEO, after he joined the Company in October, had discussions with numerous major media companies and other potential interested parties. Only two of these discussions resulted in substantive proposals and neither valued the enterprise above the Company's debt.

    Background of the Recapitalization

        Since at least 2000, Hallmark has provided the Company with financial and operational support. Hallmark has provided the Company with royalty-free license agreements to use the Hallmark trademark to enhance the Company's on-air presence and revenue potential. The license agreements terminate on September 1, 2010. Hallmark has also provided the Company with much-needed liquidity to support significant capital investments and the operation and growth of its business, including the payment of subscriber acquisition fees to increase subscribers to the Hallmark Channel and programming costs to achieve viewer ratings that support advertising sales. The Company now has substantial obligations due to HCC and its affiliates as described under "Indebtedness to Hallmark and its Affiliates" below. As of March 31, 2010, the balance of the HCC Debt (defined below) was approximately $1.2 billion.

        Commencing in March 2006, the Company, HCC and certain of their affiliates entered into a waiver agreement and an amended and restated waiver agreement, which has been periodically amended and extended, pursuant to which, among other things, HCC and its affiliates agreed to defer certain payments due with respect to the HCC Debt.

        On May 28, 2009, HCC and its affiliates proposed a plan for the recapitalization of the HCC Debt that included, among other things, the continuation of $500 million of the HCC Debt and the conversion of the balance of the HCC Debt into Preferred Stock. In response, the Company's Board of Directors formed the Special Committee, which retained its own financial and legal advisors. As a

10


Table of Contents


result of negotiation between the Special Committee and HCC, on February 9, 2010, HCC and the Special Committee signed a non-binding term sheet for the Recapitalization, and on February 26, 2010 the Company and HCC entered into the Master Recapitalization Agreement.


Indebtedness to Hallmark and Its Affiliates

        As of March 31, 2010, the Company's outstanding indebtedness and obligations to Hallmark and its affiliates included the following:

        The 10.25% Note.    The Company issued a senior secured note dated August 5, 2003, payable to HCC on August 5, 2011. This note bears interest at the rate of 10.25%. Accrued interest is converted to principal on each February 5 and August 5 through August 5, 2010. Thereafter, interest is payable on each subsequent February 5 and August 5. At March 31, 2010, the Company owed $778.0 million on the 10.25% Note.

        Other Notes.    In addition, the Company has several promissory notes outstanding payable to HCC as follows:

    On December 14, 2001, the Company issued a $75 million promissory note payable to HCC (the "2001 Note"). At March 31, 2010, the Company owed $110 million under the 2001 Note.

    On October 1, 2005, the Company converted approximately $132.8 million of its license fees payable to affiliates of Hallmark to a promissory note (the "2005 Note"). At March 31, 2010, the Company owed $172.3 million under the 2005 Note.

    On March 21, 2006, the Company converted approximately $70.4 million of payables to an affiliate of Hallmark to a promissory note (the "2006 Note"). At March 31, 2010, the Company owed $62.8 million under the 2006 Note.

        Each of these notes bore interest at LIBOR plus 3% until March 10, 2008 when the amended Waiver Agreement (defined below) increased the rate to LIBOR plus 5%. The applicable interest rate at March 31, 2010, was 5.25%. The interest rate reset on April 1 to 5.29% and will remain at that rate through June 30, 2010. At November 15, 2008, accrued interest under each note was added to the respective principal balance pursuant to the amended and restated waiver and standby purchase agreement entered into by Hallmark, certain affiliates of Hallmark and the Company on March 10, 2008 (as amended, the "Waiver Agreement"). Thereafter, interest became payable quarterly in arrears five (5) days after the end of each calendar quarter. Pursuant to the terms of the Master Recapitalization Agreement, interest on these three notes will continue to be payable in cash prior to the Closing.

        The 10.25% Note and these other notes are secured by all of the Company's personal property, tangible and intangible, including without limitation, accounts, contract rights, copyrights and trademarks.

        Accounts Payable.    As of March 31, 2010, the Company and its affiliates had accounts payable due to HCC and its affiliates in the amount of $15.3 million.

        Tax Sharing Agreement.    The Company and its subsidiaries are also indebted to Hallmark with respect to the Federal Income Tax Sharing Agreement (as amended, the "Tax Sharing Agreement"), dated as of March 11, 2003, by and between Hallmark and the Company. As of December 31, 2009, the Company owed $8.5 million under this agreement, and this amount is included in the HCC Debt. Amounts accruing under the Tax Sharing Agreement following December 31, 2009 will be payable in cash quarterly. No payment is due until after the first full quarter following the Closing.

        Guaranty of Credit Facility.    In 2001, the Company entered into a credit agreement with a syndicate of banks, led by JP Morgan Chase Bank, N.A. ("JP Morgan"). The facility is guaranteed by

11


Table of Contents


the Company's subsidiaries, is secured by all tangible and intangible property of the Company and its subsidiaries, and is also guaranteed by Hallmark. As a result of amendments through March 2010, the bank credit facility with JP Morgan as the sole lender in the amount of $30 million has been extended until August 31, 2010. Hallmark has the right and, under certain circumstances, has the obligation to purchase all of the bank lender's interest in the bank credit facility. On March 2, 2010, the Company and JP Morgan set the maximum amount that could be borrowed under the revolving credit facility at $30.0 million and extended the maturity date to August 31, 2010. After this amendment, the Company had $30.0 million of current borrowing capacity under the revolving credit facility.

        HCC Debt.    For purposes of discussing the Transactions, "HCC Debt" means (i) the aggregate principal amount of all indebtedness owed to Hallmark, HCC and their controlled affiliates, including accrued and unpaid interest thereon through the Closing Date, but excluding accrued but unpaid interest with respect to the 2001 Note, the 2005 Note and the 2006 Note; (b) all accounts payable and open intercompany accounts of the Company and its subsidiaries owed to HCC and Hallmark and their controlled affiliates (other than the Company and its subsidiaries); and (c) any amounts due to Hallmark or its affiliates under the Tax Sharing Agreement through December 31, 2009; provided that for the avoidance of doubt the following shall not constitute HCC Debt: (i) Reimbursement Obligations (as defined in the Master Recapitalization Agreement), (ii) Ordinary Course of Business Obligations (as defined in the Master Recapitalization Agreement), and (iii) any amounts due to Hallmark or its affiliates under the Tax Sharing Agreement accruing on or after January 1, 2010.

        Waiver Agreement.    Under the Waiver Agreement, the Company granted a security interest in its assets with respect to the HCC Debt. Pursuant to the terms of the Waiver Agreement, HCC and its affiliates party to the Waiver Agreement have deferred certain payments of the HCC Debt until the end of the Waiver Period (as defined in the Waiver Agreement) and except for certain permitted actions, have agreed not to initiate proceedings for the collection of the HCC Debt or foreclose on the collateral with respect to the HCC Debt. Under the terms of the Waiver Agreement, the Company may cause Hallmark to purchase all of the bank lender's interest in loans under the bank credit facility in the event of default. The Company agreed to, among other things, use its commercially reasonable efforts to refinance the HCC Debt and to repay HCC with "Excess Cash Flow" as defined in the Waiver Agreement. In the Master Recapitalization Agreement, the automatic termination date was extended through August 31, 2010, and the obligations to repay the HCC Debt with Excess Cash Flow were also deferred to that date. If the Transactions close, no principal amounts will be paid on the HCC Debt from Excess Cash Flow.

        Each of the above obligations is described under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K for the year ended December 31, 2009, attached hereto as Appendix B, which Item is incorporated herein by reference.


Original Proposal Regarding Recapitalization

        On May 28, 2009, HCC delivered a proposal to the Company (the "Proposal Letter"), with respect to a recapitalization of the HCC Debt, a copy of which was filed with the SEC on May 28, 2009 as an exhibit to the Company's report on Form 8-K. Pursuant to the Proposal Letter, in lieu of exercising other rights available upon the expiration of the Waiver Period, including foreclosing on the collateral security or commencing certain bankruptcy proceedings, HCC proposed a recapitalization of the HCC Debt (the "Proposed Recapitalization"). At that time, the Waiver Period expired on May 1, 2010. In the Proposal Letter, HCC stated that this expiration date would not be extended.

        In particular, HCC proposed that, among other things:

    Approximately $500 million principal amount of the HCC Debt would be restructured into new debt instruments on terms described in the Proposal Letter or as negotiated with the Company.

12


Table of Contents

      The new debt would consist of two (2) tranches: Tranche 1 of $300 million would be cash pay and bear interest at the rate of 12% per annum, which the Company would have the ability to pay-in-kind, by adding interest to the principal, ("PIK") for up to three quarterly payments; and Tranche 2 of $200 million would be pay-in-kind at the rate of 15% per annum.

      The maturity of the new debt instruments would be September 30, 2011.

    The balance of the HCC Debt would be converted into Preferred Stock on terms described in the Proposal Letter or as negotiated with the Company.

    The aggregate liquidation preference of the preferred stock would be in an amount equal to the amount of the converted HCC Debt. Each share of the preferred stock would be convertible at any time at the option of the holder at a rate equal to the liquidation preference with respect to such share divided by the conversion price per share, which would initially be set at $1.00 per share, subject to adjustments for stock splits and for stock issued at less than the then-current conversion price.

    The preferred stock would not be entitled to preferential dividends but would participate in any dividends on the Common Stock on an "as if converted" basis.

    The Company would have an option to redeem the preferred stock at any time, upon 30-days' written notice, at a price equal to the liquidation preference.

    Holders of the preferred stock would vote together with holders of the Company's Class A Common Stock on an "as if converted" basis.

    As part of the proposal, the Company's certificate of incorporation would be amended to authorize additional shares of preferred stock and Common Stock in amounts sufficient for the proposed conversion of HCC Debt into preferred stock and the conversion of such preferred stock into Common Stock.

    The Tax Sharing Agreement would be amended to among other things permit the Company to deduct both cash and PIK interest due to Hallmark in calculating tax-sharing payments on a prospective basis.

    HEH and HEIC would be merged into the Company, with the stockholders of HEH and HEIC receiving Common Stock in accordance with their indirect ownership of the Company immediately prior to such mergers.


Special Committee

        In response to HCC's proposal, on June 2, 2009, the Company appointed the Special Committee to evaluate the Proposed Recapitalization and take other actions as the Special Committee deemed appropriate. The Special Committee consisted of Herbert Granath, Drue Jennings (Chairman), and Peter Lund, all of whom are independent of Hallmark.

        The Special Committee subsequently engaged Richards, Layton & Finger, P.A. as special counsel to advise the Special Committee. On June 8, 2009, the Company's Board of Directors empowered the Special Committee to, among other things, (i) consider the terms of the Proposed Recapitalization, (ii) negotiate with HCC with respect to the terms and conditions of the Proposed Recapitalization, and, if the Special Committee deemed it appropriate in its sole discretion, to recommend or not recommend the Proposed Recapitalization, (iii) direct management in regard to its participation in the Special Committee's review of the Proposed Recapitalization, (iv) review, comment on, and participate in the drafting of any definitive agreement and any other documents with respect to the Proposed Recapitalization, (v) consider such matters and take such further actions as it deemed advisable, and

13


Table of Contents


(vi) report to the Company's Board of Directors the recommendations and conclusions of the Special Committee with respect to what action, if any, should be taken by the Company's Board of Directors and the Company with respect to the Proposed Recapitalization as a whole or any aspect of the Proposed Recapitalization. The Board of Directors also resolved not to recommend any part of the Proposed Recapitalization for approval by the Company's stockholders, or otherwise authorize an agreement with respect to the Proposed Recapitalization, without a prior favorable recommendation by the Special Committee. Further, the Special Committee was authorized to retain and compensate, at the Company's expense, such advisors, including financial and legal advisors and other experts, as the Special Committee deemed appropriate to assist it.

        On June 24, 2009, the Special Committee and its legal advisors met with three potential financial advisors to be retained by the Special Committee. Each of the three potential financial advisors discussed its preliminary views on the Company's financial condition, the Proposed Recapitalization and potential alternatives to the Proposed Recapitalization. Each of the potential financial advisors indicated that it did not customarily render fairness opinions in recapitalizations like that provided for in the Proposed Recapitalization. On July 8, 2009, the Special Committee engaged Morgan Stanley, based on Morgan Stanley's qualifications, experience, reputation and knowledge of the business and affairs of the Company and its industry, to provide financial advice and assistance concerning the Proposed Recapitalization, including, as appropriate, advice and assistance with respect to defining objectives, performing valuation analyses, and structuring, planning and negotiating the Proposed Recapitalization. In light of the fact that Morgan Stanley customarily does not render fairness opinions in connection with recapitalizations structured similarly to the Proposed Recapitalization, Morgan Stanley was not engaged to render an opinion as to the fairness of the Proposed Recapitalization.

        On July 13, 2009, S. Muoio & Co. LLC ("Plaintiff"), a holder of 5.8% of the outstanding Class A Common Stock, filed a complaint in the Delaware Court of Chancery challenging the fairness of the Proposed Recapitalization and asking the Court to enjoin the consummation of the Proposed Recapitalization. The complaint named as defendants (i) HCC and its affiliates, (ii) all of the Company's directors, and (iii) the Company, as a nominal defendant (collectively, the "Defendants"). On July 22, 2009, a Stipulation Providing for Notice of Transaction (the "Stipulation") was filed with the Court of Chancery. The Stipulation provided that the Company would not consummate any transaction arising out of or relating to the Proposed Recapitalization until not less than seven weeks after providing Plaintiff with a notice of the terms of the proposed transaction. Notice of the terms of the proposed Recapitalization, including copies of the agreements, was provided to the plaintiff on March 1, 2010. Accordingly, the seven-week period described in the Stipulation expired on April 19, 2010.

        On July 16, 2009, counsel to HCC delivered a letter (the "July 16 Letter") to counsel to the Special Committee. In the July 16 Letter, counsel to HCC reiterated its understanding that the Special Committee needed time to determine an appropriate response to the Proposed Recapitalization. Although HCC had initially requested to receive a decision from the Company regarding the Proposed Recapitalization prior to the filing of the Company's second quarter Form 10-Q, HCC's counsel confirmed in the July 16 Letter that the Form 10-Q filing date was in no way intended as a deadline. In addition, counsel to HCC confirmed that notwithstanding HCC's understanding that the Company was unable to obtain refinancing of the debt owed to HCC, HCC assumed that the Special Committee would explore refinancing alternatives.

        Throughout July and August 2009, Morgan Stanley conducted financial due diligence of the Company. The Special Committee was updated on Morgan Stanley's progress at regular meetings of the Special Committee and its advisors. On July 27, 2009, representatives from Morgan Stanley met with the Company's Chief Financial Officer and the Company's Vice President of Planning and Analysis to review the Company's five-year business plan. On August 6, 2009, representatives from Morgan Stanley and Richards, Layton & Finger met with the Company's President and Chief Executive

14


Table of Contents


Officer and Chief Financial Officer to discuss the Company's current and projected advertising sales and ratings performance.

        On August 25, 2009, Mr. Granath and the Special Committee's advisors met with Mr. Muoio and his advisors at the offices of Morgan Stanley in New York City to discuss Mr. Muoio's concerns regarding the Proposed Recapitalization. The Special Committee's legal advisors advised Mr. Muoio that the Special Committee was unable to provide Mr. Muoio with any confidential information regarding the Special Committee's negotiations that was not available to the Company's stockholders generally unless Mr. Muoio entered into a confidentiality agreement, which Mr. Muoio declined to do.

        On September 11, 2009, the Company's President, Chief Financial Officer, and Vice President of Financial Planning and Analysis presented the Company's revised five-year business plan to the members of the Special Committee at a meeting held at the offices of Morgan Stanley in New York City. At that meeting, representatives of Morgan Stanley also discussed the Proposed Recapitalization and potential alternatives to the Proposed Recapitalization, including doing nothing or maintaining the status quo, a capital markets refinancing, a going private transaction in which Hallmark would acquire all of the remaining shares of Class A Common Stock not already owned by Hallmark or its affiliates, entering into bankruptcy proceedings and negotiating improved terms with respect to a recapitalization.

        On September 21, 2009, the Special Committee delivered a letter to Hallmark indicating that the Special Committee had determined that Hallmark should make a proposal to acquire all of the shares of Class A Common Stock not owned by Hallmark or its affiliates. Hallmark responded with a letter to the Special Committee indicating that it had no plans to take the Company private and that the Proposed Recapitalization offer remained open and unchanged. Continuing negotiations between the Special Committee and Hallmark confirmed that Hallmark was unwilling to make an offer to purchase all of the shares of Class A Common Stock not owned by Hallmark or its affiliates.

        On October 1, 2009, representatives of Morgan Stanley met with representatives of Evercore Partners ("Evercore"), financial advisors to HCC, to present the terms of the Special Committee's response to the Proposed Recapitalization (the "Proposal Response"). On October 15, 2009, the representatives from Morgan Stanley and Evercore met to discuss HCC's response to the Proposal Response. At a meeting of the Special Committee on October 27, 2009, representatives of Morgan Stanley reviewed with the Special Committee HCC's verbal response to the Proposal Response (the "October Proposal"). Morgan Stanley analyzed with the Special Committee the differences between the terms of the Proposed Recapitalization, the Proposal Response, and the October Proposal. The Special Committee directed the representatives of Morgan Stanley to advise HCC's advisors that the Special Committee could not accept the October Proposal in light of certain unacceptable terms, including, among other things, the proposed maturity date of the new debt, the amount of the new debt and HCC's pro forma ownership of the Company.

        Following the Special Committee's delivery of the October Proposal, the Special Committee's advisors and HCC's advisors had several meetings with respect to the terms of the Proposed Recapitalization. Morgan Stanley updated the Special Committee as to the status of those negotiations at several meetings of the Special Committee. The parties focused on the ability of the Company to service any restructured debt, the cost to HCC and the potential outcome of enforcing its rights under the HCC Debt upon expiration of the Waiver Period, and the value of the equity to be retained by the holders of the Common Stock other than HCC and its affiliates. On November 12, 2009, HCC's advisors verbally communicated to the Special Committee HCC's response (the "November Proposal") to the October Proposal, which addressed many of the Special Committee's concerns with the Proposed Recapitalization, and requested a principals meeting to discuss the November Proposal. On November 18, 2009, representatives of Morgan Stanley reviewed with the Special Committee the preliminary terms proposed by HCC and its advisors in the verbal November Proposal. On November 23, 2009, the members of the Special Committee held a telephonic meeting with the

15


Table of Contents


Company's President and Chief Executive Officer and the Company's Chief Financial Officer to receive an update on the Company's financial performance and 2010 projections.

        On November 27, 2009, HCC delivered to the Special Committee a written term sheet providing the terms of the November Proposal. On December 1, 2009, the members of the Special Committee and its advisors and representatives from HCC and its advisors met at the offices of Willkie, Farr & Gallagher LLP, legal counsel to HCC, in New York City to discuss the terms of the November Proposal. The parties were unable to reach agreement on the terms of the November Proposal and the Special Committee determined that it was not prepared to accept the November Proposal. On December 7, 2009, the Special Committee determined that it would be advisable to retain a financial advisor to assist the Special Committee in connection with the Special Committee's consideration of the Recapitalization and, if appropriate, to render an opinion to the Special Committee with respect to whether the aggregate consideration to be issued by the Company in the Recapitalization was, in the aggregate, fair to the Company from a financial point of view. At a telephonic meeting of the Special Committee held on December 7, 2009, representatives of Morgan Stanley discussed with the Special Committee the items that were still under negotiation with HCC. Those negotiations centered on the terms of a standstill agreement with respect to HCC's activities that would be included in the recapitalization agreement, HCC's pro forma ownership levels in the Company following the recapitalization, and the Special Committee's continuing requirement of the approval of the recapitalization by a majority of the Company's non-Hallmark affiliated stockholders. On December 10, 2009, the Special Committee delivered a revised term sheet to HCC (the "December Proposal"). The Special Committee's advisors and HCC's advisors continued to negotiate the terms of the Special Committee's revised proposal.

        In December 2009, two individuals ("Mr. A and Mr. B") submitted a "Finders Agreement" to the Company pursuant to which they sought confidential information about the Company and the Proposed Recapitalization. Thereafter, a third individual ("Mr. G") contacted the Special Committee and expressed his desire for the Special Committee to furnish himself, Mr. A, and Mr. B with information regarding the Proposed Recapitalization. In response to those inquiries, Richards, Layton & Finger, at the direction of the Special Committee, sent a confidentiality agreement to Mr. G and requested that Mr. G execute the confidentiality agreement before the Special Committee would furnish confidential information to him. On January 25, 2010, Mr. G, Mr. A, and Mr. B submitted a revised Finder's Agreement (the "Finder's Agreement") to the Special Committee. The Finder's Agreement contemplated the engagement of the partners by the Company to identify qualified investors for the recapitalization of the Company and provided for the payment of fees. Richards, Layton & Finger engaged in numerous phone calls with Mr. G and relayed the partners' interest in refinancing the HCC Debt or the New Debt to the Special Committee, including a proposed transaction involving financing from an unnamed bank. At the direction of the Special Committee, Richards, Layton & Finger requested that Mr. G provide the identity of the unnamed bank and information regarding previous transactions in which the bank had been involved and to provide the terms of any proposal by the bank. After several requests, Mr. G, Mr. A and Mr. B refused to provide the Special Committee with additional information regarding the bank without an executed Finder's Agreement. The Special Committee concluded that, absent additional information regarding the bank and an executed confidentiality agreement, it would not pursue discussions with the partners.

        On December 14, 2009, the Special Committee engaged Houlihan Lokey as a financial advisor to assist the Special Committee in connection with the Special Committee's consideration of the Recapitalization and, if appropriate, render an opinion to the Special Committee as to whether the aggregate consideration to be issued or paid by the Company or CMUS in exchange for the HCC Debt and the outstanding shares of common stock of HEIC and HEH in the Mergers was, in the aggregate, fair to the Company from a financial point of view. Counsel to the Special Committee initially contacted Houlihan Lokey in July, 2009 concerning potential retention by the Special Committee.

16


Table of Contents


During December, January and February, representatives from Houlihan Lokey reviewed documents and information provided by the Company and had several meetings with the Company's President and Chief Executive Officer and the Company's Chief Financial Officer.

        On January 26, 2010, the Company announced a programming partnership with the MSLO Transaction for the exclusive airing of the Martha Stewart lifestyle series. In light of the MSLO Transaction, Morgan Stanley and Houlihan Lokey received reports and an updated business plan from the Company's Chief Financial Officer, which included the impact of the MSLO Transaction on the Company's business plan and projections.

        After further negotiation throughout December and early January, HCC and the Special Committee finalized their negotiation of the terms of the December Proposal. At a meeting on February 9, 2010, the Special Committee met with its financial and legal advisors to discuss the status of the negotiations. The Company's President and Chief Executive Officer and Chief Financial Officer presented updated and revised five-year projections, including the impact of the programming partnership with Martha Stewart Living Omnimedia (the "MSLO Transaction"), which are summarized in "Internal Financial Forecasts." At this meeting, during discussions regarding the terms of the December Proposal and other potential financial alternatives available to the Company, representatives of Morgan Stanley stated that, given the current market conditions and the extensive efforts by the Company with potential interested parties from June 2006 through March 2009, they did not believe that it was likely that a third party would be interested in a strategic transaction with the Company that would result in a better transaction for the Company's stockholders than the terms negotiated with HCC.

        Following this meeting, on February 9, 2010, the Special Committee signed a non-binding term sheet. Thereafter, the Special Committee and its advisors and HCC and its advisors negotiated the terms and provisions of the Master Recapitalization Agreement and the Ancillary Documents based on the term sheet.

        On February 25, 2010, the Special Committee held a meeting at which Morgan Stanley recommended, from a financial point of view, the Transactions to the Special Committee based on the financial analyses undertaken by Morgan Stanley, a review of financial alternatives available to the Company, and the facts, circumstances and conditions existing as of such date. The recommendation of Morgan Stanley and the related financial analyses are more fully described under "Recommendation of Morgan Stanley" in this Information Statement.

        On February 26, 2010, Houlihan Lokey rendered its oral opinion to the Special Committee (which was subsequently confirmed in writing by delivery of Houlihan Lokey's written opinion dated the same date) to the effect that the aggregate consideration to be issued or paid by the Company or CMUS in exchange for the HCC Debt under the Master Recapitalization Agreement and the outstanding shares of common stock of HEIC and HEH in the Mergers under the HEIC Merger Agreement and the HEH Merger Agreement is, in the aggregate, fair to the Company from a financial point of view. See "Opinion of Houlihan Lokey" in this Information Statement.

        Following the filing of the Company's preliminary information statement, the Special Committee continues to receive and consider inquiries for refinancing a portion of the Company's indebtedness from parties in connection with the Recapitalization. However, no substantive offers or proposals for a refinancing or a recapitalization of the Company's indebtedness of a similar magnitude to the Recapitalization has been received by the Company.

17


Table of Contents


THE RECAPITALIZATION

        After lengthy negotiations between HCC and the Special Committee and each of their respective advisors, HCC and the Special Committee negotiated and agreed to revised terms with respect to a recapitalization (the "Recapitalization") described below. The following is a summary of the material terms of the Master Recapitalization Agreement and Ancillary Documents. Although we believe that this description covers the material terms of the Master Recapitalization Agreement and Ancillary Documents, it may not contain all the information that is important to you and is qualified in its entirety by reference to the Master Recapitalization Agreement and Ancillary Documents. We urge you to carefully read the Master Recapitalization Agreement and Ancillary Documents in their entirety.


Master Recapitalization Agreement

        As more fully described below, under the terms of the Master Recapitalization Agreement:

    $315 million principal amount of the HCC Debt will be converted into an equal principal new debt to be issued pursuant to the terms of the Credit Agreement included as Exhibit A to the Master Recapitalization Agreement;

    $185 million principal amount of the HCC Debt will be converted into 185,000 shares of Preferred Stock to be issued pursuant to the Certificate of Designation included as Exhibit C to the Master Recapitalization Agreement; and

    the balance of the HCC Debt will be converted into Common Stock based on the Conversion Price set forth in the Master Recapitalization Agreement.

        The Company estimates that the Conversion Price (as defined in the Master Recapitalization Agreement) will be $2.5969, and that if the Transactions were to close on May 31, 2010, the Company would issue Preferred Stock and Class A Common Stock as follows:

    to HCC 185,000 shares of Preferred Stock with a liquidation preference of $1,000 per share and an initial estimated conversion price of $2.5969 (which is subject to future adjustments as provided in the Certificate of Designation), which shares would be convertible into an estimated 71,238,785 shares of Class A Common Stock at such Conversion Price;

    to HCC a number of shares of Class A Common Stock equal to the HCC Debt on the closing of the Recapitalization (which is expected to be approximately $1.2 billion) less $500.0 million divided by the estimated Conversion Price, or an estimated 252,451,757 shares of Class A Common Stock; and

    as a result of the mergers of each of HEIC and HEH with and into the Company, to HCC, Liberty Crown, Inc., VISN Management Corp. and JP Morgan Partners (BHCA), L.P., in the aggregate, 83,817,071 shares of Class A Common Stock and will cancel 83,817,071 shares of the Company's Class A and Class B Common Stock owned currently by HEIC.

The actual Conversion Price may differ from $2.5969 per share as a result of a number of factors, including the final determination of HCC Debt as of March 31, 2010. The actual number of shares of Class A Common Stock issued in exchange for HCC Debt may differ from the number stated above as a result of (a) an actual closing date other than May 31, 2010, (b) the final determination of HCC Debt as of the actual closing date, and (c) the difference, if any, in the actual Conversion Price and the estimated Conversion Price of $2.5969 per share.

        Immediately following the closing of the Transactions, assuming a closing date of May 31, 2010, and based on the assumptions set forth above, HCC will hold an estimated 322,449,413 shares of Class A Common Stock (including shares of Class A Common Stock currently held directly by HCC, but excluding shares of Class A Common Stock issuable upon conversion of the Preferred Stock).

18


Table of Contents

        The Transactions also include the filing of the Second Amended Charter, the filing of the Certificate of Designation, the HEIC Merger pursuant to the HEIC Merger Agreement and the HEH Merger pursuant to the HEH Merger Agreement. In addition, the Master Recapitalization Agreement provides that, at the request of a special committee of independent Company directors at any time prior to December 31, 2013, the Company will file the Third Amended Charter to effect the Reverse Split.

        Conditions:    The obligations of the parties to consummate the Transactions are subject to the satisfaction or waiver of customary conditions on or prior to the Closing Date including:

    (i)
    No order, statute, rule, regulation or injunction by any court or other governmental entity that prohibits or prevents the consummation of the Transactions is in effect on the Closing Date.

    (ii)
    Twenty (20) calendar days have passed since the date the Company mailed the Information Statement to its stockholders.

    (iii)
    The Company has obtained a revolving credit facility from a third-party lender (with a term of not less than 360 days from the Closing Date) with availability of at least $30 million and on other terms and conditions reasonably acceptable to the Company, and Hallmark has guaranteed, or caused one or more of its affiliates to guarantee, such credit facility. See "THE RECAPITALIZATION—Revolving Credit Facility" below.

    (iv)
    The Company has received from HCC certified copies of the board resolutions of HCC and HEH approving the execution and delivery of the Master Recapitalization Agreement and the Ancillary Documents and the consummation of the Transactions.

    (v)
    HCC has received from the Company certified copies of the board resolutions of each Debtor (as defined in the Master Recapitalization Agreement) approving the execution and delivery of the Master Recapitalization Agreement and the Ancillary Documents and the consummation of the Transactions.

    (vi)
    Hallmark not having delivered a notice that Hallmark, in its sole discretion (but after consultation with legal counsel), shall have determined that the status of any pending or threatened litigation (including, without limitation, the action styled S. Muoio & Co. LLC v. Abbott et al, C.A. No. 4729-CC (Del. Ch.)) or regulatory proceeding relating to the Recapitalization transactions is unsatisfactory to Hallmark. See "THE RECAPITALIZATION—Lawsuit" below.

    (vii)
    All conditions to the effectiveness of the Credit Agreement have been satisfied or waived.

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

        Termination:    The Master Recapitalization Agreement and the Transactions may be terminated in any of the following ways at any time before the Closing:

    (i)
    By mutual written consent of all of the parties to the Master Recapitalization Agreement;

    (ii)
    By either HCC or the Company upon written notice if a court or other governmental entity of competent jurisdiction has enacted, issued, or entered any restraining order, preliminary or

19


Table of Contents

      permanent injunction or similar order or legal restraint or prohibition that enjoins or otherwise prohibits consummation of all or any part of the Transactions; or

    (iii)
    After the later of (i) June 30, 2010 and (ii) 45 days following receipt of notice that the Information Statement will not be reviewed by the SEC or that the SEC staff has no further comments the Information Statement, by HCC or the Company (if such terminating party or any of its Affiliates is not then in default of any obligation under the Master Recapitalization Agreement), if the Closing has not occurred on or before that date. June 18, 2010 is the date which is 45 days after notice from the SEC staff that they have no further comments, making the applicable termination date June 30, 2010.

        Expenses:    Except as otherwise set forth in the Master Recapitalization Agreement, each party bears the legal, accounting, and other expenses incurred by it or on its behalf in connection with the Master Recapitalization Agreement and the Transactions.


New Debt

        Approximately $315 million principal amount of the HCC Debt will be restructured into new debt instruments (the "New Debt") on terms including the following:

    Maturity:  The maturity of the New Debt will be December 31, 2013.

    Tranches:  The New Debt will include two tranches:

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

    Term B Loan of $115 million will allow PIK through December 31, 2010 and will require interest to be paid in cash only for the quarterly period beginning on January 1, 2011 and for all quarterly periods thereafter. The interest rate will be 11.5% through December 31, 2011, increasing to 14% on and after January 1, 2012 through December 31, 2013.

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

        Default Interest:    The Company will be required to pay interest on its obligations to HCC at an interest rate equal to the original interest rate applicable to such obligations plus 2% if: (i) any amount of principal of the New Debt is not paid when due; (ii) any amount payable under any Fundamental Document (as defined in the Credit Agreement) is not paid when due; or (iii) an Event of Default (as defined below) exists.

        Prepayment:    The New Debt will be prepayable at any time at par plus accrued interest.

        Mandatory Prepayments:    The following amounts must be used to prepay to New Debt. All net cash proceeds from asset sales or other dispositions, except to the extent such net cash proceeds are reinvested in productive assets of a kind then used or usable in the business of the Company or its subsidiaries within 180 days of the sale or other disposition; 100% of net cash proceeds from equity issuances; 100% of net cash proceeds from debt issuances (exclusive of the Revolver as described below); 75% of Excess Cash Flow (as defined in the New Debt agreements); and upon the sale of assets in advance of a condemnation proceeding, or following the occurrence of a casualty or condemnation for which the Company or its subsidiaries have received proceeds, any such proceeds in excess of the amount used to replace the subject assets. Prepayments must be applied in the following

20


Table of Contents


order (i) first to PIK interest on the Term A Loan (ii) then to principal on the Term A Loan (iii) then to PIK interest on the Term B Loan, and (iv) finally to principal on the Term B Loan.

        Acceleration:    A change of control is not an event of default under the Credit Agreement for the New Debt. The principal and interest on the New Debt will, however, become immediately due and payable upon a change in control arising from (i) a Premium Transaction (as defined below in the section titled "THE RECAPITALIZATION—Stockholders Agreement") or (ii) a transaction approved by the Company's Board of Directors.

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

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

        Affirmative Covenants:    Under the Credit Agreement, the Company and its subsidiary guarantors (the "Credit Parties") will, among other things:

    (i)
    Provide annual and quarterly financial statements and compliance certificates to HCC.

    (ii)
    Maintain their corporate existence and material rights, licenses and permits and comply in all material respects with applicable law.

    (iii)
    Keep their tangible properties that are material to the business in good repair and working condition and their assets of an insurable character.

    (iv)
    Provide prompt notice to HCC of material events including any Event of Default, any material adverse change in the party's condition or operations or any event which could reasonably be expected to materially and adversely affect performance of such party's obligations to HCC, result in a Material Adverse Effect (as defined in the Credit Agreement) or otherwise cause the loss of more than 7.5 million subscribers.

    (v)
    Provide prompt notice to HCC of the institution of any action or investigation by any governmental authority or material development in any action or investigation, which might, if adversely determined, reasonably be expected to have a material adverse effect or otherwise cause the loss of more than 7.5 million subscribers.

    (vi)
    Upon HCC's request, take all actions necessary to register copyrights or trademarks.

    (vii)
    Defend the collateral against liens other than permitted encumbrances.

    (viii)
    Notify HCC of any potential violation of, non-compliance with or potential liability under, any environmental laws which could reasonably be expected to have a material adverse effect.

    (ix)
    Upon HCC's request, obtain credit ratings issued by Moody's or S&P.

        Negative Covenants:    The Credit Agreement also includes restrictions on the ability of the Credit Parties to, among other things:

    (i)
    Incur additional indebtedness, subject to certain exceptions including, but not limited to, indebtedness in respect of secured purchase money financings not to exceed $30 million at any

21


Table of Contents

      time, ordinary trade payables, indebtedness to another Credit Party and a $30 million revolving credit facility.

    (ii)
    Incur liens on any collateral, subject to certain exceptions including, but not limited to, subordinated liens in favor of guilds as required by collective bargaining agreements and liens incurred in the ordinary course of business.

    (iii)
    Incur guaranties, subject to certain exceptions including, but not limited to, certain guaranties that would constitute investments.

    (iv)
    Make investments or payments, subject to certain exceptions including investments of less than $5 million in the aggregate to entities that are not wholly-owned subsidiaries, intercompany advances, payments to other Credit Parties and to Hallmark pursuant to the terms of a service agreement.

    (v)
    Sell, lease, transfer, license, or otherwise dispose of (A) movies or television programs other than in the ordinary course of business (provided that the Company will not be entitled to sell, transfer or alienate its entire interest items of such products with an aggregate value in excess of $5 million), (B) channels owned or operated by the Credit Parties or (C) other property except de minimus dispositions made in the ordinary course of business.

    (vi)
    Sell, discount or otherwise dispose of notes, accounts receivable, or other obligations owing to HCC except in the ordinary course of business.

    (vii)
    Make or incur obligations to make capital expenditures in excess of $10 million for fiscal year 2010, $5 million for fiscal year 2011, $5 million for fiscal year 2012, and $5 million for fiscal year 2013.

    (viii)
    Amend any material agreement in a manner materially disadvantageous to HCC.

    (ix)
    Enter into any agreement prohibiting the creation or assumption of liens upon the properties or assets of the Credit Parties or requiring an obligation to be secured if some other obligation is secured.

    (x)
    Enter into any interest rate protection agreement or currency agreement other than for bona fide hedging purposes.

    (xi)
    Permit the Cash Interest Coverage ratio (as defined in the Credit Agreement) of the Company and its consolidated subsidiaries, as at the end of each fiscal quarter, to be less than 2.0:1.0.

        Events of Default:    The Credit Agreement defines "Events of Default" to include the following:

    (i)
    Any representation or warranty made by any Credit Party in the Credit Agreement, other Fundamental Document or in any document furnished to HCC pursuant to the Credit Agreement or other Fundamental Document, is proven to have been false or misleading in any material respect.

    (ii)
    Default in the payment of any principal of or interest on the New Debt (subject to a five day grace period) or other fees payable by the Company under the Credit Agreement.

    (iii)
    Default by any Credit Party in the performance of the covenant requiring notice of material events, any other negative covenant or the requirement to establish the NICC reserve account.

    (iv)
    Default by any Credit Party in the performance of any other covenant or agreement contained in the Credit Agreement or any Fundamental Document, continuing unremedied for thirty days after the defaulting party obtains knowledge thereof or receives written notice from HCC.

22


Table of Contents

    (v)
    Default with respect to any indebtedness of any Credit Party in excess of $1 million when due or the performance of any obligation relating to such indebtedness, if the effect is to accelerate or permit the acceleration of the maturity of such indebtedness.

    (vi)
    Any Credit Party does not pay its debts as they become due or admits in writing its inability to pay its debts, makes a general assignment for the benefit of creditors or is subject of a voluntary or involuntary bankruptcy or similar proceeding.

    (vii)
    Final judgments for payments in excess of $1,000,000 are rendered in the aggregate against any Credit Party that is not discharged or stayed pending appeal within thirty days from the entry of the judgment.

    (viii)
    The Credit Agreement or other Fundamental Document ceases to be in full force and effect.

    (ix)
    The Credit Parties fail to maintain employee benefit plans in accordance with ERISA.

    (x)
    The Company defaults on the NICC Preferred Interest as required by the CMUS limited liability company agreement and such default is not remedied, cured, waived or consented to within the grace period with respect thereto.

    (xi)
    Any demand for payment is made pursuant to the Hallmark Guaranty (as defined in the Credit Agreement).


Issuance of Preferred Stock

        As part of the Recapitalization, $185 million principal amount of the HCC Debt will be converted into an equal liquidation preference of convertible preferred stock on the Closing Date, that is 185,000 shares of Preferred Stock.

        The terms of the Preferred Stock include the following:

        Dividends:    No dividends will accrue or be payable from the date of issue of the Preferred Stock through December 31, 2010. Cumulative dividends will accrue from and after January 1, 2011 through December 31, 2011 at the rate of 14% per annum of the Original Issue Price. The "Original Issue Price" is $1,000 per share subject to adjustment in the event of any stock dividends, stock splits, stock distributions or combinations and other corporate actions having a similar effect with respect to the Preferred Stock. Cumulative dividends will accrue from and after January 1, 2012 at the rate of 16% per annum of the Original Issue Price. Until December 31, 2014, dividends are payable in cash or in additional shares of Preferred Stock, at the option of the Company. After December 31, 2014, dividends on the Preferred Stock are payable in cash only. The Preferred Stock will participate with the Common Stock as to any declared dividends on an "as converted" basis.

        Optional Conversion:    Each share of Preferred Stock will become and remain convertible at the earlier of December 31, 2013, or upon a payment or refinancing of the New Debt (a "Refinancing") at the option of the holder into a share of Common Stock at the rate equal to the Original Issue Price plus accrued and unpaid cash dividends with respect to such shares of Preferred Stock divided by the Preferred Conversion Price. "Preferred Conversion Price" will initially be equal to the Conversion Price calculated pursuant to the Master Recapitalization Agreement, subject to adjustments for stock splits, combinations, dividends, mergers, recapitalizations and other corporate actions having a similar effect with respect to the Preferred Stock and other adjustments as provided below under "Anti-Dilution Protection."

        Anti-Dilution Protection:    The Preferred Conversion Price will be subject to adjustment for stock splits, combinations, dividends, mergers, recapitalizations and other corporate actions having a similar effect with respect to the Preferred Stock. The Preferred Conversion Price will also be subject to adjustment on a full-ratchet basis in the event that the Company issues additional shares (other than

23


Table of Contents


Board approved employee options or shares in an acquisition, merger or joint venture) at a purchase price less than the prevailing Preferred Conversion Price. Full-ratchet basis means an adjustment of the Preferred Conversion Price to the lowest consideration paid per share for the additional shares. Shares subject to options, other rights to acquire and convertible securities are deemed issued at their then exercise or conversion price.

        Mandatory Redemption:    The Company must provide written notice (the "Excess Proceeds Notice") to holders of Preferred Stock, when and as the Company receives, upon a refinancing of the New Debt, net proceeds from such refinancing in excess of the aggregate outstanding principal and interest amounts of New Debt (the "Excess Refinancing Proceeds"). Upon receipt of such notice, the holders of Preferred Stock may elect to apply such Excess Refinancing Proceeds to redeem (to the extent of funds legally available for such redemption) at the Redemption Price a number of the outstanding shares of Preferred Stock. The "Redemption Price" means a price per share equal to the Original Issue Price, plus an amount equal to any accrued but unpaid cash dividends with respect to such share, together with any other dividends declared but unpaid. If the Company receives any such requests, it must redeem on the twentieth day after delivery of the Excess Proceeds Notice, the number of outstanding shares of Preferred Stock set forth in all such notices received by the Company within fifteen days after delivery of the Excess Proceeds Notice. If the Excess Refinancing Proceeds are not sufficient to redeem all shares of Preferred Stock to be redeemed, the Company will redeem a pro rata portion of redeemable shares based on the holders' respective redemption requests.

        Optional Redemption:    The Company will be able to redeem the Preferred Stock at any time, upon 10-days' written notice, at the Redemption Price.

        Voting Rights:    The Preferred Stock will vote together with the Common Stock as a single class, with the Preferred Stock voting on an "as converted" basis.

        Protective Provisions:    The consent of holders of more than 50% of the Preferred Stock, voting as a separate class, will be required to approve certain actions, including without limitation:

    (i)
    Any authorization, offer, sale or issuance of any equity securities pari passu or senior in right of liquidation, dividends or otherwise to the Preferred Stock or any additional shares of Preferred Stock.

    (ii)
    Repurchase or redemption of equity securities (other than from an employee following termination), or declaration or payment of any dividend on the Common Stock.

    (iii)
    Any sale, merger, liquidation or dissolution of the Company.

    (iv)
    Any significant acquisitions involving the payment, contribution or assignment by or to the Company or its subsidiaries of money or assets greater than $5,000,000.

    (v)
    Any action that adversely alters or changes the rights, preferences or privileges of the Preferred Stock.

    (vi)
    The issuance of any additional shares of Common Stock (other than pursuant to options outstanding on the Closing Date) or options or rights to acquire Common Stock.

    (vii)
    Except for certain indebtedness, liens and guaranties permitted by the Credit Agreement, authorization or issuance of any debt security unless the debt security has received the prior approval of the Board of Directors, or amendment of the terms of any agreement regarding material indebtedness of the Company, unless the amendment has been approved by the Board of Directors.

        Liquidation Preference:    In the event of any liquidation or winding up of the Company, the holders of the Preferred Stock will be entitled to receive, in preference to the holders of the Common Stock,

24


Table of Contents


an amount equal to the greater of (x) the Original Issue Price per share plus accrued but unpaid cash dividends thereon, or (y) that amount that would be received by such holders on an "as converted" basis had all Preferred Stock been converted into Common Stock immediately prior to such liquidation or winding up. A consolidation, merger or other form of acquisition of the Company or a sale of all or substantially all of its assets will be deemed to be a liquidation or winding up for purposes of the liquidation preference.

        Transferability:    Preferred Stock will be freely transferable subject only to those restrictions imposed by applicable securities laws.

The issuance of Preferred Stock will affect existing stockholders by (i) restricting the ability of the Company to take certain actions (including paying dividends on Common Stock) without the consent of the majority of the holders of Preferred Stock, and (ii) giving the holders of Preferred Stock a liquidation preference in the event of any liquidation or winding up of the Company.


Conversion of Class B Common Stock

        Upon the effectiveness of the Second Amended Charter, each share of Class B Common Stock outstanding immediately prior to the effectiveness of the Second Amended Charter will automatically be reclassified as one share of Common Stock. This will eliminate the "supervoting" nature of the Class B Common Stock previously held by HEIC.


Issuance of Common Stock

        The balance of the HCC Debt not converted into New Debt or Preferred Stock will be converted into shares of Common Stock on the Closing Date at a rate equal to the Conversion Price. "Conversion Price" means the amount equal to (x) the quantity of (i) the total HCC Debt as of the Date of Determination, less (ii) $500 million, divided by (y) the Conversion Price Shares. "Conversion Price Shares" means a notional number of shares of Class A Common Stock which, when combined with the number of shares of Class A Common Stock directly or indirectly owned by Hallmark as of the Date of Determination (for purposes of such calculation (x) including with respect to shares of Class A Common Stock owned directly by HEIC, only HEH's pro rata portion of the Class A Common Stock owned by HEIC, and (y) excluding the shares of Class A Common Stock that will be receivable by HCC upon conversion of the Preferred Stock), will equal 90.1% of the sum of (i) all outstanding shares of Class A Common Stock on the Date of Determination prior to the Closing Date, (ii) the Conversion Price Shares and (iii) all shares potentially issuable upon exercise of all outstanding options as of the Date of Determination. "Date of Determination" means the Closing Date, provided that if the Closing Date occurs on or after March 31, 2010, the "Date of Determination" will be deemed to be March 31, 2010.

        The terms of the Common Stock include the following:

        Dividends:    Subject to the preferences and other rights of the Preferred Stock, the holders of Common Stock will be entitled to receive dividends when declared from time to time by the Board of Directors.

        Voting:    Each holder of Common Stock will be entitled to one (1) vote for each share of Common Stock held as of the applicable date on any matter that is submitted to a vote or for the consent of the stockholders of the Company.

        Liquidation:    In the event of any liquidation or winding up of the Company, the holders of Common Stock will be entitled to receive share for share, all of the assets of the Company of whatever kind available for distribution to stockholders, after the rights of the holders of the Preferred Stock have been satisfied.

25


Table of Contents

        Registration Rights:    In connection with the Transactions, the Company, HCC and any other HEIC stockholder that executes a joinder, will enter into the Registration Rights Agreement attached as Exhibit H to the Master Recapitalization Agreement (the "Registration Rights Agreement") relating to the shares of Common Stock (i) issued to HCC or any joined party in connection with the HEIC Merger or the HEH Merger, (ii) issuable to HCC upon conversion of the HCC Debt and upon conversion of the Preferred Stock, (iii) acquired by HCC pursuant to the its subscription rights as set forth in the Stockholders Agreement (as defined below) 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 Registration Rights Agreement grants (i) three (3) demand registration rights exercisable by the holders of a majority of the Registrable Securities, (ii) three (3) 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.

        Listing Requirements:    Under the Stockholders Agreement by and among HCC, Hallmark and the Company attached as Exhibit D to the Master Recapitalization Agreement (the "Stockholders Agreement"), the Company will agree to use its commercially reasonable efforts to maintain the listing of the Common Stock on NASDAQ through December 31, 2013. In addition, HCC will (i) reasonably cooperate with the Company in meeting with representatives of NASDAQ to support the Company's listing thereon, (ii) not cause the Company voluntarily to delist the Common Stock from NASDAQ or to deregister the shares of Common Stock under the Exchange Act except, in the case of the immediately preceding clauses (i) and (ii), in connection with a Premium Transaction or pursuant to certain tender offers and (iii) vote in favor of any proposed amendment to the Company's certificate of incorporation to effect a reverse stock split with respect to the Common Stock if a majority of the Company's directors who are not affiliates of Hallmark determine that such reverse stock split is reasonably likely to prevent the delisting of the Common Stock from NASDAQ.

        In addition to those restrictions described above, the Common Stock issued to Hallmark will also be subject to restrictions as described in the section of this Information Statement titled "THE RECAPITALIZATION—Stockholders Agreement" that other holders of Common Stock will not be subject to.

        By issuing the Common Stock to HCC, the Company will be able to refinance the principal amount of the HCC Debt that is not restructured into New Debt or converted into Preferred Stock and reduce the amount of its aggregate indebtedness to HCC and its affiliates by this amount.

        Following the issuance of Common Stock to HCC pursuant to the Transactions, Hallmark, through its wholly-owned subsidiary HCC, will own at least 90.1% of the Common Stock. In addition, following the Transactions, Hallmark, through its wholly-owned subsidiary HCC, will be the sole owner of the Preferred Stock, the only other outstanding class of the Company's capital stock. Under Section 253 of the DGCL, a corporation that owns over 90% of each class of another corporation's outstanding stock can merge itself into such subsidiary corporation or merge such subsidiary corporation into itself without the approval of the subsidiary corporation's board of directors and without a vote of the subsidiary corporation's minority stockholders. Minority stockholders would have appraisal rights under the DGCL with respect to such short-form merger. Hallmark could use such a short-form merger to acquire the remaining equity of the Company or as part of transactions resulting in the sale of the Company to another party. The Special Committee negotiated for a Stockholders Agreement that, among other things, includes certain protections for the Company's minority stockholders in connection with a short-form merger. The terms of the Stockholders Agreement described in the section of this Information Statement titled "THE RECAPITALIZATION—Stockholders Agreement" provide protection for the minority stockholders with respect to Hallmark's ability to effect a short-form merger.

26


Table of Contents

        The issuance of Common Stock to HCC will dilute the holdings of existing stockholders. The rights of existing stockholders will otherwise remain unchanged by the issuance of Common Stock to HCC.


Stockholders Agreement

        Under the Stockholders Agreement which will be executed in connection with the Transactions, HCC will agree to the following:

        Standstill Provisions:    HCC 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, 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 continues to hold at least the same percentage of the shares of all classes of the Company's capital stock as Hallmark owned immediately prior to such issuance; and

    (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 or its affiliates for all of the outstanding shares of Common Stock, provided the holders of Common Stock not affiliated with Hallmark 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 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 or pursuant to a bona fide pledge of the shares to a lender that is not an affiliate of Hallmark (collectively, a "Permitted Transfer");

    (ii)
    with the prior approval of a special committee of the Board of Directors comprised solely of independent 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

27


Table of Contents

      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 and such time as Hallmark 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 will at Hallmark'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 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

28


Table of Contents

      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 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 and its controlled affiliates cease to hold a majority of the Common Stock, (ii) such time as Hallmark and its affiliates own all of the outstanding Common Stock and (iii) December 31, 2020.

        Inapplicability of Prior Stockholders Agreement.    As a result of the Mergers and the terms of the Stockholders Agreement, Hallmark will no longer be subject to the existing stockholders agreement with the Company. The existing stockholders agreement among the Company and its largest stockholders sets forth certain corporate governance rights, and limitations on the Company's ability, directly or indirectly, to enter into any material contracts or transactions with any affiliate of certain stockholders, including a wholly-owned subsidiary of Hallmark, unless certain conditions were met.


The Mergers

        HEIC, and then HEH, will each be merged with and into the Company, with the stockholders of HEIC and HEH receiving Common Stock in accordance with their ownership of the Company immediately prior to the Mergers. Please refer to the section of this Information Statement titled "THE MERGERS".


Additional Agreements

        The parties have also agreed to the following:

        Waiver Agreement:    The waiver period under the Waiver Agreement will terminate on the earlier of (i) the Closing Date and (ii) August 31, 2010. Additionally, Hallmark will use its best efforts to ensure that the Company will have continued access to up to $30 million under the existing bank credit facility until August 31, 2010.

29


Table of Contents

        Tax Sharing Agreement:    As part of the consummation of the Recapitalization, the existing Tax Sharing Agreement between Hallmark and the Company will be amended effective as of January 1, 2010. The amendment will provide, among other things, that:

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

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

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

    cancellation of indebtedness income resulting from the Recapitalization will be excluded from the calculation of tax sharing payments for the tax year in which the closing of the Transactions occurs; and

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

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

        Revolver Guaranty:    Hallmark will guarantee (the "Revolver Guaranty") a revolving line of credit from a third party lender of up to $30 million (the "Revolver") until the earlier of (i) a refinancing of the New Debt or (ii) December 31, 2013. The Revolver Guaranty will have terms and conditions no less favorable to the Company than those provided under the existing JP Morgan credit facility, including guaranty fees equal to 12.5 basis points on any undrawn portion of the Revolver and 75 basis points on any drawn portion of the Revolver.


Recommendation of the Special Committee and the Board of Directors

        At meetings held on February 25-26, 2010, after consideration, including a review of the Master Recapitalization Agreement, the Ancillary Documents, and the Transactions with the Special Committee's financial and legal advisors, the Special Committee unanimously:

    (i)
    determined that the terms of the Master Recapitalization Agreement, the Ancillary Documents and the consummation of the Transactions are fair to, and in the best interests of, the Company and its stockholders (other than HCC and its affiliates); and

    (ii)
    recommended to the Company's Board of Directors that the Board approve the Master Recapitalization Agreement and each of the Ancillary Documents and the consummation of the Transactions, including each of the Mergers.

        On February 26, 2010, the Board of Directors, subsequent to and in reliance on, the unanimous recommendation of the Special Committee:

    (i)
    determined that the consummation of the Transactions are in the best interests of the Company and its stockholders;

    (ii)
    approved the execution, delivery and performance of the Master Recapitalization Agreement and the Ancillary Documents; and

    (iii)
    resolved to direct that to the extent required by the DGCL, the Mergers, the Merger Agreements, the Second Amended Charter and the Third Amended Charter be submitted for consideration of the stockholders of the Company.

30


Table of Contents

        The Board of Directors, subsequent to and in reliance on, the unanimous recommendation of the Special Committee, unanimously recommended that the Company's stockholders approve the Mergers, the Merger Agreements, the Second Amended Charter and the Third Amended Charter, and the Consenting Holders, as the holders of a majority in voting power of the outstanding shares of the Company's Class A Common Stock and Class B Common Stock, voting as a single class, and a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting as a separate class have approved the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the shares issuances pursuant to the Transactions.


Reasons for the Recommendation by the Special Committee

        The Special Committee negotiated on behalf of the Company's minority stockholders and obtained certain concessions from HCC with respect to the Master Recapitalization Agreement and the terms of the Transactions. The Special Committee based its determinations and recommendations on a number of factors that the Special Committee believes support its conclusion that the terms of the Master Recapitalization Agreement and the Transactions are fair to and in the best interests of the Company and its stockholders (other than HCC and its affiliates). This discussion of the information and factors considered by the Special Committee includes the principal positive and negative factors, but is not intended to be exhaustive and does not include all of the factors considered. The Special Committee did not quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination. Rather, the Special Committee viewed its position and recommendation as being based on the totality of the information presented to it and the factors it considered. Such factors include, but are not limited to, those described below.

        Recommendation of Morgan Stanley.    The Special Committee considered:

    the recommendation of Morgan Stanley to the Special Committee on February 25, 2010, from a financial point of view, of the Transactions based on the financial analyses undertaken by Morgan Stanley, a review of financial alternatives available to the Company and the facts, circumstances and conditions existing as of such date.

        Financial Analysis and Opinion of Houlihan Lokey.    The Special Committee considered:

    the financial analyses reviewed and discussed with the Special Committee by representatives of Houlihan Lokey; and

    the opinion of Houlihan Lokey to the Special Committee on February 26, 2010 to the effect that the aggregate consideration to be issued or paid by the Company or CMUS in exchange for the HCC Debt pursuant to the Master Recapitalization Agreement and the outstanding shares of common stock of HEIC and HEH in the Mergers pursuant to the HEIC Merger Agreement and the HEH Merger Agreement is, in the aggregate, fair to the Company from a financial point of view.

        Financial and Business Information.    The Special Committee considered its familiarity with the current and historical financial condition, results of operations, competitive position, business, prospects, and strategic objectives of the Company, including potential risks involved in achieving such prospects and objectives, and the current and expected conditions in the general economy and television industry. A discussion of these matters can be found in the Company's Form 10-K for the year ended December 31, 2009.

        Limited Strategic Alternatives.    The Special Committee took into account the current state of the acquisition and financing markets, the recent processes conducted by the Company to seek a potential acquirer, and the Company's inability to refinance the HCC Debt, as well as potential alternatives to the Proposed Recapitalization, including doing nothing or maintaining the status quo, a capital markets

31


Table of Contents


refinancing, a going private transaction in which Hallmark would acquire all of the remaining shares of Class A Common Stock not already owned by Hallmark or its affiliates, entering into bankruptcy proceedings and negotiating improved terms with respect to a recapitalization. The Special Committee also considered the fact that preliminary discussions with potential strategic buyers for the Company held over the preceding years have indicated that only a purchase at valuations which would leave no residual value for the Company's current stockholders would be of interest to such buyers, whereas a sale transaction at such values after the Transactions could result in significant incremental value that would accrue to all of the Company's stockholders, including the holders of the Common Stock prior to the Transactions.

        Negotiation Process and Procedural Fairness.    The terms of the Master Recapitalization Agreement and the Ancillary Documents were the result of robust arms' length negotiations conducted by the Special Committee, which is comprised entirely of independent directors, with the assistance of independent financial and legal advisors. Those negotiations resulted in economic and substantive improvements to the Proposed Recapitalization from the perspective of the Company's stockholders other than HCC and its affiliates.

        Other Terms and Factors.    The Special Committee considered other terms of the Master Recapitalization Agreement and the Transactions, including:

    Minority stockholders will retain approximately 10% of the Common Stock on the Closing Date and the potential opportunity to share in the future growth of the Company.

    Minority stockholders will receive a premium with respect to their equity in the event of a sale transaction that occurs prior to December 31, 2013.

    The Transactions provide the Company with a substantially improved capital structure. Specifically, the Company will avoid default on in excess of $1 billion of HCC Debt, reduce its indebtedness and obtain better overall terms than would be available in the credit markets.

    Hallmark has indicated that it will not extend the Waiver Agreement and may consider exercising its options, which include foreclosing on the Company's assets.

    The enterprise value of the Company relative to the aggregate principal amount of the HCC Debt and NICC Preferred Interest.

    The favorable tax treatment available to the Company following the Recapitalization.

    The risks and costs to the Company if the Recapitalization does not close, including the diversion of management and employee attention, potential employee attrition, the potential effect on business and customer relationships, and a potential bankruptcy filing.

    The current and historical market prices of the Company's Class A Common Stock, including the market price of the Company's Class A Common Stock relative to those of other industry participants and general market indices.

    The fact that the directors of the Company affiliated with Hallmark may have interests that are separate from and in addition to the interests of the Company's minority stockholders, and the fact that the officers of the Company may have an interest in the Company successfully completing a recapitalization transaction in connection with their current positions with, and equity ownership interests in, the Company.

    The Company's large amount of indebtedness relative to its currently estimated future revenue and cash flow prospects.

    Beginning in 2011, the increased liquidity afforded by the Recapitalization transactions due to the elimination of approximately $70 million of annual interest payments on the debt that will be

32


Table of Contents

      exchanged for Class A Common Stock in the Transactions, which the Company views as critical due to its belief that, under its current capital structure, the Company would not have sufficient liquidity to fund its operations, capital expenditures and long-term debt.

    The other terms of the Master Recapitalization Agreement and Ancillary Documents regarding the Transactions.

        In reaching its determinations and recommendations described above, the Special Committee also considered the following potential negative factors:

    The Transactions do not require a vote of the holders of a majority of the minority stockholders and the Company's stockholders will not have the right to dissent from the transactions contemplated by the Transactions and to demand appraisal of the fair value of their shares under Delaware law.

    The risk that the conditions contained in the Master Recapitalization Agreement and the Ancillary Documents will not be met, and the potential adverse impact on the Company if the Transactions do not close, including the diversion of management and employee attention, potential employee attrition, the potential effect on business and customer relationships and a potential bankruptcy filing.

    There will not be a meeting of the stockholders of the Company to consider the Master Recapitalization Agreement or the Transactions.

    If the Transactions are consummated, the Company's Certificate of Incorporation will be amended so that the Company will elect not to be governed by Section 203 of the DGCL until such time as Hallmark's beneficial interest in the Company is less than 50% of the outstanding shares of Class A Common Stock.

    If the Transactions are consummated, HCC, as the holder of 90.1% of the Common Stock, may eliminate the minority stockholders through a short-form merger.


Reasons for the Recommendation by the Board of Directors

        The determinations and recommendations of the Board of Directors were based on the following factors which the Board of Directors believes supported its conclusion that the terms of the Master Recapitalization Agreement and the Transactions are substantively and procedurally fair to and in the best interests of the Company and its stockholders:

    The recommendation of the Special Committee, based on the analysis and factors described in this Information Statement which were adopted by the Board of Directors. The Special Committee having received from its independent financial advisor, Morgan Stanley, the recommendation on February 25, 2010, from a financial point of view, of the Transactions based on the financial analyses undertaken by Morgan Stanley, a review of financial alternatives available to the Company and the facts, circumstances and conditions existing as of such date.

    The Special Committee having received from its independent financial advisor, Houlihan Lokey, an opinion on February 26, 2010 to the effect that the aggregate consideration to be issued or paid by the Company or CMUS in exchange for the HCC Debt pursuant to the Master Recapitalization Agreement and the outstanding shares of common stock of HEIC and HEH in the Mergers pursuant to the HEIC Merger Agreement and the HEH Merger Agreement is, in the aggregate, fair to the Company from a financial point of view.

    The terms of the Master Recapitalization Agreement and the Transactions were the result of what the Board of Directors believed were robust arms' length negotiations between the Special Committee and HCC.

33


Table of Contents


Recommendation of Morgan Stanley

        Summary of Morgan Stanley's Presentation.    In connection with the Proposed Recapitalization, the Special Committee of the Board of Directors of the Company engaged Morgan Stanley as its financial advisor, effective July 8, 2009. The Special Committee selected Morgan Stanley based on Morgan Stanley's qualifications, experience, reputation and knowledge of the business and affairs of the Company and its industry. In connection with its engagement, on February 25, 2010, based on the financial analyses undertaken by Morgan Stanley, a review of financial alternatives available to the Company, and the facts, circumstances, and conditions existing as of such date, Morgan Stanley recommended, from a financial point of view, the Transactions to the Special Committee. In connection with such recommendation, Morgan Stanley provided a written presentation to the Special Committee, which included certain financial analyses (the "February 25 Presentation").

        The financial analyses performed by Morgan Stanley were for the purpose of assisting the Special Committee in assessing the Proposed Recapitalization and alternatives thereto and do not purport to be appraisals or to reflect the prices at which the shares of the Company may actually trade. Morgan Stanley did not provide any opinion as to the fairness of the Transactions to the Special Committee, the Company or its stockholders and the February 25 Presentation should not be considered as any form of fairness opinion. Morgan Stanley also did not express an opinion regarding the solvency or financial condition of the Company and whether other strategic alternatives exist for the Company or if such alternatives are available. Morgan Stanley advised the Special Committee at the time of its engagement that it customarily does not render fairness opinions on recapitalization transactions in which stockholders do not directly receive consideration in exchange for their equity interests, as is the case with the Transactions. The financial analyses performed by Morgan Stanley do not constitute, and should not be viewed as, a recommendation to any stockholder of the Company with respect to any matter pertaining to the Transactions or to take any specific action in connection with the Transactions. The following is a summary of the material financial analyses contained in the February 25 Presentation. However, it does not purport to be a complete description of the financial analyses performed by Morgan Stanley or of its presentation to the Special Committee.

        In preparing the February 25 Presentation, Morgan Stanley, among other things:

    reviewed certain publicly available financial statements and other business and financial information concerning the Company, including five year financial projections for the Company, dated January 28, 2010, prepared by the management of the Company for the board of directors of the Company (the "2010 Plan"), which are summarized in the "Internal Financial Forecasts" section of this Information Statement;

    reviewed certain other financial and operating data concerning the Company prepared by management of the Company;

    reviewed the reported prices and trading activity for the Company's shares;

    reviewed the prices and trading activity of the securities of certain other publicly-traded cable network affiliated companies comparable to the Company;

    reviewed the financial terms, to the extent publicly available, of certain transactions;

    participated in discussions with Hallmark and its legal and financial advisors regarding the Transactions;

    participated in discussions with management of the Company regarding the financial projections and the past and current business operations, financial condition and prospects of the Company;

    reviewed the Master Recapitalization Agreement and Ancillary Documents; and

34


Table of Contents

    considered such other factors and performed such other analyses as Morgan Stanley deemed appropriate.

        In preparing the February 25 Presentation, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the publicly available information and other information supplied to it by the Company and which were utilized by Morgan Stanley in the preparation of such presentation. With respect to the financial projections, Morgan Stanley assumed that they had been reasonably prepared to reflect the Company's best currently available estimates and judgments of its future financial performance. Morgan Stanley is not a legal, tax or regulatory advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of the Company and its legal, tax or regulatory advisors with respect to such matters. Morgan Stanley did not make an independent valuation or appraisal of the assets or liabilities of the Company. Morgan Stanley's analyses were necessarily based on financial, economic, market and other conditions prevailing as of, and the information made available to Morgan Stanley as of, February 23, 2010.

        The February 25 Presentation.    In the February 25 Presentation, Morgan Stanley analyzed the following:

    the projected liquidity (defined as cash, cash equivalents and available borrowings under the Company's existing revolving credit facility) of the Company, assuming the Company took no action (the "Status Quo Scenario"). The analysis indicated that, under the Status Quo Scenario, the Company would likely face a liquidity shortfall in the hundreds of millions of dollars beginning in the second quarter of 2010 following the maturity of its existing credit facility and expiration of the Amended Waiver and Standby Purchase Agreement;

    the pro forma projected liquidity of the Company, assuming the Company consummated the Transactions. The analysis indicated that under the Transactions the Company would likely have positive liquidity until the maturity of the new debt in 2013;

    the pro forma credit profile of the Company, assuming the Company consummated the Transactions, including (A) a review of the ratios of (i) adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") to cash interest expense and (ii) net debt to Adjusted EBITDA and (B) a comparison of certain of the Company's pro forma credit metrics to industry benchmarks as outlined by Moody's Investor Services for North American Media Companies. The analyses indicated that under the Transactions (i) the ratio of Adjusted EBITDA to cash interest expense would exceed the proposed covenant levels in the new debt and (ii) the ratios of Adjusted EBITDA to cash interest expense and net debt to Adjusted EBITDA would be better than the median industry benchmarks as outlined by Moody's Investor Services for North American Media Companies;

    an illustrative bankruptcy recovery analysis based on the doctrine of absolute priority under the Status Quo Scenario. The analysis indicated that the shares of the Company's common stock would likely have de minimis or no economic value in the event the Company filed for bankruptcy;

    illustrative current and discounted future pro forma trading analyses. The analyses indicated that, based on a range of Enterprise Value (defined as equity value, plus net debt less non-core assets and adjusted for fair market value of minority interests) to EBITDA multiples at which the Company may trade, in the range of 6.5x-8.5x, the economic value attributable to shares of the Company's common stock was greater under the Transactions than under either the May 28, 2009 Proposed Recapitalization or the Status Quo Scenario; and

35


Table of Contents

    an illustrative pro forma discounted future sale analysis, including the impact of the $0.50 per share premium payable to non-Hallmark stockholders contemplated under the Transactions. The analysis indicated that under the Transactions, based on a range of Enterprise Value to EBITDA multiples at which the Company may be sold in the future, in the range of 8.0x-14.0x, the economic value attributable to shares of the Company's common stock was greater under the Transactions than under either the May 28, 2009 Proposed Recapitalization or the Status Quo Scenario.

        In the February 25 Presentation, Morgan Stanley also considered:

    the pro forma capital structure, including the key economic and structural terms of the new debt and new preferred stock to be issued in connection with the Transactions;

    the terms of the Transactions, as compared to the terms contemplated in the May 28, 2009 Proposed Recapitalization;

    the current and pro forma equity ownership of the Company; and

    an analysis of equity recoveries in 22 selected in-court pre-negotiated and pre-packaged bankruptcies since July 2000 and four out-of-court restructuring transactions since January 2009. The analysis indicated that existing equity retained between 0.0% and 12.5% of the pro forma equity ownership, with a mean of 0.8% in pre-negotiated bankruptcies and 3.3% in pre-packaged bankruptcies. The analysis also indicated that existing equity retained between 5.0% and 6.0% in selected out-of-court restructurings, with a mean of 5.3%.

        In the February 25 Presentation, Morgan Stanley also performed the following valuation analyses and compared such analyses to the estimated net debt and preferred stock of the Company of $1,174.7 million as of March 31, 2010:

            Selected Companies Analysis.    Using publicly available information, Morgan Stanley analyzed selected companies that operate similar lines of business as the Company, namely companies that operate as (i) pure-play cable networks, and (ii) diversified media conglomerates. For this analysis, Morgan Stanley reviewed the following companies:

    Selected Companies

Pure-Play Cable Networks   Diversified Media Conglomerates
Discovery Communications, Inc.   Walt Disney Co.

Outdoor Channel Holdings, Inc.

 

Time Warner Inc.

Scripps Network Interactive, Inc.

 

News Corp.

Viacom, Inc.

 

CBS Corporation

    Morgan Stanley analyzed the following statistics for each of these companies, as of February 23, 2010 and based on estimates for the comparable companies provided by Wall Street equity research analysts and public filings:

      the ratio of enterprise value to estimated calendar year 2009 EBITDA; and

      the ratio of enterprise value to estimated calendar year 2010 EBITDA.

    Enterprise value was defined as equity value plus net debt less non core assets and adjusted for fair market value of minority interests. Based on the analysis of the relevant metrics for the selected companies, Morgan Stanley applied the resulting ranges of multiples to the relevant financial statistic for the Company. For purposes of estimated fiscal year 2009 EBITDA and fiscal

36


Table of Contents

    year 2010 EBITDA, Morgan Stanley utilized financial forecasts prepared by the management of the Company. The analysis indicated the following:

(dollars in millions)
  Selected Company
Multiple Range
  Implied Enterprise
Value Range for
the Company

Enterprise value to estimated fiscal 2009 EBITDA

  7.0x - 9.0x   $632 - $812

Enterprise value to estimated fiscal 2010 EBITDA

  6.5x - 8.5x   $589 - $770

    No company in the selected company analysis is identical to the Company. In evaluating the selected companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the business of the Company or the industry generally, industry growth and the absence of any material adverse change in the financial condition and prospects of the Company or the industry or in the financial markets in general. Mathematical analysis, such as determining ranges, is not in itself a meaningful method of using selected company data.

    Selected Transactions Analysis.    Using publicly available information, Morgan Stanley analyzed the terms of selected precedent transactions in which the targets were pure-play cable networks. For this analysis, Morgan Stanley deemed that transactions exhibiting the following characteristics were not comparable to the Transactions and excluded such transactions from its analysis:

      Transactions of less than $100 million in enterprise value;

      structured transactions that included non-cable related assets;

      transactions involving networks with less than 25 million subscribers; and

      regional, sports-related and non-English language assets.

    For this analysis, Morgan Stanley reviewed the following transactions:

    Selected Transactions

Acquiror
  Target   Announcement Date

Scripps Network Interactive, Inc. 

  Travel Channel   November 2009

Lionsgate Entertainment Corp. 

 

TV Guide Channel

 
January 2009

Bain Capital, LLC / NBC Universal, Inc. / The Blackstone Group

 

The Weather Channel

 
July 2008

Cablevision Systems Corporation

 

Sundance

 
May 2008

NBC Universal, Inc. 

 

Oxygen Networks

 
October 2007

    Morgan Stanley analyzed for each of these transactions, based on publicly available information, the ratio of enterprise value to projected one fiscal year forward EBITDA. Based on the analysis of the relevant metrics for the selected transactions, Morgan Stanley applied the resulting range of multiples to the relevant financial statistic for the Company. For purposes of estimated fiscal 2010

37


Table of Contents

    EBITDA, Morgan Stanley utilized financial forecasts prepared by the management of the Company. The analysis indicated the following:

(dollars in millions)
  Selected
Transaction
Multiple Range
  Implied Enterprise
Value Range for
the Company

Enterprise value to estimated fiscal 2010 EBITDA

    11.3x - 14.2x   $1,024 - $1,287

    No company or transaction utilized in the selected transactions analysis is identical to the Company or the Transactions. In evaluating the selected transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the business of the Company or the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of the Company or the industry or in the financial markets in general. Mathematical analysis, such as determining ranges, is not in itself a meaningful method of using selected transaction data.

            Discounted Cash Flow Analysis.    Morgan Stanley performed a discounted cash flow analysis of the Company, which is an analysis of the present value of projected unlevered free cash flows using (i) terminal year enterprise value to EBITDA multiples based on projected EBITDA and (ii) terminal year unlevered free cash flow based upon perpetual growth rates. For this analysis, Morgan Stanley utilized publicly-available information, information obtained from discussions with the Company's management and the 2010 Plan. The terminal value was calculated by (i) applying terminal multiples ranging from 6.5x to 8.5x to fiscal year 2013 EBITDA, as estimated by the Company's management and (ii) applying terminal year perpetual growth rates ranging from 1.0% to 3.0% to unlevered free cash flow, as provided by the Company's management. For purposes of this analysis, Morgan Stanley calculated the Company's discounted unlevered free cash flow value using discount rates ranging from 12.5% to 14.5%. The range of discount rates was selected based upon an analysis of the Company's weighted average cost of capital and on the experience and judgment of Morgan Stanley. Morgan Stanley also performed an illustrative valuation of the Company's net operating losses, or NOLs, the value of which was added to the discounted cash flow valuation. In conducting its valuation of the Company's NOLs, Morgan Stanley calculated the estimated tax savings resulting from the use of NOLs in the future, based on financial projections and income tax assumptions provided by the Company's management, and discounted the projected income tax savings to March 31, 2010 utilizing the Company's estimated cost of equity of 14.9%. Based on the exit multiple methodology, the analysis indicated an implied enterprise value range for the Company of $955 million to $1,336 million. Based on the perpetual growth rate methodology, the analysis indicated an implied enterprise value range for the Company of $818 million to $1,199 million.

        Miscellaneous.    In connection with its recommendation to the Special Committee, Morgan Stanley performed a variety of financial and comparative analyses. The order of the analyses described and the results of the analyses do not represent relative importance or weight given to these analyses by Morgan Stanley. The preparation of such financial analyses is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description. Morgan Stanley believes that the summary provided and the analyses described above must be considered as a whole and that selecting any portion of its analyses without considering all analyses, would create an incomplete view of the process underlying its analyses. In addition, Morgan Stanley and/or the Special Committee may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions.

38


Table of Contents

        Morgan Stanley is an internationally recognized investment banking and advisory firm. Morgan Stanley, as part of its investment banking and financial advisory business, is continuously engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. In the ordinary course of Morgan Stanley's securities underwriting, trading and brokerage, foreign exchange, commodities and derivatives trading, prime brokerage, investment management and financing and financial services activities, Morgan Stanley, its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, trade or otherwise structure and effect transactions, for its own account or for the account of customers, in the equity or debt securities or loans of the Company or Hallmark.

        Under the terms of its engagement letter, Morgan Stanley agreed to provide the Special Committee with financial advisory services in connection with the Transactions. As provided in the engagement agreement with Morgan Stanley, the Company has paid the following amounts to Morgan Stanley for its providing the Special Committee with financial advice and assistance in connection with the Recapitalization: (i) An advisory fee of $500,000 paid at the time of executing the engagement agreement in July, 2009; and (2) $1,000,000 as an announcement fee at the time the Master Recapitalization Agreement was signed in February 2010, as compensation for Morgan Stanley's contributing to the parties reaching an agreement.

        If the Recapitalization is successfully completed, Morgan Stanley will be paid a completion fee of $1,000,000. The Special Committee, in its sole discretion, may pay Morgan Stanley an additional fee if it determines such additional fee is appropriate under the circumstances. The Company has also agreed to reimburse Morgan Stanley for its expenses incurred in performing its services. In addition, the Company has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under the federal securities laws, related to or arising out of Morgan Stanley's engagement.


Opinion of Houlihan Lokey

        On February 26, 2010, Houlihan Lokey rendered its oral opinion to the Special Committee of the Board of Directors of the Company (which was subsequently confirmed in writing by delivery of Houlihan Lokey's written opinion dated the same date) to the effect that, as of February 26, 2010, the Aggregate Consideration to be issued or paid by the Company or its wholly owned subsidiary, CMUS, in exchange for the HCC Debt and the Intermediate Holdco Stock in the Exchange and Merger Transactions pursuant to the Master Recapitalization Agreement and Ancillary Documents was fair to the Company from a financial point of view.

        For the purpose of the description of Houlihan Lokey's opinion in this Information Statement, the following defined terms are used:

    "Exchange and Merger Transactions" means the Recapitalization Transaction, the HEH Merger and the HEIC Merger;

    "Recapitalization Transaction" means the issuance or payment by the Company and/or CMUS of (a) $315,000,000 principal amount of indebtedness (the "New Debt Consideration") on the terms and subject to the conditions set forth in a new Credit Agreement (the "New Credit Agreement") entered into among the Company, HCC and the credit parties identified on the signature pages thereto, (b) 185,000 shares (the "Preferred Stock Consideration") of Preferred Stock with an initial liquidation preference of $185,000,000, (c) a number of shares of New Common Stock (as defined herein) determined in accordance with the Recapitalization Agreement (the "Common Stock Consideration") and (d) an amount in cash equal to the accrued but unpaid interest (the

39


Table of Contents

      "Cash Consideration" and, together with the New Debt Consideration, the Preferred Stock Consideration and the Common Stock Consideration, the "Aggregate Recapitalization Consideration") on the 2001 Note, the 2005 Note and the 2006 Note to the HCC Lenders in exchange for the HCC Debt;

    "Intermediate Holdco Stock" means the issued and outstanding capital stock of HEIC and HEH;

    "Aggregate Consideration" means the consideration to be issued in the HEH Merger and the HEIC Merger and the Aggregate Recapitalization Consideration; and

    "New Common Stock" means a single class of Class A Common Stock, par value $0.01 per share of the Company, into which the Class B Common Stock of the Company was reclassified on a one for-one basis pursuant to the Second Amended and Restated Certificate of Incorporation of the Company to be filed with the Secretary of State of the State of Delaware.

        Houlihan Lokey's opinion was directed to the Special Committee and only addressed the fairness, from a financial point of view, of the Aggregate Consideration to be issued or paid by the Company or its wholly owned subsidiary CMUS in exchange for the HCC Debt and the Intermediate Holdco Stock in the Exchange and Merger Transactions pursuant to the Master Recapitalization Agreement and Ancillary Documents, and did not address any other aspect or implication of the proposed transactions. The summary of Houlihan Lokey's opinion in this Information Statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Appendix C to this Information Statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey's written opinion nor the summary of its opinion and the related analyses set forth in this Information Statement are intended to be, and do not constitute, advice or a recommendation to any stockholder of the Company with respect to any matter relating to the Transactions.

        In connection with its opinion, Houlihan Lokey made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey:

    1.
    reviewed the following agreements and documents:

            a.     a draft, dated February 24, 2010, of the Recapitalization Agreement;

            b.     a draft, dated February 18, 2010, of the Second Amended Charter;

            c.     a draft, dated February 20, 2010, of the Certificate of Designation;

            d.     a draft, dated February 24, 2010, of the New Credit Agreement;

            e.     a draft, dated February 22, 2010, of the HEIC Merger Agreement;

            f.      a draft, provided to Houlihan Lokey on February 23, 2010, of the HEH Merger Agreement;

            g.     a draft, provided to Houlihan Lokey on February 23, 2010, of Amendment No. 2 to the Tax Sharing Agreement;

            h.     the Credit, Security, Guaranty and Pledge Agreement, dated August 31, 2001, as amended, by and among the Company, its subsidiaries named therein, the lenders named therein and The Chase Manhattan Bank (now known as JPMorgan Chase Bank) as Administrative Agent and Issuing Bank (the "Credit Facility");

            i.      the Tax Sharing Agreement;

            j.      the 2001 Note;

40


Table of Contents

            k.     the 2005 Note;

            l.      the 2006 Note; and

            m.    the 10.25% Note;

    2.
    reviewed certain publicly available business and financial information relating to the Company that it deemed to be relevant;

    3.
    reviewed certain information relating to the historical, current and future operations, financial condition and prospects of the Company made available to Houlihan Lokey by the Company, including financial projections (and adjustments thereto) prepared by the management of the Company relating to the Company for the fiscal years ending 2009 through 2013;

    4.
    spoke with certain members of the management of the Company and certain of its representatives and advisors regarding the business, operations, financial condition and prospects of the Company, the Exchange and Merger Transactions and related matters;

    5.
    compared the financial and operating performance of the Company with that of other public companies that Houlihan Lokey deemed to be relevant;

    6.
    reviewed the current and historical market prices and trading volume for certain of the Company's publicly traded securities, and the historical market prices and certain financial data of the publicly traded securities of certain other companies that Houlihan Lokey deemed to be relevant;

    7.
    reviewed a certificate addressed to Houlihan Lokey from senior management of the Company, which contains, among other things, representations regarding the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Houlihan Lokey by or on behalf of the Company; and

    8.
    conducted such other financial studies, analyses and inquiries and considered such other information and factors as Houlihan Lokey deemed appropriate.

The above documents reviewed by Houlihan Lokey in draft form did not change in any material manner before execution of definitive documents.

        Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and did not assume any responsibility with respect to such data, material and other information. In addition, management of the Company advised Houlihan Lokey, and Houlihan Lokey assumed, that the financial projections reviewed by it had been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the future financial results and condition of the Company, and Houlihan Lokey expressed no opinion with respect to such projections or the assumptions on which they are based. Houlihan Lokey relied upon and assumed, without independent verification, that there had been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company since the date of the most recent financial information provided to it that would be material to its analyses or its opinion, and that there was no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. Houlihan Lokey also assumed, at the direction of the Company, that any adjustments to the Aggregate Consideration pursuant to the Recapitalization Agreement would not in any way be material to its analyses or its opinion.

        Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the agreements identified in item 1 above and all other related documents and instruments that are referred to therein were true and correct, (b) each party to

41


Table of Contents


all such agreements and such other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the Exchange and Merger Transactions would be satisfied without waiver thereof, and (d) the Exchange and Merger Transactions would be consummated in a timely manner in accordance with the terms described in the related documents and instruments, without any amendments or modifications thereto. Houlihan Lokey also relied upon and assumed, without independent verification, that (i) the Exchange and Merger Transactions would be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the Exchange and Merger Transactions would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would result in the disposition of any material portion of the assets of the Company, or otherwise have an effect on the Company that would be material to its analyses or its opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final forms of any draft documents identified above would not differ in any respect from the drafts of said documents.

        Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties, or liabilities (fixed, contingent, derivative, off-balance-sheet, or otherwise) of the Company or any other party, nor was Houlihan Lokey provided with any such appraisal or evaluation. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity. Houlihan Lokey did not undertake any independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company is or may be a party or is or may be subject.

        Houlihan Lokey was not requested to, and did not, (a) initiate or participate in any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to the Exchange and Merger Transactions, the assets, businesses or operations of the Company or any other party, or any alternatives to the Exchange and Merger Transactions, (b) negotiate the terms of the Exchange and Merger Transactions, or (c) advise the Special Committee, the Board of Directors of the Company or any other party with respect to alternatives to the Exchange and Merger Transactions. Houlihan Lokey's opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of its opinion. Houlihan Lokey did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date of its opinion. Houlihan Lokey did not express any opinion as to what the value of the New Common Stock or the Series A Preferred Stock actually would be when issued pursuant to the Exchange and Merger Transactions or the price or range of prices at which the New Common Stock, the Series A Preferred Stock, the Class A Common Stock, the Class B Common Stock or the Intermediate Holdco Stock may be purchased or sold at any time.

        Houlihan Lokey's opinion was furnished for the use and benefit of the Special Committee (solely in its capacity as such) in connection with its consideration of the Exchange and Merger Transactions and may not be used for any other purpose without Houlihan Lokey's prior written consent. Houlihan Lokey's opinion should not be construed as creating any fiduciary duty on Houlihan Lokey's part to any party. Houlihan Lokey's opinion was not intended to be, and does not constitute, a recommendation to the Special Committee, the Board of Directors of the Company, any security holder of the Company or any other person as to how to act or vote with respect to any matter relating to the Exchange and Merger Transactions.

42


Table of Contents

        Houlihan Lokey's opinion only addressed the fairness to the Company, from a financial point of view of the Aggregate Consideration to be issued or paid by the Company or its wholly owned subsidiary, CMUS, in exchange for the HCC Debt and the Intermediate Holdco Stock in the Exchange and Merger Transactions pursuant to the Transaction Agreements and did not address any other aspect or implication of the Exchange and Merger Transactions, or any agreement, arrangement or understanding entered into in connection therewith or otherwise including, without limitation: (i) the underlying business decision of the Special Committee, the Board of Directors of the Company, the Company, its security holders or any other party to proceed with or effect the Exchange and Merger Transactions, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the Exchange and Merger Transactions or otherwise (other than the Aggregate Consideration to the extent expressly specified herein), (iii) the fairness of any portion or aspect of the Exchange and Merger Transactions to the holders of any class of securities, creditors or other constituencies of the Company, or to any other party, except as expressly set forth in the last sentence of Houlihan Lokey's opinion, (iv) the relative merits of the Exchange and Merger Transactions as compared to any alternative business strategies that might exist for the Company or any other party or the effect of any other transaction in which the Company or any other party might engage, (v) the fairness of any portion or aspect of the Exchange and Merger Transactions to any one class or group of the Company's or any other party's security holders vis-à-vis any other class or group of the Company's or such other party's security holders (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders), (vi) whether or not the Company, its security holders or any other party was receiving or paying reasonably equivalent value in the Exchange and Merger Transactions, (vii) the solvency, creditworthiness or fair value of the Company or any other participant in the Exchange and Merger Transactions, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount or nature of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the Exchange and Merger Transactions, any class of such persons or any other party, relative to the aggregate consideration or otherwise. A determination as to whether the Company is paying or receiving reasonably equivalent value in the transactions has special legal meaning under the federal bankruptcy code and state law relating to fraudulent transfers that the Company understands is not typically made in connection with the rendering of the type of opinion Houlihan Lokey was asked to render to the Special Committee. Furthermore, no opinion, counsel or interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. It was assumed that such opinions, counsel or interpretations had been or would be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with the Special Committee's consent, on the assessments by the Special Committee, the Company and their respective advisers, as to all legal, regulatory, accounting, insurance and tax matters with respect to the Company and the Exchange and Merger Transactions. The issuance of Houlihan Lokey's opinion was approved by a committee authorized to approve opinions of such nature.

        In preparing its opinion to the Special Committee, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey's valuation analyses described below is not a complete description of the analyses underlying Houlihan Lokey's opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of those methods to the unique facts and circumstances presented. As a consequence, neither Houlihan Lokey's opinion nor the analyses underlying its opinion are readily susceptible to partial analysis or summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, analytic method or factor. Accordingly, Houlihan Lokey believes that its analyses must be considered as a whole and that selecting

43


Table of Contents


portions of its analyses, analytic methods and factors, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

        In performing its analyses, Houlihan Lokey considered business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction, or business used in Houlihan Lokey's analyses for comparative purposes is identical to the Company or the proposed Exchange and Merger Transactions. While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. The implied valuation reference ranges indicated by Houlihan Lokey's analyses are illustrative and not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which assets, businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond our control and the control of Houlihan Lokey. Much of the information used in, and accordingly the results of, Houlihan Lokey's analyses are inherently subject to substantial uncertainty.

        Houlihan Lokey's opinion and analyses were provided to the Special Committee in connection with the Special Committee's consideration of the proposed Exchange and Merger Transactions, and Houlihan Lokey's analyses were among many factors considered by the Special Committee in evaluating the proposed Exchange and Merger Transactions.

        The following is a summary of the material valuation analyses performed in connection with the preparation of Houlihan Lokey's opinion rendered to the Special Committee on February 26, 2010. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying and the assumptions, qualifications and limitations affecting each analysis, could create a misleading or incomplete view of Houlihan Lokey's analyses.

        As the Special Committee was aware, Houlihan Lokey was generally of the view that (i) a transaction, such as the HEIC and HEH Mergers, in which a company effectively acquires shares of its common stock in exchange for an equal number of shares of its common stock without incurring any additional liabilities, obligations or other financial consequences is, ceteris paribus, inherently fair to the Company from a financial point of view and (ii) a recapitalization transaction in which, ceteris paribus, a company whose outstanding indebtedness, preferred stock and capital lease obligations exceeds its enterprise value is able to reduce the value of its outstanding indebtedness, preferred stock and capital lease obligations to an amount less than its enterprise value is inherently fair to the Company from a financial point of view as it implies that the inherent value of its common stock has increased and become positive, and Houlihan Lokey evaluated whether the Aggregate Consideration to be issued or paid by the Company or its wholly owned subsidiaries in exchange for the HCC Debt and the Intermediate Holdco Stock in the Exchange and Merger Transactions pursuant to the Transaction Agreements was fair to the Company from a financial point of view on the basis of the foregoing.

        For purposes of its analyses, Houlihan Lokey reviewed a number of financial metrics including:

      Enterprise Value—generally the value as of a specified date of the relevant company's outstanding common equity securities (taking into account its outstanding warrants and other securities convertible into common equity securities) plus the value of its minority interests plus the value as of such date of its net debt (the value of its outstanding indebtedness, preferred stock and capital lease obligations less the amount of cash on its balance sheet).

44


Table of Contents

      EBITDA—generally the amount of the relevant company's earnings before interest, taxes, depreciation, and amortization for a specified time period.

      Net Debt—generally the value of its outstanding indebtedness, preferred stock and capital lease obligations less the amount of cash on its balance sheet.

        Unless the context indicates otherwise, enterprise values used in the selected companies analysis described below were calculated using the closing price of the common stock of the selected companies listed below as of February 25, 2010. Estimates of adjusted EBITDA for the Company for the fiscal years ending 2009 through 2013, which we refer to as Adjusted EBITDA, were based on estimates of EBITDA for the Company for those years provided by management of the Company, as adjusted for certain nonrecurring items, including certain impairment charges, severance payments, asset sales, litigation settlements, recapitalization costs, bank fees and termination fees related to the HD launch. Estimates of EBITDA for the selected companies listed below for fiscal year 2009 through 2011 were based on publicly available research analysts estimates for those companies. For purposes of its analyses and its opinion, Houlihan Lokey assumed the Company had pre-Recapitalization Net Debt of $1,141.5 million comprised of $1.0 million borrowed under the Company's revolving credit facility, debt and interest payable to Hallmark and its affiliates of $1,107.2 million, capital lease obligations of $13.9 million, accrued redemption price of the mandatorily redeemable membership interest of CMUS of $23.1 million, other interest payable of $0.1 million less cash of $3.8 million calculated based on information provided by the Company's management. For purposes of its analyses and its opinion, Houlihan Lokey assumed the Company had post-Recapitalization Net Debt of $538.1 million comprised of $315 million of new debt issued in the Recapitalization, $185 million of Preferred Stock of the Company issued in the Recapitalization, $1.0 million borrowed under the Company's revolving credit facility, capital lease obligations of $13.9 million, accrued redemption price of the mandatorily redeemable membership interest of CMUS of $23.1 million and other interest payable of $0.1 million calculated based on information provided by the Company's management.

    Selected Companies Analysis

        Houlihan Lokey calculated the multiples of enterprise value to Adjusted EBITDA and certain other financial data for the Company and the selected companies in the media industry.

        The calculated multiples included:

      Enterprise Value as a multiple of 2009E Adjusted EBITDA;
      Enterprise Value as a multiple of 2010P Adjusted EBITDA; and
      Enterprise Value as a multiple of 2011P Adjusted EBITDA.

        The selected companies were selected because they were deemed to be similar to the Company in one or more respects which included nature of business, size, diversification, financial performance and geographic concentration. No specific numeric or other similar criteria were used to select the selected companies and all criteria were evaluated in their entirety without application of definitive qualifications or limitations to individual criteria. As a result, a significantly larger or smaller company with substantially similar lines of businesses and business focus may have been included while a similarly sized company with less similar lines of business and greater diversification may have been excluded. Houlihan Lokey identified a sufficient number of companies for purposes of its analysis but may not have included all companies that might be deemed comparable to the Company. The selected companies were:

      Discovery Communications, Inc.
      Viacom, Inc.
      Walt Disney Co.
      News Corp.

45


Table of Contents

      Scripps Networks Interactive, Inc.
      Outdoor Channel Holdings, Inc.
      Time Warner Inc.

        Houlihan Lokey applied multiple ranges based on the selected companies analysis to the Company's FY 2009E Adjusted EBITDA, FY 2010P Adjusted EBITDA and FY 2011P Adjusted EBITDA to derive implied enterprise value reference ranges for the Company and compared those reference ranges to the Company's estimated pre-Recapitalization Net Debt and Post-Recapitalization Net Debt.

        The selected companies analysis indicated implied pre-Recapitalization enterprise value reference ranges for the Company, as compared to the Company's estimated pre-Recapitalization Net Debt as follows:

Enterprise Value
As a Multiple of
  Enterprise Value
Reference Range
  Pre-Recapitalization
Net Debt
 

FY2009E Adjusted EBITDA

  $829.7 million to $919.9 million   $ 1,141.5 million  

FY2010P Adjusted EBITDA

  $788.2 million to $878.8 million   $ 1,141.5 million  

FY2011P Adjusted EBITDA

  $817.1 million to $931.3 million   $ 1,141.5 million  

        The selected companies analysis also indicated implied post-Recapitalization enterprise value reference ranges for the Company, as compared to the Company's estimated post-Recapitalization Net Debt as follows:

Enterprise Value
As a Multiple of
  Enterprise Value
Reference Range
  Post-Recapitalization
Net Debt and
Convertible Preferred Stock
 

FY2009E Adjusted EBITDA

  $915.1 million to $1,005.3 million   $ 538.1 million  

FY2010P Adjusted EBITDA

  $873.6 million to $964.2 million   $ 538.1 million  

FY2011P Adjusted EBITDA

  $902.5 million to $1,016.7 million   $ 538.1 million  

    Discounted Cash Flow Analysis

        Houlihan Lokey also calculated the net present value of the Company's unlevered, after-tax cash flows based on projections provided by management of the Company. In performing a discounted cash flow analysis with respect to the Company, Houlihan Lokey applied discount rates ranging from 13.5% to 14.5% based on the Company's estimated weighted average cost of capital and terminal value multiples ranging from 6.5x to 7.5x. The discounted cash flow analyses indicated an implied pre-Recapitalization Transaction enterprise value reference range of $912.6 million to $1,046.6 million, as compared to the pre-Recapitalization Transaction net debt value of $1,141.5 million based on information provided by the Company's management. The discounted cash flow analyses indicated an implied post-Recapitalization Transaction enterprise value reference range of $998.0 million to $1,132.0, as compared to the post-Recapitalization Transaction net debt value of $538.1 million based on information provided by the Company's management.

    Other Considerations

        Houlihan Lokey also compared the implied value of the Aggregate Recapitalization Consideration to be issued or paid by the Company and CMUS in the Recapitalization Transaction to the HCC Lenders in exchange for the HCC Debt indicated by its financial analyses to the implied value of the HCC Debt indicated by its financial analysis. Because the implied pre-Recapitalization enterprise value reference ranges for the Company indicated by the selected companies analysis and the discounted cash flow analysis were lower than the Company's estimated pre-Recapitalization Net Debt calculated based on information provided by the Company's management, the implied value of the HCC Debt was

46


Table of Contents

determined by subtracting the net debt more senior to the HCC Debt (assumed based on discussions with management of the Company to consist of the $1.0 million borrowed by the Company under the Company's revolving credit facility and the Company's $13.9 million of capital lease obligations) from the implied enterprise value reference ranges for the Company indicated by the selected companies analysis and the discounted cash flow analysis. This analysis indicated that the HCC Debt had an implied valuation reference range of $773.2 million to $1,031.6 million as compared to the implied value of $655.8 million to $736.6 million indicated by its analysis for the Aggregate Recapitalization Consideration to be issued or paid by the Company and CMUS to the HCC Lenders in exchange for the HCC Debt in the Recapitalization Transaction.

        Based on information and assumptions provided by management of the Company, including the projections prepared by management of the Company with respect to the future financial performance of the Company, Houlihan Lokey also calculated that the implied net present value to the Company of the Company's net operating loss carry forwards, which we refer to as NOLs. That analysis indicated that the NOLs had an implied net present value to the Company pre-Recapitalization of approximately $14.0 million as compared to an implied net present value to the Company post-Recapitalization of approximately $99.4 million.

    Other Matters

        Houlihan Lokey was engaged as financial advisor to the Special Committee in connection with the proposed Exchange and Merger Transactions pursuant to a letter agreement dated as of December 14, 2009. The Special Committee and the Company engaged Houlihan Lokey based on Houlihan Lokey's experience and reputation and knowledge of the Company and its industry. Houlihan Lokey is regularly engaged to render financial opinions in connection with mergers and acquisitions, financial restructurings, tax matters, ESOP and ERISA matters, corporate planning, and for other purposes. Houlihan Lokey will receive a fee of $400,000 for rendering its opinion and providing other financial advice to the Special Committee, no portion of which is contingent upon the conclusions in the opinion or the successful completion of any portion of the proposed Exchange and Merger Transactions. The Company has also agreed to reimburse certain of Houlihan Lokey's expenses and to indemnify it and certain related parties for certain potential liabilities arising out of Houlihan Lokey's engagement.

        Houlihan Lokey and certain of its affiliates have in the past provided investment banking, financial advisory and other financial services to the Company and certain of its affiliates, for which Houlihan Lokey and such affiliates have received compensation, including, among other things, having acted as financial advisor to the Company in connection with the sale of its subsidiary, Crown Media Distribution LLC in 2006. Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and other financial services to the Company, Hallmark, other participants in the Exchange and Merger Transactions or certain of their respective affiliates in the future, for which Houlihan Lokey and such affiliates may receive compensation. Furthermore, in connection with bankruptcies, restructurings, and similar matters, Houlihan Lokey and certain of its affiliates may have in the past acted, may currently be acting and may in the future act as financial advisor to debtors, creditors, equity holders, trustees and other interested parties (including, without limitation, formal and informal committees or groups of creditors) that may have included or represented and may include or represent, directly or indirectly, the Company, Hallmark, other participants in the Exchange and Merger Transactions or certain of their respective affiliates, for which advice and services Houlihan Lokey and such affiliates have received and may receive compensation.

        In the ordinary course of business, certain of Houlihan Lokey's affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or investments in, the Company or any other party that may

47


Table of Contents


be involved in the Exchange and Merger Transactions and their respective affiliates or any currency or commodity that may be involved in the Exchange and Merger Transactions.


Internal Financial Forecasts

        The Company does not as a matter of course make public forecasts as to financial performance beyond the current fiscal year, and the Company avoids making forecasts for any long-term periods due to the unpredictability of the underlying assumptions and estimates. In connection with the activities of the Special Committee, the Company's management provided to the Special Committee, Morgan Stanley, Houlihan Lokey and HCC certain non-public, internal financial forecasts regarding future operations for the years 2010 through 2013. These internal forecasts took into account the agreements with Martha Stewart Living Omnimedia and were provided to the Special Committee, Morgan Stanley, Houlihan Lokey and HCC in February 2010. Below is a summary of these forecasts in order to provide stockholders with access to this non-public information that was furnished to third parties.

        These internal financial forecasts were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or GAAP. In addition, these internal forecasts were not prepared with the assistance of, or reviewed, compiled or examined by, any independent auditor. The summary of these internal financial forecasts is provided because these internal financial forecasts were provided by the Company to Morgan Stanley, Houlihan Lokey and HCC.

        These internal financial forecasts were based on a number of variables and assumptions (including but not limited to those related to industry performance and competition and general business, economic, market and financial conditions) that are inherently subjective and uncertain and are beyond the control of the Company's management. Important factors that may affect actual results and cause internal financial forecasts not to be achieved include but are not limited to risks and uncertainties relating to the Company as set forth in the Annual Report on Form 10-K for 2009 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, which accompany this Information Statement. These factors include the risks described by the Company's independent registered public accounting firm, as referenced in Note 1 of the Consolidated Financial Statements to the Annual Report, providing that "if for any reason the Recapitalization is not consummated, the Company would be unable to meet its obligations which become due on August 31, 2010, which provides substantial doubt about the entity's ability to continue." In addition, it is unlikely that the Company could obtain, without a guarantee or other support of Hallmark, other equity or debt financing prior to August 31, 2010 in order to replace or refinance obligations becoming due on that date. These internal financial forecasts were prepared assuming that the Company will continue as a going concern and also reflect assumptions as to certain business decisions that are subject to change. As a result, actual results may differ materially from those contained in these internal financial forecasts. There can be no assurance that the forecasted results summarized below will be realized.

        The inclusion of a summary of these internal financial forecasts in this Information Statement should not be regarded as an indication that the Company or its directors, officers, affiliates, advisors or representatives considered these internal financial forecasts to be predictive of actual future events, and these internal financial forecasts should not be relied upon as such. The Company and its directors, officers, affiliates, advisors and representatives cannot give you any assurance that actual results will not differ materially from these internal financial forecasts, and none of them undertakes any obligation to update or otherwise revise or reconcile these internal financial forecasts to reflect circumstances existing after the date these internal financial forecasts were generated or to reflect the occurrence of future events, even in the event that any or all of the assumptions underlying these forecasts are shown to be in error. The Company does not intend to make publicly available any update or other revision to these internal financial forecasts.

        The Company urges all stockholders to review the Company's most recent SEC filings for a description of the Company's reported financial results.

48


Table of Contents

Summary Financial Forecasts

 
  Actual
2009
  Estimate
2010
  Estimate
2011
  Estimate
2012
  Estimate
2013
  Compound
Actual
Growth
 

Channel Metrics

                                     
 

Hallmark Channel Subscribers (average in millions)(1)

    86.9     89.9     92.6     94.1     94.9     2 %
 

Hallmark Movie Channel Subscribers (average in millions)(1)

          28.3     34.8     39.9     41.6     14 %
 

Hallmark Channel Average Full Day Household Rating

    0.56     0.56     0.57     0.57     0.58     1 %
 

Hallmark Movie Channel Average Full Day Household Rating

          0.20     0.27     0.31     0.34     20 %

Crown Media Holdings, Inc.

                                     
   

Revenue (in millions)

  $ 279.6   $ 292.1   $ 332.6   $ 372.6   $ 411.4     10 %
   

Adjusted EBITDA (in millions)(2)

  $ 81.6   $ 85.1   $ 114.2   $ 147.2   $ 175.0     21 %
   

Cash Flow (before interest and taxes)(in millions)(3)

  $ 56.6   $ 82.0   $ 122.9   $ 137.0   $ 166.4     31 %

(1)
The Company's forecast of subscribers as reported by the Nielsen Code and the Nielsen Public Universe Estimate.

(2)
The Company evaluates operating performance based on several factors, including Adjusted EBITDA. The Company's calculation of Adjusted EBITDA adds back non-cash expenses and other items mentioned below.

The Company's measure of Adjusted EBITDA differs from the normal definition of EBITDA (earnings before interest, taxes, depreciation and amortization) used by most companies. The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, subscriber acquisition fee amortization, amortization of film assets, impairment charges, and other non-cash expenses. Adjusted EBITDA for the actual year ended 2009 and estimated year ended 2010 includes certain costs related to the Transactions, severance, and transitioning the Hallmark Channel to high-definition, which are non-recurring in nature. These items total approximately $7.5 million for 2009 and $5.5 million in 2010. This measure is viewed by the Company's management as important in analyzing a capital structure for the Company. The Company's bank credit facility also contained in the past a covenant that used this adjusted EBITDA measure. The Company no longer has an EBITDA covenant in its bank credit agreement. Management views Adjusted EBITDA as a critical measure of the Company's operating performance and monitors this measure closely.

The Company's management believes that an Adjusted EBITDA provides an indication of the Company's ability to generate cash flows from operating activities since its non-cash expenses are excluded from the Company's calculation of Adjusted EBITDA. The Adjusted EBITDA calculation allows the Company to assess how much is available to pay debt service and gives a further indication of how much remains to fund discretionary expenditures such as the acquisition of programming or additional subscriber base. However, Adjusted EBITDA should be considered in addition to, not as a substitute for, historical operating income or loss, net loss, cash flow from operations and other measures of financial performance reported in accordance with accounting principles generally accepted in the United States.

Adjusted EBITDA differs significantly from cash flows from operating activities reflected in the consolidated statement of cash flows. Cash flow from operating activities is net of interest and taxes paid and is a more comprehensive determination of periodic income on a cash basis,

49


Table of Contents

    exclusive of non-cash items of income and expenses such as depreciation, amortization, loss from discontinued operations and impairment of film assets. In contrast, Adjusted EBITDA is derived from accrual basis income and is not reduced for cash invested in working capital. Consequently, Adjusted EBITDA is not affected by the timing of receivable collections or when accrued expenses are paid. The Company is not aware of any uniform standards for determining EBITDA or the Company's Adjusted EBITDA and believes that the Company's calculation of Adjusted EBITDA is probably calculated differently than presentations of EBITDA by other entities.

(3)
Cash Flow (before interest and taxes) is calculated as Adjusted EBITDA plus non-cash programming expenses less cash programming payments less capital expenditures plus working capital changes. Cash Flow (before interest and taxes) can also be calculated by adding or subtracting the following to/from net cash flows provided by operating activities: (i) minus or plus net cash flow used in investing activities; (ii) minus principal payments on capital lease obligation; and (iii) plus cash interest expense.


Revolving Credit Facility

        Hallmark and the Company are working with a major bank on the extension of the credit facility, which has currently been extended through August 31, 2010. However, no definitive agreement has been reached.


Lawsuit

        On July 13, 2009, a lawsuit was brought in the Delaware Court of Chancery against each member of the Board of Directors of the Company, Hallmark and its affiliates, as well as the Company as a nominal defendant, by a minority stockholder of the Company regarding the Proposed Recapitalization. The plaintiff is S. Muoio & Co. LLC which owns beneficially approximately 5.8% of the Company's Class A common stock, according to the complaint and filings with the SEC. The lawsuit claims to be a derivative action and a class action on behalf of the plaintiff and other minority stockholders of the Company. The lawsuit alleges, among other things, that the defendants have breached fiduciary duties owed to the Company and minority stockholders in connection with the Transactions. The lawsuit includes allegations that if the Transactions are consummated the minority stockholders' equity and voting interests in the Company would be reduced, and that the minority stockholders could be eliminated through a short-form merger. The complaint requested the court enjoin the defendants from consummating the Transactions and award plaintiff fees and expenses incurred in bringing the lawsuit.

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

        By a letter of February 28, 2010, the plaintiff in this lawsuit informed the Special Committee that the plaintiff objected to the proposed recapitalization on the terms set forth in the term sheet dated February 9, 2010. The plaintiff asserted, among other things, that the transactions contemplated by the term sheet would unfairly dilute the economic and voting interests of the Company's minority stockholders, that the transactions should be subject to a vote of the majority of the minority

50


Table of Contents


stockholders and that the proposed transactions remain inadequate. The plaintiff indicated that if the Company executed definitive documents for the Recapitalization, the plaintiff would pursue the litigation. The February 26, 2010 agreements executed by the Company for the Recapitalization materially followed the provisions in the earlier term sheet.

        Notice of the terms of the proposed Recapitalization, including copies of the executed definitive documents for the Recapitalization, was provided to the plaintiff on March 1, 2010. Accordingly, the seven-week period described in the Stipulation expired on April 19, 2010.

        On March 11, 2010, the plaintiff filed an amended complaint raising similar allegations of breach of fiduciary duty against the Board of Directors of the Company, Hallmark and its affiliates, as well as the Company as a nominal defendant, and seeking rescission of the Recapitalization rather than a preliminary injunction enjoining the consummation of the Recapitalization, or alternatively, an award of rescissory damages. The plaintiff also filed a motion for expedited proceedings and a request that the Chancery Court set a trial date sometime in September 2010. Defendants have informed the Court that they do not oppose a trial in August or September 2010 but reserve the right to oppose rescission as an available or proper remedy.

        On March 23, 2010, the Court notified the parties that the trial was scheduled for September 21, 2010.

        It is not currently possible to predict the outcome of the proceeding discussed in this report. Legal fees incurred to defend the proceeding described in this report will be expensed as incurred.


Interests of the Company's Executive Officers and Directors

    Common Executive Officers and Directors

        The following directors of the Company are also employees of Hallmark: Dwight C. Arn, Brad R. Moore, Robert C. Bloss, Steve Doyal, Brian E. Gardner, Donald J. Hall, Jr. and Deanne R. Stedem. Additional information regarding these directors is provided under "Interest of Certain Persons in Matters to be Acted Upon" below.

    Indemnification of Directors and Officers; Exculpation of Monetary Liability

        Under the current Certificate of Incorporation of the Company and the Second Amended Charter, to the fullest extent permitted under the DGCL or any other applicable law as such may be amended from time to time, the Company must provide indemnification of directors and officers of the Company and of each such person who has served at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, in accordance with the By-Laws. Under the current Certificate of Incorporation and the Second Amended Charter, the Company may enter into agreements with its directors and officers that provide for indemnification greater or different than that provided in the certificate of incorporation. The current Certificate of Incorporation and the Second Amended Charter provide that the Company's directors are not personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (concerning unlawful dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit.

        The By-Laws of the Company provide that the Company will indemnify, to the fullest extent permitted by DGCL as may be amended from time to time, any person who is or is threatened to be made a party to or involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another

51


Table of Contents


corporation or of a partnership, joint venture, trust or other enterprise, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person. Notwithstanding the previous sentence, other than suits brought against the Company for its failure to pay indemnification claims, the Company will only indemnify any such person seeking indemnification in connection with a proceeding initiated by such person if such proceeding was authorized by the Board of Directors. The By-Laws provide that the Company will advance expenses incurred by a director or officer in defending any action, suit or proceeding, subject to a repayment obligation in the event it is subsequently determined such person was not entitled to indemnification. The By-Laws also provide that the Company may, to the extent authorized by the Board of Directors, grant rights to indemnification (including attorneys' fees and expenses) to any employee or agent of the Company.

        A. Drue Jennings was nominated to the Company's Board of Directors by Hallmark in 2006 pursuant to the Second Amended and Restated Stockholders Agreement, dated August 30, 2001, as amended, by and among the Company, HEIC, VISN Management Corp. and The DIRECTV Group, Inc. and was elected to the Board. As such, Mr. Jennings is included under Hallmark's directors and officer's insurance policy, a fact of which Mr. Jennings was not aware until he was advised as such by counsel to the Special Committee in July 2009 (based on disclosure by Hallmark).

    Other Arrangements with Current Executive Officers and Directors of the Company

        For information regarding agreements, arrangements or relationships between Hallmark or its officers, directors, controlling persons or subsidiaries and Crown or its officers, directors, controlling persons or subsidiaries, please see "Interest of Certain Persons in Matters to be Acted Upon" below.


Certain Fees and Expenses

    Special Committee

        Each Special Committee member receives $1,000 for each Special Committee meeting they attended and $500 per day for work the member performed for the Special Committee. As of April 30, 2010, Mr. Granath had received $82,000, Mr. Lund had received $81,000 and Mr. Jennings had received $83,000 for their meeting participation and other work for the Special Committee.

    Financial Advisors

        Fees to be paid to Morgan Stanley are described in "Recommendation of Morgan Stanley" and fees to be paid to Houlihan Lokey are described in "Opinion of Houlihan Lokey" above.

    Expenses

        All costs and expenses incurred in connection with the Master Recapitalization Agreement and the Transactions will be paid by the party incurring such expense.

        The following table presents the estimated fees and expenses incurred by the Company in connection with the Transactions:

Description
  Amount to be Paid  

Financial advisor fees

  $ 2,900,000  

Legal fees and expenses

  $ 1,000,000  

Miscellaneous fees

  $ 100,000  

Total

  $ 4,000,000  

52


Table of Contents


Regulatory Approvals

        We believe there are no material federal, state, or foreign regulatory approvals, filings or notices that are required in connection with the Master Recapitalization Agreement and the Transactions, including the Mergers, other than filings or notices required under federal securities laws and the filing of the Certificates of Merger, Second Amended Charter, Certificate of Designation and Third Amended Charter with the Secretary of State of the State of Delaware.


Accounting Treatment of the Transactions

        For financial reporting purposes, the Transactions will be accounted for as a troubled debt restructuring in accordance with the guidance of the Accounting Standards Codification (the "ASC") Topic 470-60 Debt—Troubled Debt Restructurings, based on the estimated fair value of the Company's Preferred Stock and Common Stock as of the Closing Date. Identification of the Transactions as a troubled debt restructuring involves 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 million of principal and interest payable to HCC on May 1, 2010 upon the expiration of the Waiver Agreement (which has been extended to August 31, 2010 pursuant to the Master Recapitalization Agreement), along with an additional $785 million of principal and interest that would 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 is deemed to have granted a "concession" within the meaning of ASC 470-60. Prior to consummation of the Transactions, the weighted average interest rate of HCC debt is approximately 8.4%. After consideration of (x) the estimated fair values of Preferred Stock and Common Stock to be issued in the Transactions and (y) the debt service requirements of New Debt, the overall effective interest rate resulting from the Transactions is expected to be less than 1.0%.

        Pursuant to the guidance in the ASC, we will (1) record the issuance of Preferred Stock and Common Stock at their respective estimated fair values and (2) record 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. If necessary, the recorded amount of New Debt will be reduced to an amount equal to the minimum future interest and principal payments required by the credit agreement underlying New Debt (a reduction estimated to be $2.7 million if the Transactions had closed as of March 31, 2010). As a result, the residual amount to be recorded as New Debt (estimated to be $452 million if the Transactions had closed as of March 31, 2010) will significantly exceed the $315 million principal amount of New Debt. Such excess would be amortized over the term of New Debt as a reduction of the interest expense that otherwise would arise from the stated cash interest rates. The ultimate amount of interest expense recognized by the Company would also be impacted by the Company's ability to elect up to six pay-in-kind options. If, and when, any of these pay-in-kind options are exercised, the effects of such elections will be recognized prospectively.

        The accounting treatment could change significantly based on the values ultimately ascribed to the Preferred Stock and Common Stock, which cannot be determined until the Closing Date, and the number of shares of Common Stock ultimately issued, which cannot be determined until the Closing Date.

        The HEIC Merger and HEH Merger involve non-substantive Hallmark subsidiaries. Hallmark affiliates' ownership in us will be insignificantly affected by the Mergers. The Mergers will be recorded at carry-over basis pursuant to the guidance of ASC 805-50 Business Combinations—Related Issues. HEIC and HEH do not have assets other than their investment in the Company. Therefore, no pro forma adjustments are necessary to reflect these mergers, and Hallmark affiliates' overall ownership in us will not be affected by the Mergers.

53


Table of Contents

        For additional information, see the pro forma financial statements and related discussion under "Financial Information" elsewhere herein.


Material U.S. Federal Income Tax Consequences of the Transactions

        The following discussion generally describes the material U.S. federal income tax consequences of the Transactions to holders of Class A Common Stock, other than Hallmark and its affiliates. This discussion is not a complete analysis or listing of all of the possible tax consequences of the Transactions, and does not address all tax considerations that may be relevant to you. Special rules that are not discussed in the general descriptions below may also apply to you. In particular, the description of U.S. federal income tax consequences deals only with shareholders that hold shares as capital assets. In addition, this description of U.S. federal income tax consequences does not address the tax treatment of special classes of stockholders, such as banks and other financial institutions, tax-exempt entities, insurance companies, persons holding shares as part of a "straddle," "hedge," "integrated transaction," or "conversion transaction," persons holding shares through partnerships or other pass-through entities, U.S. expatriates, persons liable for alternative minimum tax, broker-dealers or traders in securities or currencies, holders whose "functional currency" is not the U.S. dollar, regulated investment companies, real estate investment trusts, traders in securities who have elected the mark-to-market method of accounting for their securities, non-U.S. corporations, and non-resident alien individuals and other persons not subject to U.S. federal income tax on their worldwide income.

        This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the "Code"), its legislative history, existing and proposed Treasury regulations promulgated thereunder, judicial decisions, published rulings and administrative pronouncements as in effect on the date of this information statement, any of which may change, possibly with retroactive effect. There can be no assurance that the Internal Revenue Service (the "IRS") will not disagree with or will not challenge any of the consequences described herein. In addition, this discussion does not generally address any aspects of U.S. taxation other than federal income taxation or any aspects of the taxation of the Transactions other than U.S. federal income taxation.

        We have not sought and will not seek rulings from the IRS with respect to the U.S. federal income tax consequences discussed below. This discussion does not in any way bind the IRS or the courts or constitute any kind of assurance as to the U.S. federal income tax consequences described below.

        You should consult with your own tax advisor regarding the U.S. federal, state, local and foreign tax consequences of the Transactions and your ownership and disposition of Class A Common Stock.

    U.S. Federal Income Tax Consequences to Holders of Class A Common Stock

    Conversion of HCC Debt; Conversion of Class B Common Stock; Mergers

        We do not expect that the conversion of the HCC Debt into new debt, preferred stock, and common stock will have material U.S. federal income tax consequences to the holders of Class A Common Stock, other than Hallmark and its affiliates. We do not expect that the HEIC Merger and the HEH Merger will have material U.S. federal income tax consequences to the holders of Class A Common Stock, other than HEIC, HEH and the owners thereof. Furthermore, we do not expect that the conversion of Class B Common Stock into Class A Common Stock will have material U.S. federal income tax consequences to the holders of Class A Common Stock.

    Reverse Split

        Whether the Reverse Split will be taxable to a holder of Class A Common Stock depends upon whether a holder receives cash in addition to Common Stock, or only Common Stock. If you receive only Common Stock in the Reverse Split, you will not recognize gain or loss in connection with the Reverse Split, and your aggregate tax basis and holding period in your shares of Class A Common

54


Table of Contents

Stock will carry over as the aggregate tax basis and holding period of your shares of post-split Common Stock.

        The receipt of cash in lieu of fractional shares in the Reverse Split will be a taxable transaction for U.S. federal income tax purposes to the extent of the cash received.

        If any one of the following three "Section 302 tests" described below is met, you will recognize gain or loss equal to the difference between the amount of cash received and your adjusted tax basis in the shares that were exchanged for cash. Gain or loss must be calculated separately with respect to each block of shares. Any gain or loss will be capital gain or loss and will be long-term capital gain or loss if the shares were held by you for more than one year. If you are an individual, any gain may be eligible for a reduced rate of taxation. Certain limitations apply to the deductibility of capital losses. If you receive cash in lieu of fractional shares, your aggregate tax basis and holding period in the Class A Common Stock not exchanged for cash will carry over as the aggregate tax basis and holding period of your shares in the post-split Common Stock.

        Section 302 will apply if there is either: (1) a "complete termination" of a holder's interest in the Company; (2) receipt of cash that is "substantially disproportionate" with respect to the holder; or (3) receipt of cash that is "not essentially equivalent to a dividend" with respect to the holder.

        In determining whether any of the Section 302 tests are met, holders must take into account both shares actually owned by such holder and shares constructively owned by such holder pursuant to section 318 of the Code. Under the constructive ownership rules of section 318, a holder will be considered to own (i) shares which the holder has the right to acquire by the exercise of an option or warrant or by conversion or exchange of a security, (ii) shares owned (in some cases, constructively) by certain members of the holder's family, and (iii) shares owned (in some cases, constructively) by certain entities in which the holder, a member of the holder's family, or a related entity has an interest.

        An exchange of shares for cash will result in a "complete termination" of the holder's interest in the Company if, in connection with the Reverse Split, either (i) all the shares actually and constructively owned by the holder are exchanged for cash, or (ii) all of the shares actually owned by the holder are exchanged for cash and, with respect to constructively owned shares, the holder is eligible to waive, and effectively waives, the constructive ownership of all such shares under the procedures described in section 302(c) of the Code. The "complete termination" rule would apply only to holders of less than the Reverse Split ratio number of pre-split Class A Common Stock, and not to holders who are continuing shareholders in the Company but receive cash in lieu of fractional shares.

        An exchange of shares for cash that is "substantially disproportionate" with respect to the shareholder will also constitute a taxable sale or exchange under section 302. A holder who receives cash in the Reverse Split and immediately after the Reverse Split constructively owns shares of post-split Common Stock must compare (i) its percentage ownership of the voting stock of the Company immediately before the Reverse Split, with (ii) its percentage ownership of the voting stock of the Company immediately after the Reverse Split. If the holder's post-Reverse Split ownership percentage if less than 80% of the holder's pre-Reverse Split ownership percentage, the receipt of cash is "substantially disproportionate" with respect to the holder.

        The third Section 302 test applies to exchanges of cash for shares in which the cash is "not essentially equivalent to a dividend." The receipt of cash will be considered "not essentially equivalent to a dividend" if the exchange results in a "meaningful reduction" of the holder's proportionate interest in the Company. Whether the receipt of cash by a holder of the Company will result in a "meaningful reduction" of the holder's proportionate interest will depend on the holder's particular facts and circumstances. The IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority shareholder (for example, less than 1%) in a publicly held corporation as to which the shareholder exercises no control over corporate affairs may constitute a

55


Table of Contents


"meaningful reduction." Holders are urged to consult with their own tax advisors regarding of the application of this test to their particular circumstances.

        If none of the three Section 302 tests described above are satisfied, you will be treated as having received a distribution in an amount equal to the amount of cash received by you. The distribution will be treated as (i) first, a taxable dividend to the extent of our current and accumulated earnings and profits (for U.S. federal income tax purposes), if any, (ii) second, as a tax-free return of capital, to the extent of your adjusted tax basis in the shares exchanged for cash, and (iii) finally, as taxable gain from the sale or exchange of the exchanged shares. Amounts treated as a taxable dividend are ordinary income to the recipient, but for non-corporate shareholders, qualified dividend income is currently taxed at the same rate as net long-term capital gain. If dividend treatment applies, a holder's tax basis in the shares exchanged for cash should be added to the tax basis of any shares retained (actually or constructively) by the holder.

        If a corporate holder receives a distribution taxed as a dividend, it may be eligible for a dividends-received deduction. This deduction is subject to certain limitations. In addition, since not all shareholders will exchange the same proportionate interest in their shares, any amount received by a corporate holder that is treated as a dividend may constitute an "extraordinary dividend" under section 1059 of the Code, which may result in either the reduction of the adjusted tax basis in the holder's shares or gain recognition. Corporate shareholders are urged to consult with their own tax advisors as to the tax consequences of dividend treatment in their particular circumstances.

    Backup Withholding

        You may be subject to backup withholding with respect to cash received pursuant to the Reverse Split. You will be subject to backup withholding if you are not otherwise exempt and you fail to furnish your taxpayer identification number ("TIN"), furnish an incorrect TIN, or are notified by the IRS that you are subject to backup withholding. Backup withholding is not an additional tax. You will be generally entitled to credit any amount withheld against your U.S. federal income tax liability, provided the required information is furnished to the IRS in a timely manner.

    Information Reporting

        We are required to furnish to the IRS and to the holders of Class A Common Stock who receive cash as a result of the Reverse Split, other than corporations and other exempt holders, information statements reporting the payments made.

    Tax Consequences to the Company

    Conversion of Class B Common Stock; Mergers; Reverse Split

        We do not expect that the conversion of Class B Common Stock into Class A Common Stock, the HEIC Merger, the HEH Merger, or the Reverse Split will have any material U.S. federal income tax consequences to the Company.

    Conversion of HCC Debt

        The Company (as a member of the consolidated tax group of which Hallmark is the common parent) expects to realize cancellation of indebtedness income for U.S. federal income tax purposes with respect to the exchange of the HCC Debt for new debt, preferred stock, and common stock pursuant to the Recapitalization. In general, cancellation of indebtedness income is realized if old debt is exchanged for new debt and the issue price of the new debt is less than the adjusted issue price of the old debt. Cancellation of indebtedness income is also realized if old debt is exchanged for stock and the value of the stock is less than the adjusted issue price of the old debt. There are a number of exceptions to the recognition of cancellation of indebtedness income. These exceptions include, among

56


Table of Contents

other things, an exception from the recognition of cancellation of indebtedness income to the extent of a taxpayer's insolvency. Cancellation of indebtedness income that is recognized by the Company, however, is not expected to result in a liability for U.S. federal income taxes under the Tax Sharing Agreement.

        The Company is a member of the Hallmark consolidated group for U.S. federal income tax purposes. As such, the Company and Hallmark have entered into the Tax Sharing Agreement to define their respective obligations and benefits with regard to U.S. federal income tax liabilities. The Company's liability for U.S. federal income taxes is effectively determined under the Tax Sharing Agreement. Although the Company expects that it may recognize cancellation of indebtedness income as a result of the Recapitalization, the amendment to the Tax Sharing Agreement (as described in the section of this Information Statement titled "THE RECAPITALIZATION—Additional Agreements") provides that such income will not be taken into account under the Tax Sharing Agreement for the tax period during which the Recapitalization occurs. The Company, therefore, does not expect to have any liability for U.S. federal income taxes attributable to the Transactions for the taxable year in which the Transactions occur. The Transactions, including the amendment to the Tax Sharing Agreement, may affect the Company's liability for U.S. federal income taxes in future periods, and the amount of payments due to Hallmark under the Tax Sharing Agreement.


SECOND AMENDED CHARTER

        In connection with the Master Recapitalization Agreement and the Transactions, the Board of Directors recommended that the Company's Certificate of Incorporation filed with the Secretary of State of the State of Delaware be amended and restated to reclassify each share of the Company's Class B Common Stock outstanding immediately prior to the effectiveness of the Second Amended Charter as one share of Class A Common Stock upon such effectiveness, to increase the Company's authorized common stock from 200,000,000 shares to 500,000,000 shares and to decrease the Company's authorized preferred stock from 10,000,000 shares to 1,000,000 shares. The Consenting Holders approved the Second Amended Charter on May 21, 2010 and the Second Amended Charter will be filed with the Secretary of State of the State of Delaware on the Closing Date. The Certificate of Designation setting forth the rights, powers and preferences and the qualifications, limitations and restrictions thereof, of the Preferred Stock will also be filed with the Secretary of State of the State of Delaware on the Closing Date.

        The Second Amended Charter also modifies the provisions in the Company's current Certificate of Incorporation with respect to corporate opportunities. Under the current Certificate of Incorporation, the Company waives any interest or expectancy it might have in business opportunities presented to Hallmark or Hallmark's directors, officers, agents, employees or affiliates, specifically the rights the Company might have in the same or similar activities or lines of business as Hallmark, subject to certain exceptions. Furthermore, neither Hallmark nor any of its directors, officers, agents, employees or affiliates (i) are liable to the Company or its stockholders for breach of any duty by reason of such person's participation in such business opportunities or (ii) have any duty to communicate or present any activities or omissions concerning business opportunities to the Company or its stockholders.

        In the Second Amended Charter, Hallmark generally maintains its right to engage in the same or similar activities or lines of business as the Company. However, the Second Amended Charter distinguishes such "Business Opportunities" from "Corporate Transaction Opportunities." "Business Opportunity" means any corporate opportunity relating to the operation of a multichannel video programming provider, and does not include any Corporate Transaction Opportunity. "Corporate Transaction Opportunity" means any corporate opportunity relating to the acquisition by a third party of the Company or of all or a material portion of its equity, debt, assets, or voting power.

57


Table of Contents

        With respect to a Business Opportunity:

      (i)
      A Business Opportunity offered to any person who is an officer of the Company, and who is also a director but not an officer of Hallmark, belongs to the Company;

      (ii)
      A Business Opportunity offered to any person who is a director but not an officer of the Company, and who is also a director or officer of Hallmark, belongs to the Company if such Business Opportunity is expressly offered to such person in his or her capacity as a director of the Company, and otherwise belongs to Hallmark; and

      (iii)
      A Business Opportunity offered to any person who is an officer of both the Company and Hallmark belongs to the Company if such Business Opportunity is expressly offered to such person in his or her capacity as an officer of the Company, and otherwise belongs to Hallmark.

        With respect to a Corporate Transaction Opportunity, under the Second Amended Charter, any Corporate Transaction Opportunity belongs to Hallmark, and any person who is an officer or director of the Company and an officer or director of Hallmark has no duty to communicate such Corporate Transaction Opportunity to the Company. Under the current Certificate of Incorporation, Business Opportunities are addressed just as they will be under the Second Amended Charter, but Corporate Transaction Opportunities are not distinguished from Business Opportunities. Under the Second Amended Charter, Business Opportunities and Corporate Transaction Opportunities that do not belong to the Company under the foregoing rules are specifically renounced.

        The provisions regarding business opportunities described above terminate when and if Hallmark ceases to own at least 20% of the total voting power of all classes of the outstanding capital stock of the Company entitled to vote in the election of directors and no person who is a director or officer of the Company is also a director or officer of Hallmark.

        Furthermore, unlike the Company's current Certificate of Incorporation, the Second Amended Charter provides that the Company elects not to be governed by Section 203 of the DGCL, subject to certain carveouts. Section 203 of the DGCL, subject to certain exceptions, prohibits a company from engaging in business combinations with interested stockholders for a period of three years following the time such stockholder becomes an interested stockholder. The Second Amended Charter provides that the Company will not be governed by Section 203 of the DGCL until the moment in time immediately following the time at which both the following conditions exist (if ever): (a) Section 203 by its terms would apply to the Company and (b) there occurs a transaction in which Hallmark's beneficial ownership interest in the Company is reduced to less than 50% of the outstanding shares of Common Stock.


THIRD AMENDED CHARTER

        In connection with the Master Recapitalization Agreement and the Transactions, the Board of Directors recommended that the stockholders approve the Third Amended Charter which provides for a reverse stock split of outstanding shares of the Class A Common Stock if the Third Amended Charter is filed with the Delaware Secretary of State. Even with stockholder approval, the reverse stock split will only be implemented if recommended by an independent committee as described below and further authorized by the Board of Directors. In accordance with the Master Recapitalization Agreement, at any time prior to December 31, 2013, if requested by the Special Committee (or another committee consisting solely of disinterested, independent directors, either of which are referred to in this section as the "independent committee"), the Company will file the Third Amended Charter with the Secretary of State of the State of Delaware and do so within three business days following the request. The ratio of a reverse stock split will range from 2 to 20 shares being automatically classified into one share, with the exact ratio to be determined by the Board of Directors upon the recommendation of the independent committee (which has discretion to act in the best interests of the

58


Table of Contents


Company) and to be publicly announced by the Company. The Consenting Holders have granted authority for the filing of the Third Amended Charter. The text of the form of Third Amended Charter is attached as Exhibit G to the Master Recapitalization Agreement.

        If the Company elects to effect a reverse stock split, except for adjustments that may result from the treatment of fractional shares as described below, each stockholder will hold the same percentage of our outstanding Common Stock immediately following the reverse stock split as such stockholder held immediately prior to the reverse stock split. Our Common Stock would continue to have the same par value per share. Currently, the Company does not have any plans with regard to the authorized but unissued shares of our Common Stock following the reverse split.

    Reasons For the Reverse Stock Split

        Potential reasons for implementing a reverse split may include any one or more of the following:

      to increase the stock price per share in order to continue our listing with NASDAQ;

      to increase the price per share of our stock in order to help increase market confidence in the Company; or

      to facilitate various financing arrangements that we may decide to pursue in the future.

        Under NASDAQ rules, NASDAQ can delist issuers with low trading prices per share. While the Company's stock has traded through the date of this Information Statement above the minimum price per share required for continued listing on NASDAQ, it is possible that a notice of delisting for this reason could be received in the future. The Company believes that any delisting or threatened delisting of its Common Stock from NASDAQ, among other things, may cause a decrease in the price of its stock and make its stock less attractive to certain investors. In addition, not being listed on NASDAQ may affect the Company's eligibility to use a more streamlined form of registration statement for resales of restricted securities, if any are issued. Having the authority to implement a reverse stock split upon a receipt of any such notice from NASDAQ would allow the Board to quickly address this issue should it arise before December 31, 2013.

        An increased stock price may facilitate various financing arrangements that the Company may decide to pursue in the future. Such potential financing partners may be more willing to negotiate with if its stock price is higher.

        The Board of Directors believes that having authority to implement a reverse stock split, if and when it determines such to be appropriate, is in the best interests of stockholders.

    Potential Effects of a Reverse Stock Split

        A reverse stock split, if implemented, would reduce the number of shares of Common Stock outstanding and potentially increase the trading price of the Common Stock. However, the Company cannot predict the effect of any reverse stock split upon the market price of the Common Stock. The history of reverse stock splits for companies varies. The Company cannot assure stockholders that the trading price of the Common Stock after the reverse stock split will rise in exact proportion to the reduction in the number of shares of the Common Stock outstanding. Also, the Company cannot assure you that a reverse stock split would lead to a sustained increase in the trading price of the Common Stock. The trading price of the Common Stock may change due to a variety of other factors, including operating results, other factors related to the Company's business and general market conditions.

        The reverse stock split, if implemented, would not change the number of authorized shares of Common Stock as designated by the Second Amended Charter and the Third Amended Charter. Therefore, because the number of issued and outstanding shares of the Common Stock would decrease, the number of shares remaining available for issuance under our authorized pool of the Common Stock

59


Table of Contents


would increase. Potential effects of having a large number of shares authorized and unissued are discussed below.

        The Company believes that a larger number of authorized shares of Common Stock could provide the flexibility to issue additional shares of Common Stock as needs may arise without further stockholder action unless required by applicable law, regulation, listing requirements or the Third Amended Charter. Except as set forth herein, we have no agreements, understandings or plans for the issuance or use of the additional shares of Common Stock proposed to be authorized.

        The issuance of additional shares of Common Stock may, among other things, have a dilutive effect on earnings per share, and on stockholders' equity and voting rights. The issuance of additional shares, or the perception that additional shares may be issued, may also adversely affect the market price of Common Stock. Holders of Common Stock have no preemptive rights, except for the contractual preemptive rights granted to Hallmark in the Stockholders Agreement as described above.

        The availability for issuance of additional shares of Common Stock also could have the effect of rendering more difficult or discouraging an attempt to change or obtain control of the Company in the future. For example, the issuance of shares of Common Stock (within the limits imposed by applicable law and the rules of any market upon which the Common Stock may be listed) in a public or private sale, merger or similar transaction would increase the number of outstanding shares, thereby possibly diluting the interest of a party attempting to obtain control of the Company in the future. The issuance of additional shares of Common Stock could also be used to render more difficult a merger or similar transaction even if it appears to be desirable to a majority of stockholders. The Company is not aware of any efforts to change control of the Company.

        The Company's Board may issue additional shares of Common Stock only if (i) the action is permissible under Delaware law and the rules of any stock market on which Common Stock is traded, and (ii) while any shares of Preferred Stock are outstanding, the action is approved by the holders of the Preferred Stock.

    Number of Shares after a Reverse Stock Split

        The following table shows, based on the Company's outstanding Common Stock as of April 30, 2010 and assuming the increase in the authorized shares of Class A Common Stock stated in the Second Amended Charter and the Third Amended Charter, the number of shares of our Common Stock that will be (1) issued and outstanding, (2) authorized and reserved for issuance and (3) authorized and unreserved after the adoption of a reverse stock split, showing various ratios between 1:2 and 1:20.

NUMBER OF SHARES IF A REVERSE STOCK SPLIT
WERE EFFECTED POST-CLOSING, ASSUMING A CLOSING DATE OF APRIL 30, 2010
AND AN INCREASE IN AUTHORIZED CLASS A SHARES

 
  Reverse Stock Split Ratio  
 
  Pre-Split   1:3   1:5   1:10   1:13   1:15   1:20  

Issued and outstanding shares

    354,748,428     118,249,476     70,949,686     35,474,843     27,288,341     23,649,895     17,737,421  

Reserved shares(1)

    71,316,498     23,772,166     14,263,300     7,131,650     5,485,884     4,754,433     3,565,825  

Authorized, unissued and unreserved shares(2)

    73,935,074     357,978,358     414,787,014     457,393,507     467,225,775     471,595,672     478,696,754  

Total authorized shares

    500,000,000     500,000,000     500,000,000     500,000,000     500,000,000     500,000,000     500,000,000  

(1)
Reserved shares include 77,713 shares of Common Stock that are expected to be issuable under outstanding stock options as of April 30, 2010 and 71,238,785 shares of Common Stock underlying the Preferred Stock.

60


Table of Contents

(2)
Prior to the Second Amended Charter and the Third Amended Charter, the authorized Class A Common Stock consists of 200,000,000 shares.

    No Fractional Shares

        The Company will not issue fractions of shares of Common Stock in connection with a reverse stock split pursuant to the Third Amended Charter. Stockholders who would otherwise own, as a result of the reverse stock split, a fractional interest in a share of post-split Common Stock immediately following the split, will instead be entitled to receive, with respect to and in lieu of such fractional interest, cash from the Company representing the fair market value of the fractional shares at the election of the Board of Directors either as determined by the Board of Directors or by following the procedures described below. The Company will arrange for the disposition of fractional interests by those otherwise entitled thereto by the mechanism of having (x) the transfer agent of the Company aggregate such fractional interests, (y) the shares resulting from the aggregation sold and (z) the net proceeds received from the sale allocated and distributed among the holders of the fractional interests as their respective interests appear.

    Effects on Ownership by Individual Stockholders

        If the Company implements a reverse stock split, the number of shares of Common Stock each record stockholder holds would be reduced by dividing the number of shares held immediately before the reverse split by the number recommended for the reverse split by the independent committee, and then rounding down to the nearest whole share. The reverse stock split would affect the Common Stock uniformly and would not affect a stockholder's percentage of ownership interests in the Company or proportionate voting power, except to the extent that interests in fractional shares would be paid in cash. A fractional share that is not issued could eliminate as many as 19 outstanding shares per record holder of the Common Stock (if the maximum level of a reverse stock split at 1:20 is implemented), and therefore a cash payment could be made for up to 19 shares held by any record holder.

        If the reverse stock split is implemented and existing stock certificates are to be exchanged, the Company would provide to the stockholders information on exchanging the certificates.

    Effect on Preferred Stock, Options and Other Rights

        If a reverse stock split is implemented, all the terms of any then outstanding shares of Preferred Stock, options and other rights to acquire shares of the Common Stock would be adjusted to take into account the reverse stock split, as required by the terms of these securities. In particular, the conversion ratio for each security would be reduced, and the exercise price for each security, as applicable, would be increased, in accordance with the terms of such security.

    Other Effects on Outstanding Shares

        If the Company implements a reverse stock split, the rights and powers of the outstanding shares of Common Stock would remain the same after the reverse stock split. Each share of Common Stock issued pursuant to the reverse stock split would be fully paid and non-assessable.

        The reverse stock split would result in some stockholders owning "odd-lots" of less than 100 shares of Common Stock. Brokerage commissions and other costs of transactions in odd-lots may be higher than the costs of transactions in "round-lots."

        The Common Stock is currently registered under the Exchange Act. As a result, the Company is subject to the periodic reporting and other requirements of the Exchange Act. The proposed reverse stock split would not affect the number of holders in a way that changes the Company's ability to continue or discontinue the registration of the Common Stock under the Exchange Act. According to the records of the Company's transfer agent, as of April 30, 2010 the Company had 55 holders of record of its Common Stock and a stock split at the maximum level of 20 shares becoming one share of Common Stock (1:20) would reduce our record holders to 52.

61


Table of Contents

    Accounting Consequences

        The reverse stock split will not affect the par value of the Common Stock. As a result, on the effective date of the reverse stock split, the Company will reduce the Common Stock account on the balance sheet to correspond to the ratio of the reverse split, and credit the additional paid-in capital account by the same amount. The Company will increase the per share net income or loss and net book value of the Common Stock because there will be fewer shares of our Common Stock outstanding.

        Certain tax consequences of a reverse stock split are described in "Material U.S. Federal Income Tax Consequences of the Transactions" above.


THE MERGERS

        The following is a summary of the material terms of the Mergers and the Merger Agreements. Although we believe that this description covers the material terms of the Mergers and the Merger Agreements, it may not contain all the information that is important to you and is qualified in its entirety by reference to the Merger Agreements, copies of which are included as Exhibits E and F to the Master Recapitalization Agreement. We urge you to carefully read the Merger Agreements in their entirety.


The Companies

    Crown Media Holdings, Inc.

        The Company owns and operates a cable television channel, known as the Hallmark Channel, dedicated to high-quality entertainment programming for adults and families. The Hallmark Channel is a 24-hour television destination for family-friendly programming and a leader in the production of original movies. In addition, the Company owns and operates the Hallmark Movie Channel, which is a 24-hour digital cable network dedicated to offering viewers a collection of movies and mini-series appropriate to the entire family, and the Hallmark Movie Channel HD, which is simulcast alongside the Hallmark Movie Channel and offers a mix of original movies, mini-series and feature films. These channels are distributed to more than 89.1 million subscribers in the U.S. and its territories and possessions, including Puerto Rico, at March 31, 2010. The Company currently distributes (a) the Hallmark Channel through approximately 5,450 cable, satellite, and other distribution systems and (b) the Hallmark Movie Channel through approximately 800 such systems. The Company has agreements with various pay television distributors for the distribution of the Hallmark Channel. The Company also has agreements with select distributors, which give these distributors the right to distribute the Hallmark Movie Channel and the Hallmark Movie Channel HD. In addition, the Company has entered into agreements with several telephone companies that have started to furnish video programming to consumers. The Company was incorporated in Delaware on December 15, 1999. The Company's Class A Common Stock is currently listed on NASDAQ under the symbol "CRWN".

        The Company's telephone number is (818) 755-2400 and its principal executive offices are located at 12700 Ventura Boulevard, Suite 200, Studio City, California 91604.

    Hallmark Entertainment Investments Co.

        HEIC is a company engaged in the ownership of media business. At present its principal asset is Class A Common Stock and Class B Common Stock of the Company. HEIC has no material liabilities other than the guarantees of liabilities of the Company and its subsidiaries. There is no established public trading market for the common stock of HEIC.

        HEIC's telephone number is (816) 274-5583 and its principal executive offices are located at 2501 McGee Street, Kansas City, Missouri 64108.

62


Table of Contents

    Hallmark Entertainment Holdings, Inc.

        HEH is a holding company formed to hold the stock in HEIC. HEH's principal asset is the stock of HEIC, and HEH has no material liabilities other than the guarantees of liabilities of the Company and its subsidiaries. HEH, a subsidiary of Hallmark, holds approximately 73.9% of HEIC's Class A Common Stock and 100% of HEIC's Class B Common Stock, and controls the voting of all of the Company's shares held by HEIC. There is no established public trading market for the common stock of HEH.

        HEH's telephone number is (816) 274-5583 and its principal executive offices are located at 2501 McGee Street, Kansas City, Missouri 64108.


Past Contacts, Transactions or Negotiations Between the Companies

        HEIC is a significant investor in the Company and holds approximately 71.7% of the Class A Common Stock and 100% of the Class B Common Stock, representing in the aggregate approximately 94.5% of the outstanding voting power on all matters submitted to our stockholders. Pursuant to a stockholders agreement, HEIC is entitled to nominate twelve (12) of the Company's fifteen (15) directors and holds four (4) demand registration rights and unlimited piggyback registration rights with respect to the shares of the Class A Common Stock that it owns. HEH owns 0 shares of Class A Common Stock directly and owns 83.4% of HEIC. Under HEIC Stockholders Agreement, HEH directs the voting of Company shares held by HEIC.

        Please refer to the section of this Information Statement titled "BACKGROUND" for a description of the negotiations, transactions and material contacts during the past two (2) years between the Company and HEIC and its affiliates concerning the Transactions.

        There are significant relationships between HEIC, HEH and their affiliates and the Company and its affiliates. For more information regarding these relationships, please see the descriptions of the Transactions contained herein and "Item 13 Certain Relationships and Related Transactions and Director Independence" of the Company's Annual Report on Form 10-K for the year ended December 31, 2009, attached hereto as Appendix B and incorporated by reference herein. See "THE RECAPITALIZATION -Interests of the Company's Executive Officers and Directors" and "INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON."

        HEH, a subsidiary of Hallmark, holds approximately 73.9% of HEIC's Class A Common Stock and 100% of HEIC's Class B Common Stock and controls the voting of all of the Company's shares held by HEIC.


Appraisal Rights

        Holders of the Company's Class A Common Stock are not entitled to appraisal rights with respect to the Mergers.


Effective Time of the Mergers

        With respect to each Merger, if all of the conditions to such Merger are satisfied, the Merger will be consummated and become effective at the time that a Certificate of Merger is filed with the Secretary of State of the State of Delaware or at such later time as set forth in the applicable Certificate of Merger (each, an "Effective Time"). The filing of the Certificates of Merger is expected to occur within ten (10) business days following the satisfaction or waiver of the closing conditions set forth in the Master Recapitalization Agreement.

63


Table of Contents


Reasons for the Mergers

        Hallmark bargained for the Mergers as part of the Recapitalization in order to provide greater liquidity to the minority stockholders of HEIC who, upon consummation of the Transactions, will hold publicly-traded Common Stock. The Mergers also serve to simplify Hallmark's ownership interest in the Company.


Structure of the Mergers

        The Master Recapitalization Agreement requires that the HEIC Merger occur prior to the HEH Merger. The details of each Merger are set forth below.

    HEIC Merger

        The HEIC Merger Agreement provides for the merger of HEIC with and into the Company. At the Effective Time:

    (i)
    all shares of Common Stock outstanding immediately prior to the Effective Time, other than those held by HEIC, will remain outstanding and unaffected by the Merger;

    (ii)
    all shares of Common Stock outstanding immediately prior to the Effective Time and held by HEIC (83,817,071 shares) will be cancelled; and

    (iii)
    each share of common stock of HEIC outstanding immediately prior to the Effective Time (a total of 83,818 shares) will be converted into that number of shares of Common Stock equal to the number of shares of Common Stock owned by HEIC immediately prior to the Effective Time divided by the total number of shares of common stock of HEIC outstanding immediately prior to the Effective Time (a resulting total of 83,817,071 shares).

        The Company's stockholders will receive no consideration in connection with the HEIC Merger and the HEIC Merger will not result in any material difference in the rights of the Company's stockholders.

        The Certificate of Incorporation and By-laws of the Company, as in effect immediately prior to the Effective Time, will be the Certificate of Incorporation and the By-laws of the surviving corporation.

    HEH Merger

        The HEH Merger Agreement provides for the merger of HEH with and into the Company. At the Effective Time:

    (i)
    all shares of Common Stock outstanding immediately prior to the Effective Time, other than those held by HEH, will remain outstanding and unaffected by the Merger;

    (ii)
    all shares of Common Stock outstanding immediately prior to the Effective Time and held by HEH (69,929,225 shares) will be cancelled; and

    (iii)
    each share of common stock of HEH outstanding immediately prior to the Effective Time (a total of 1,000 shares) will be converted into that number of shares of Common Stock equal to the number of shares of Common Stock owned by HEH immediately prior to the Effective Time divided by the total number of shares of common stock of HEH outstanding immediately prior to the Effective Time (a resulting total of 69,929,225 shares).

        The Company's stockholders will receive no consideration in connection with the HEH Merger and the HEH Merger will not result in any material difference in the rights of the Company's stockholders.

64


Table of Contents

        The Certificate of Incorporation and By-laws of the Company, as in effect immediately prior to the Effective Time, will be the Certificate of Incorporation and the By-laws of the surviving corporation.


Surviving Corporation Officers and Directors

        With respect to each of the Mergers, the directors and officers of the Company immediately prior to the Effective Time will become the directors and officers of the surviving corporation. The Mergers will not have any effect on the indemnification and insurance obligations of the Company with respect to its directors and officers.


Conditions to the Mergers

        Under each Merger Agreement, the obligations of each party to complete the Merger are subject to the satisfaction of certain conditions. Included in these conditions are the approval by the Company's stockholders (which has been obtained), the satisfaction or waiver of all conditions to the Closing Date set forth in the Master Recapitalization Agreement and the occurrence of the Closing concurrent with the Effective Time and HEIC or HEH, as applicable, having no material liabilities other than the guarantees of liabilities of the Company and its subsidiaries at the Effective Time.


Termination

        Each of the Merger Agreements will terminate automatically, whether before or after approval of the stockholders of the company and HEIC or HEH, as applicable, upon termination of the Master Recapitalization Agreement without the Closing having occurred thereunder.

        In addition, each Merger Agreement may be terminated and the related Merger abandoned at any time prior to the Effective Time, notwithstanding adoption of the Merger Agreement by the stockholders of HEIC or HEH, as applicable, by mutual consent of the Boards of Directors of the Company and HEIC or HEH, as applicable.


Modification, Amendment and Waiver

        At any time prior to the Effective Time, the Boards of Directors of each of the Company and HEIC or HEH may, to the fullest extent permitted by law, amend, modify or supplement the HEIC Merger Agreement or the HEH Merger Agreement, as applicable, in such manner as they determine.


FINANCIAL INFORMATION

Pro Forma Financial Information

        On February 26, 2010, the Company entered into the Master Recapitalization Agreement and certain related transactions with Hallmark. The Transactions include more than $1.1 billion of debt which Hallmark will exchange for New Debt, Preferred Stock and Common Stock. The unaudited pro forma consolidated balance sheet that follows has been prepared to give effect to the Transactions as if they occurred on March 31, 2010. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2009 and the three months ended March 31, 2010 have been prepared as if the Transactions occurred separately on January 1, 2009 and January 1, 2010. Explanations of the related pro forma adjustments and pro forma net income per share follow the pro forma financial statements.

        The exchange of HCC Debt for New Debt, Preferred Stock and Common Stock as part of the Transactions has been given effect in these unaudited pro forma consolidated financial statements in accordance with the provisions of Accounting Standards Codification (the "ASC") 470-60 Debt—Troubled Debt Restructurings. Accordingly, Preferred Stock and Common Stock have been recorded at their respective estimated fair values as of March 31, 2010. Also in accordance with the ASC, New

65


Table of Contents


Debt is recorded as $452 million, which is the residual of (i) the carrying value of HCC Debt, $1,143 million as of March 31, 2010, less (ii) the estimated fair values of Preferred Stock and Common Stock of $287 million and $401 million, respectively, which were determined as of March 1, 2010 based on the third party valuation described below, less (iii) $3 million which represents the amount by which the difference between (i) and (ii) exceeds the minimum future interest and principal payments required by the credit agreement underlying New Debt. Given the related party nature of the Transactions, the $3 million amount described in (iii) has been reflected as an adjustment to Paid-in capital. The difference by which the $452 million amount recorded as New Debt exceeds the $315 million principal amount of New Debt will be amortized over the term of New Debt as a reduction of the interest expense that otherwise would arise from the stated cash interest rates. The ultimate amount of interest expense recognized by the Company would also be impacted by the Company's ability to elect up to six pay-in-kind options. If, and when, any of these pay-in-kind options are exercised, the effects of such elections will be recognized prospectively.

        For purposes of preparing the Company's pro forma financial statements below, the Company engaged an independent third party to provide a valuation of the Common Stock, Preferred Stock and the New Debt as of March 1, 2010. The Company believes the values of New Debt, Preferred Stock and Common Stock would not have been significantly different at March 31, 2010. This engagement was after the Company entered into the Master Recapitalization Agreement and therefore was not relied on by the Board of Directors, the Special Committee or the Consenting Holders in making any determinations regarding the Transactions. The engagement relates only to the preparation of the Company's pro forma financial information that follows. The valuation party utilized: (i) the public company guideline method (which attempts to value the business by identifying and selecting publicly-traded companies with financial and operating characteristics similar to our Company and applying valuation multiples to our Company) as a market-based approach and (ii) a discounted future cash flows method (which applies a discount rate to earnings projections for a period of years) to value the Company's total invested capital at March 1, 2010. The valuation party then used a 75% weighting on the public company guideline method and a 25% weighting on the discounted future cash flows method. The New Debt was valued using an income-based approach. An option pricing analysis method was used for the valuation of the Preferred Stock at March 1, 2010. The valuation party has preliminarily determined that the fair value of the invested capital of the Company as of March 1, 2010 was $1,176,979,000. The valuation party's preliminary determinations of the fair value of the New Debt, Preferred Stock and such Common Stock as would be issued in the Transactions are $285 million, $287 million and $401 million, respectively.

        Pursuant to the ASC, the fair value of the New Debt is not a factor in accounting for the troubled debt restructuring. Nonetheless, pursuant to other provisions of the ASC, the Company will periodically disclose the estimated the fair value of New Debt subsequent to the closing of the Transactions.

        We also have calculated the pro forma Conversion Price ($2.5969 per common share) as of March 31, 2010. Although the Master Recapitalization Agreement states that March 31, 2010 will be the date of determination for the Conversion Price, such amount remains subject to final determination and agreement among the parties to the Master Recapitalization Agreement.

        The accounting treatment could change significantly based on the values ultimately ascribed to Preferred Stock and Common Stock, which cannot be determined until the Closing Date, and the number of shares of Common Stock ultimately issued, which cannot be determined until the Closing Date.

        Historical financial statement amounts have been derived from our consolidated financial statements included in our Quarterly Report on Form 10-Q for the three month period ended March 31, 2010 and our Annual Report on Form 10-K for the year ended December 31, 2009.

66


Table of Contents


CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF MARCH 31, 2010

 
  Historical   Pro Forma
Adjustments
  Pro Forma  
 
  (in thousands)
 

ASSETS

 

Cash and cash equivalents

  $ 16,615   $ (4,487 )(A) $ 12,128  

Accounts receivable, net

    64,040         64,040  

Program license fees

    104,258         104,258  

Prepaid program license fees

    12,974           12,974  

Prepaid and other assets

    2,238         2,238  
               
   

Total current assets

    200,125     (4,487 )   195,638  

Program license fees

    168,643         168,643  

Property and equipment, net

    13,261         13,261  

Goodwill

    314,033         314,033  

Prepaid and other assets

    4,510     (585 )(B)   1,902  

          (2,023 )(C)      
               
   

Total assets

  $ 700,572   $ (7,095 ) $ 693,477  
               

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

LIABILITIES:

                   

Accounts payable and accrued liabilities

  $ 18,102   $ 3,171   (C) $ 21,273  

Audience deficiency reserve

    22,130         22,130  

License fees payable

    93,594         93,594  

Payables to Hallmark affiliates

    28,499     (23,796 )(B)   4,703  

Credit facility and interest payable

             

Notes and interest payable to Hallmark Cards affiliates

    345,184     (340,697 )(B)    

          (4,487 )(A)      

Company obligated mandatorily redeemable preferred interest, including accretion

    23,474         23,474  
               
   

Total current liabilities

    530,983     (365,809 )   165,174  

Accrued liabilities

    22,978         22,978  

License fees payable

    73,652         73,652  

Senior unsecured note to HC Crown, including accrued interest

    778,012     (778,012 )(B)    

New Debt

        451,594   (D)   451,594  
               
   

Total liabilities

    1,405,625     (692,227 )   713,398  

STOCKHOLDERS' EQUITY (DEFICIT):

                   

Preferred stock

        185,000   (E)   185,000  

Common stock

                   
 

Class A

    741     307   (F)   3,522  

          2,474   (E)      
 

Class B

    307     (307 )(F)    

Paid-in capital

    1,452,089     502,852   (E)   1,949,747  

          (5,194 )(C)      

Accumulated deficit

    (2,158,190 )       (2,158,190 )
               
   

Total stockholders' equity (deficit)

    (705,053 )   685,132     (19,921 )
               
   

Total liabilities and stockholders' equity (deficit)

  $ 700,572   $ (7,095 ) $ 693,477  
               

67


Table of Contents


CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2009

 
  Historical   Pro Forma
Adjustments
  Pro Forma  
 
  (in thousands, except per share amounts)
 

Revenue:

                   
 

Subscriber fees

  $ 63,597   $   $ 63,597  
 

Advertising

    213,770         213,770  
 

Advertising by Hallmark Cards

    775         775  
 

Other revenue

    1,422         1,422  
               
   

Total revenue, net

    279,564         279,564  

Cost of Services:

                   
 

Programming costs:

                   
   

Affiliates

    1,235         1,235  
   

Non-affiliates

    126,293         126,293  
 

Amortization of capital lease

    1,158         1,158  
 

Contract termination expense

    4,718         4,718  
 

Other costs of services

    14,175         14,175  
               
   

Total cost of services

    147,579         147,579  

Selling, general and administrative expense

    47,069     (1,022 )(G)   46,047  

Marketing expense

    6,551         6,551  

Depreciation and amortization expense

    1,947         1,947  

Gain from sale of film assets

    (682 )       (682 )
               
   

Income from continuing operations before interest

    77,100     1,022     78,122  

Interest income

   
481
   
   
481
 

Interest expense

    (101,020 )   91,618   (H)   (9,402 )
               
   

Income (loss) from continuing operations

    (23,439 )   92,640     69,201  

Income tax expense

   
   

  (I)
 
 
               
   

Net income (loss) from continuing operations

    (23,439 )   92,640     69,201  

Net income (loss) attributable to preferred stock:

                   
 

Cumulative preferred stock dividends

        (25,900 )(J)   (25,900 )
 

Participation in net income on an "as if converted" basis

        (7,285 )(J)   (7,285 )
               

Net income (loss) from continuing operations available to common shareholders

  $ (23,439 ) $ 59,455   $ 36,016  
               

Weighted average number of common shares outstanding

                   
   

Basic

    104,788           352,200  
   

Diluted

    104,788           352,200  

Net income (loss) from continuing operations available to common shareholders per common share

                   
   

Basic

  $ (0.23 )       $ 0.10  
   

Diluted

  $ (0.23 )       $ 0.10  

68


Table of Contents


CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010

 
  Historical   Pro Forma
Adjustments
  Pro Forma  
 
  (in thousands, except per share amounts)
 

Revenue:

                   
 

Subscriber fees

  $ 16,994   $   $ 16,994  
 

Advertising

    51,246         51,246  
 

Advertising by Hallmark Cards

    64         64  
 

Other revenue

    74         74  
               
   

Total revenue, net

    68,378         68,378  

Cost of Services:

                   
 

Programming costs:

                   
   

Affiliates

    427         427  
   

Non-affiliates

    28,730         28,730  
 

Amortization of capital lease

    289         289  
 

Contract termination expense

    103         103  
 

Other costs of services

    2,305         2,305  
               
   

Total cost of services

    31,854         31,854  

Selling, general and administrative expense

    12,028       (G)   12,028  

Marketing expense

    973         973  

Depreciation and amortization expense

    383         383  

Gain from sale of film assets

             
               
   

Income from continuing operations before interest

    23,140         23,140  

Interest income

   
18
   
   
18
 

Interest expense

    (25,482 )   23,515   (H)   (1,967 )
               
   

Income (loss) from continuing operations

    (2,324 )   23,515     21,191  

Income tax expense

   
   

  (I)
 
 
               
   

Net income (loss) from continuing operations

    (2,324 )   23,515     21,191  

Net income (loss) attributable to preferred stock:

                   
 

Cumulative preferred stock dividends

        (6,475 )(J)   (6,475 )
 

Participation in net income on an "as if converted" basis

        (2,476 )(J)   (2,476 )
               

Net income (loss) from continuing operations available to common shareholders

  $ (2,324 ) $ 14,564   $ 12,240  
               

Weighted average number of common shares outstanding

                   
   

Basic

    104,788           352,200  
   

Diluted

    104,788           352,200  

Net income (loss) from continuing operations available to common shareholders per common share

                   
   

Basic

  $ (0.02 )       $ 0.03  
   

Diluted

  $ (0.02 )       $ 0.03  

69


Table of Contents


CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2010


(A)
To reduce cash and interest payable to reflect the payment of accrued interest on the HCC Debt contemporaneously with the closing of the Transactions.

(B)
To eliminate the carrying value of HCC Debt, comprising HCC Debt as of March 31, 2010 ($1,143 million) less the unamortized portion of debt acquisition costs associated with HCC Debt ($0.6 million).

(C)
To recharacterize transaction costs incurred as of March 31, 2010 and to record a liability for transaction costs that had not been incurred as of March 31, 2010. Because it was necessary to reduce the recorded amount of New Debt to an amount not in excess of the minimum future interest and principal payments required by the related credit agreement (a reduction of $2.7 million), the debt-related portion ($1.5 million) of the aggregate transaction costs ($5.2 million) has been recorded as a reduction of Paid-in capital. The equity-related portion is also shown as a reduction of Paid-in capital. Related costs expensed during the year ended December 31, 2009 have been eliminated from the Pro Forma Consolidated Statement of Operations because they were non-recurring in nature. There were no such costs expensed during the three months ended March 31, 2010. See (G) below.

(D)
To record New Debt at the residual amount of HCC Debt as of March 31, 2010 in the manner described in the discussion that precedes the unaudited pro forma consolidated balance sheet.

(E)
To record the issuance of 185,000 shares of Preferred Stock and 247,412,252 shares of Common Stock in connection with the Transactions at their estimated fair values at March 31, 2010 ($287 million and $401 million, respectively) less the $2.7 million adjustment described in (C) above.

(F)
To give effect to the conversion of 30,670,422 shares of Class B Common Stock to 30,670,422 shares of Class A Common Stock on a one-for-one basis pursuant to the Company's Second Amended and Restated Certificate of Incorporation which is to be adopted contemporaneously with the closing of the Transactions.

(G)
To eliminate non-recurring expenses associated with evaluation and negotiation of various proposals from which the Transactions evolved.

(H)
To give effect to the reduction in interest expense resulting from the Transactions using the 0.3% effective interest rate on New Debt that results from comparing (i) management's estimate of future cash outflows for principal and interest to (ii) the recorded amount of New Debt. See (D) above.

(I)
The Company estimates that it would have no pro forma current tax liability as any current liability would be reduced by utilization of net operating loss carryforwards. The related decrease in deferred tax assets would be offset by a corresponding reduction in the related valuation allowance. Accordingly, the pro forma consolidated statements of operations reflect no income tax expense.

(J)
Pro forma basic and diluted net income from continuing operations available to common shareholders per common share have been calculated by dividing (1) the sum of (i) pro forma income from continuing operations less (ii) the annual 14% preferred stock dividends that would be applicable to 2011 (whereas the dividend rate applicable to 2010, the initial year, is 0%) less (iii) the amount of net income attributable to participation by Preferred Stock in net income on an "as if converted" basis by (2) the pro forma weighted average common shares outstanding which gives effect to the additional shares of Common Stock that would be issued on a pro forma basis in connection with the Transactions.

70


Table of Contents


CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2010

    With respect to the pro forma consolidated statement of operations for the year ended December 31, 2009, had the Preferred Stock dividend rates of 0% for 2010 or 16% ($29.6 million) for 2012 and thereafter been applied, pro forma basic and diluted net income from continuing operations available to common shareholders per common share would have been $0.16 and $0.09, respectively. Amounts attributable to participation in net income on an "as if converted" basis would have been approximately $7.3 million and $6.7 million, respectively. Such "as if converted" amounts have been deducted because their effects on the respective net income from continuing operations available to common shareholders per common share are not anti-dilutive.

    With respect to the pro forma consolidated statement of operations for the three months ended March 31, 2010, had the Preferred Stock dividend rates of 0% for 2010 or 16% ($6.5 million for the three month period) for 2012 and thereafter been applied, pro forma basic and diluted net income from continuing operations available to common shareholders per common share would have been $0.05 and $0.03, respectively. Amounts attributable to participation in net income on an "as if converted" basis would have been approximately $3.4 million and $2.3 million, respectively. Such "as if converted" amounts have been deducted because their effects on the respective net income from continuing operations available to common shareholders per common share are not anti-dilutive.

        The provisions of the Transactions, as described elsewhere in this Information Statement, also require that, not later than the Closing Date, the Company shall have obtained a revolving credit facility from a third-party lender with an availability of at least $30 million and a maturity of not less than 360 days from the Closing Date. The provisions of the credit agreement underlying New Debt, also as described elsewhere in this Information Statement, require that, not later that the Closing Date, the Company establish the NICC Reserve Account for the purpose of setting aside cash or cash equivalents, at the Company's discretion, with which to pay all or a portion of the $25 million mandatorily redeemable preferred interest on December 31, 2010.

        Subsequent to March 31, 2010, the Company established the NICC Reserve Account in accordance with the Master Recapitalization Agreement. As of the date of this Information Statement, the Company, at its sole discretion, has deposited $10 million to the NICC Reserve Account. The source of such deposit was cash and cash equivalents on hand. As of the date of this Information Statement, the Company has not obtained the $30 million revolving credit facility specified by the Master Recapitalization Agreement and described more fully elsewhere in this Information Statement.


Financial Statement Information

        The Company incorporates by reference the following information from its Annual Report on Form 10-K for the year ended December 31, 2009, attached hereto as Exhibit B:

    Part II, Item 6, Selected Financial Data

    Part II, Item 8, Financial Statements and Supplementary Data

    Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations

    Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk

        The Company incorporates by reference the following information from its Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, attached hereto as Exhibit C:

    Part I, Item 1

    Part I, Item 2

    Part I, Item 3

71


Table of Contents


INFORMATION ABOUT THE COMPANY

Market Information

        The Class A Common Stock is listed on NASDAQ under the ticker symbol "CRWN." As of May 3, 2010, there were 74,117,654 shares of Class A Common Stock issued and outstanding. The closing price per share for the Class A Common Stock was $3.03 on May 28, 2009 prior to the announcement of the then Proposed Recapitalization. The closing price per share for the Class A Common Stock on February 9, 2010 prior to the announcement of the terms of the Recapitalization was $1.52. The closing price per share on NASDAQ for the Class A Common Stock was $1.82 on May 3, 2010. There is no established public trading market for our Class B Common Stock, of which 100% is owned by HEIC. Set forth below are the high and low sales prices for the Class A Common Stock for each quarterly period in 2008 and 2009, as reported on NASDAQ.

 
  Price Range  
Common Stock
  High   Low  

2008

             

First Quarter

  $ 6.480   $ 4.520  

Second Quarter

  $ 5.440   $ 4.200  

Third Quarter

  $ 5.350   $ 3.640  

Fourth Quarter

  $ 5.230   $ 1.630  

2009

             

First Quarter

  $ 2.890   $ 1.170  

Second Quarter

  $ 3.280   $ 1.450  

Third Quarter

  $ 2.100   $ 1.450  

Fourth Quarter

  $ 1.940   $ 1.190  

2010

             

First Quarter

  $ 2.060   $ 1.280  


Holders

        As of April 30, 2010, there were 55 record holders of the Class A Common Stock and one record holder of our Class B common stock.


Dividends

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

72


Table of Contents


Securities Authorized for Issuance under Equity Compensation Plans

        Information related to the Company's Amended and Restated 2000 Long Term Incentive Plan, its only equity compensation plan, is presented as of March 31, 2010, in the following table.

Equity Compensation Plan Information

Plan Category
  Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
  Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
  Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding the Number of
Securities to be Issued Upon
Exercise of Outstanding
Options)
 
 
  (In thousands)
   
  (In thousands)
 

Equity compensation plans approved by security holders

    86   $ 13.89     9,914  


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Current Ownership

        The following table sets forth certain information, as of April 1, 2010, with respect to beneficial ownership of our Class A Common Stock and Class B Common Stock, by each of the Named Executive Officers (defined above) employed by the Company at April 1, 2010, each director, each holder of more than 5% of either Class A or Class B Common Stock, and all current directors and executive officers as a group.

        Except as indicated in the footnotes to this table, the persons named each have sole voting and investment power over the shares shown as owned by them. The percentage of beneficial ownership is based on 74,117,654 shares of our Class A Common Stock and 30,670,422 shares of our Class B Common Stock outstanding as of April 1, 2010.

73


Table of Contents

Amount of Nature of Beneficial Ownership(1)

 
  Class A
Common
Stock(2)
  % of
Class
  Class B
Common
Stock
  % of
Class
  % of
Total
Voting
Power
 

Name and Address of Beneficial Owner 5% Stockholders:

                               

H C Crown Corp.(3)(4)

                               
 

2501 McGee Street, Kansas City, MO 64108

    83,885,502     80.1 %   30,670,422     100 %   94.5 %

Hallmark Entertainment Investments Co.(3)(4)

                               
 

2501 McGee Street, Kansas City, MO 64108

    83,817,071     80.0 %   30,670,422     100 %   94.5 %

Liberty Media Corporation(3)(4)(5)

                               
 

9197 South Peoria Street, Englewood, CO 80112

    88,242,568     84.2 %   30,670,422     100 %   95.7 %

National Interfaith Cable Coalition, Inc.(3)(4)(6)

                               
 

74 Trinity Place, Suite 1550, New York, NY 10006

    88,242,568     84.2 %   30,670,422     100 %   95.7 %

J.P. Morgan Partners (BHCA), L.P.(3)(4)

                               
 

390 Madison Avenue, New York, NY 10017

    88,242,568     84.2 %   30,670,422     100 %   95.7 %

The DIRECTV Group, Inc.(7)

                               
 

(formerly known as Hughes Electronics Corporation)

                               
 

2230 E. Imperial Highway, El Segundo, CA 90245

    5,360,202     7.2 %           1.4 %

S. Muoio & Co. LLC(8)

                               
 

509 Madison Avenue, Suite 406, New York, NY 10022

    4,255,376     5.7 %           1.1 %

Directors and Named Executive Officers:

                               

William Abbott

    0     *             *  

Dwight C. Arn

    0     *             *  

Janice Arouh

    0     *             *  

Robert C. Bloss

    0     *             *  

William Cella

    5,970     *             *  

Glenn Curtis

    0     *             *  

Steve Doyal

    1,500     *             *  

Brian E. Gardner

    0     *             *  

Edward Georger

    3,400     *             *  

Herbert A. Granath

    0     *             *  

Donald J. Hall, Jr.(9)

    83,888,002     80.1 %   30,670,422     100 %   94.5 %

Irvine O. Hockaday, Jr.(10)

    40,795     *             *  

A. Drue Jennings

    0     *             *  

Peter A. Lund(11)

    6,390     *             *  

Brad R. Moore

    0     *             *  

Charles L. Stanford

    12,750     *             *  

Deanne R. Stedem

    1,000     *             *  

Brian C. Stewart

    13,500     *             *  

All directors and executive officers as a group (18 persons)

    83,973,307     80.1 %   30,670,422     100 %   94.5 %

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

(1)
Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship, or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days from April 1, 2010. Percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of unissued shares as to which the person has the right to acquire voting and/or investment power within 60 days. The number of shares shown includes outstanding shares of common stock owned as of April 1, 2010 by the person indicated and shares underlying options owned by such person on April 1, 2010 that were exercisable within 60 days of that date.

(2)
Included under the column headed "Class A Common Stock" are the number of shares of Class A Common Stock that each stockholder would hold if all beneficially owned shares of Class B Common Stock were converted into shares of Class A Common Stock.

74


Table of Contents

(3)
Based on a Schedule 13D/A filed on March 1, 2010, jointly by Hallmark, HEIC, HEH, HCC and H.A., Inc., who as of that date shared voting and dispositive power with respect to 30,670,422 shares of Class B Common Stock, which are convertible at the option of the holder into an equivalent number of shares of Class A Common Stock, and 53,146,649 shares of Class A Common Stock directly owned by HEIC. HEIC is a majority owned subsidiary of HEH, and HEH and HCC are wholly-owned subsidiaries of Hallmark. In addition to indirect ownership of shares owned by HEIC, HCC owns 68,431 shares of Class A Common Stock directly.

(4)
On March 11, 2003, HEH, Liberty Crown and J.P. Morgan Partners contributed 100% of their Company shares in return for HEIC shares representing the following percentage interest in HEIC: HEH, 83.4%; Liberty Crown, 11.2%; and J.P. Morgan Partners, 4.6%. In addition, VISN contributed 10% of its Company shares in return for HEIC shares representing an 0.8% interest in HEIC. Each of the HEIC stockholders entered into the stockholders agreement concerning HEIC and Crown shares. As a result, each of the above parties may be deemed to beneficially own Company shares held by HEIC described in note (3) above.

The total number of shares shown as beneficially owned by HEIC does not include 4,357,066 shares of Class A Common Stock we believe to be beneficially owned by VISN. Beneficial ownership of these shares of Class A Common Stock has been disclaimed by the other HEIC stockholders.

Each of HEH and Liberty Crown has the right to nominate directors to the HEIC Board; and VISN is entitled to designate a non-voting observer to HEIC's Board. In addition, Liberty Crown has the right to nominate a director to the Company's Board. J.P. Morgan had the right to nominate a director on the Company's Board and on the board of HEIC but has formally surrendered such nomination rights. VISN also had the right to nominate a director on the Company's Board but has relinquished such nomination rights. Under the HEIC stockholders agreement, HEH directs the voting of the Company shares owned by HEIC. Pursuant to the HEIC stockholders agreement, HEIC may not sell, pledge, distribute or transfer its Company common stock without the consent of Liberty Crown and J.P. Morgan Partners, except for mergers and other combinations approved in accordance with the Company stockholders agreement. This requirement terminates on the later of such date as each party (1) ceases to own beneficially at least 2.5% of the outstanding HEIC common stock and (2) ceases to own beneficially 75% of the HEIC stock owned by the party at March 11, 2003.

(5)
Based on a Schedule 13D/A filed on March 12, 2003 by Liberty Media Corporation and Liberty Crown.

(6)
The National Interfaith Cable Coalition, Inc. is a not-for-profit coalition of faith groups. To our knowledge, NICC is governed by a board of sixteen trustees appointed by the major faith groups who are members of NICC.

(7)
Based on a Schedule 13G filed on February 5, 2010 by The DIRECTV Group, Inc.

(8)
Based on a Schedule 13G/A filed on March 2, 2010 by S. Muoio & Co. LLC.

(9)
Includes 2,500 shares of Class A Common Stock beneficially owned by Donald J. Hall, Jr. Donald J. Hall, Jr., may also be deemed to be a beneficial owner of the shares beneficially owned by HEIC because Mr. Hall is a co-trustee of a voting trust which controls all of the voting securities of Hallmark and he is Vice Chairman of the board of directors, Chief Executive Officer and President of Hallmark. See note (2). Mr. Hall disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein.

(10)
Includes 4,098 shares of Class A Common Stock underlying options that have vested.

(11)
Consists of 6,390 shares of Class A Common Stock underlying options that have vested.


Effect of Transactions in Beneficial Ownership

        As part of the Transactions, Hallmark, through its wholly-owned subsidiary HCC, will increase its equity ownership of the Company to 90.1% of the Common Stock, with the intent that such ownership will, but for any limitations provided for in the Stockholders Agreement, entitle it to effectuate in the future a "short form" merger under Section 253 of the DGCL. Neither the approval by the Company's Board of Directors nor the Company's minority stockholders would be required to effect a short-form merger of the Company with Hallmark. Minority stockholders would have appraisal rights under the DGCL. The Special Committee negotiated for limitations to be placed on, among other things, Hallmark's ability to acquire additional shares of Common Stock and to effect a short-form merger, and negotiated for other protections for the minority stockholders. Specifically, the Stockholders Agreement provides standstill and co-sale provisions for periods of time in connection with Hallmark's

75


Table of Contents


ability to effectuate a short-form merger, whether the short-form merger is used to acquire all of the Common Stock or as part of transactions to sell the Company to another party. These terms of the Stockholders Agreement are described in the section of this Information Statement titled "THE RECAPITALIZATION—Stockholders Agreement."

        Pursuant to the Stockholders Agreement, Hallmark will not be permitted to acquire additional shares of Common Stock, (including pursuant to a short form merger) until December 31, 2013, except in limited circumstances. Please refer to the section of this Information Statement titled "THE RECAPITALIZATION—Stockholders Agreement."


OUTSTANDING VOTING SECURITIES; VOTING AND VOTE REQUIRED

        Under Section 228 of the DGCL and Article X of the Company's Amended and Restated Certificate of Incorporation, stockholder action may be taken without a meeting and without prior notice by written consent of the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize the action at a meeting at which all shares entitled to vote thereon are present and voted. The Consenting Holders, in their capacity as the holders of a majority in voting power of the outstanding shares of Class A Common Stock and the Class B Common Stock, voting as a single class, and a majority of the outstanding shares of Class A Common Stock and Class B Common Stock, each voting as a separate class, have approved the Mergers, the Merger Agreements, the Second Amended Charter, the Third Amended Charter and the share issuances in the Transactions. Accordingly, the written consent executed by the Consenting Holders pursuant to Section 228 of the DGCL and delivered to the Company is sufficient to approve the Transactions and no further stockholder vote or other action is required in order to effect the Transactions.

        On May 21, 2010, there were issued and outstanding: (i) 74,117,654 shares of Class A Common Stock, (ii) 30,670,422 shares of Class B Common Stock and (iii) no shares of preferred stock. Each issued and outstanding share of Class A Common Stock has one (1) vote and each issued and outstanding share of Class B Common Stock has ten (10) votes on any matter submitted to a vote of stockholders. The Class A Common Stock and Class B Common Stock vote together as a single class on all matters submitted to a vote of stockholders, except with respect to the election of directors. HEIC currently owns approximately 71.7% of the outstanding shares of Class A Common Stock and 100% of the outstanding shares of Class B Common Stock, which together represent approximately 80.1% of the Company's common stock and a 94.5% voting interest on matters in which the holders of Class A Common Stock and Class B Common Stock vote together as a single class.


INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

        Except as set forth below, none of the persons who have served as our officers or directors since the beginning of our last fiscal year, or any associates of such persons, have any substantial interest, direct or indirect, in the Master Recapitalization Agreement or the Transactions other than the interests held by such persons through their respective beneficial ownership of the shares of our capital stock (including options to purchase our capital stock) set forth above in the section entitled "Security Ownership of Certain Beneficial Owners and Management."

        Hallmark and its affiliates are parties to the Master Recapitalization Agreement and the Transactions. In addition, there are a number of significant agreements, arrangements and relationships between Hallmark and its affiliates and Crown and its affiliates. These relationships are described in: "Item 13 Certain Relationships and Related Transactions and Director Independence" and "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the year ended December 31, 2009, attached hereto as Appendix B, which Items are incorporated by reference herein; and Notes 5 and 6 to the Unaudited

76


Table of Contents


Condensed Consolidated Financial Statements in Part 1, Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 attached herein as Appendix C, which Item is incorporated herein by reference.

        The following directors have relationships with Hallmark that may allow them to benefit from the Transactions through their interests in Hallmark:

    Dwight C. Arn has been a director of the Company since March 2008. Mr. Arn has been Associate General Counsel of Hallmark since 1989. Additionally, Mr. Arn has been serving as General Counsel of Hallmark International since 1992. Mr. Arn began his career at Hallmark in 1976 and has served in various attorney positions.

    Robert C. Bloss, has been Senior Vice President—Human Resources of Hallmark since March 2008. He was human resources director for the Hallmark retail business from 2005 to 2008. Mr. Bloss has been human resources director for various divisions of Hallmark since 1986, including the product development and marketing division.

    Steve Doyal has been a director of the Company since December 2007. Mr. Doyal has been Senior Vice President of Public Affairs and Communications and a corporate officer at Hallmark since 1995. In this position, he oversees the operations of Hallmark's communications programs, including internal communications and publications, audio-visual communications, media relations, government affairs, and the Hallmark Visitors Center. Prior to that, he served as Media Relations Director from 1993 to 1994 and as Corporate Media Relations Manager from 1988 to 1993. Mr. Doyal owns 1,500 shares of the Company's Class A Common Stock.

    Brian E. Gardner has been a director and Secretary of the Company since January 2004. He has been Executive Vice President and General Counsel of Hallmark since January 2004.

    Donald J. Hall, Jr. has been a director of the Company since May 2000. Mr. Hall has been the President and Chief Executive Officer of Hallmark since January 2002 and a member of the board of directors of Hallmark since 1996. Mr. Hall has served in a variety of positions for Hallmark since 1971. Mr. Hall was the Executive Vice President, Strategy and Development from September 1999 until December 2001. Prior to that, Mr. Hall was the Vice President, Product Development, of Hallmark from September 1996 until August 1999. Mr. Hall is a member of the board of directors of Hallmark Entertainment Holdings. Mr. Hall may be deemed to own 53,217,580 shares of Class A Common Stock and 30,670,422 shares of Class B Common Stock beneficially owned by Hallmark because he is a co-trustee of a voting trust which controls all of the voting securities of Hallmark and is a director and an officer of Hallmark. He disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein.

    Irvine O. Hockaday, Jr. has been a director of the Company since May 2000. He is a member of the board of directors of Ford Motor Company, Sprint Corporation and Estee Lauder Companies Inc. and the chairman of the audit committees of Estee Lauder Companies Inc. and Ford Motor Co. Mr. Hockaday is a trustee of the Hall Family Foundations and the Aspen Institute. He was the President and Chief Executive Officer of Hallmark from January 1986 to December 2001. Mr. Hockaday owns 40,795 shares of Class A Common Stock of the Company.

    Brad R. Moore has been a director of the Company since March 2008. Mr. Moore has been President of Hallmark Hall of Fame Productions since 1993 and was the president of Hallmark Publishing from 2007 to 2009, both of which are wholly-owned subsidiaries of Hallmark. Prior to that, Mr. Moore led the development, production and distribution of the Hallmark Hall of Fame series since 1983. Mr. Moore directed Hallmark's U.S. advertising efforts from 1982 to 1998.

77


Table of Contents

    Deanne R. Stedem has been a director of the Company since March 2003. She has been Associate General Counsel for Hallmark since 1998, managing legal matters for the various entertainment divisions of Hallmark. She served as Senior Attorney for Hallmark from 1989 until 1998. Ms. Stedem owns 1,000 shares of Class A Common Stock of the Company.

        Executive officers of Crown might also be deemed to have a conflict of interest in the Recapitalization because Hallmark may be deemed to control the Company and thus indirectly the selection and retention of the management of the Company. However, the executive officers are also interested in the Company being able to have a financial structure which allows the Company's operation to grow and be successful. They cooperated fully with the Special Committee; and the Special Committee, not executive officers, negotiated the terms of the Recapitalization.

        Other than the relationships described herein, no director or officer of the Company is receiving any special compensation or other benefit, directly or indirectly, from either Hallmark and its affiliates or Crown and its affiliates relating to the Transactions.

        None of the Company's directors opposed the Master Recapitalization Agreement or the Transactions.


EFFECTIVE DATE

        Under Section 14(c) of the Exchange Act and Rule 14c-2 promulgated thereunder, the Transactions cannot be effected until twenty (20) days after the date this Information Statement is provided to the Company's stockholders. This Information Statement will be mailed on or about May 26, 2010 to the stockholders of the Company as of the date on which the Consenting Holders approved of the Mergers, Merger Agreements, the Second Amended Charter, the Third Amended Charter and share issuances in the Transactions).


NOTICE PURSUANT TO DGCL SECTION 228

        Pursuant to Section 228 of the DGCL, we are required to provide prompt notice of the taking of a corporate action by written consent to our stockholders who have not consented in writing to such action. This Information Statement serves as the notice required by Section 228 of the DGCL.


APPRAISAL RIGHTS

        Holders of the Company's Class A Common Stock are not entitled under the DGCL, the Company's Certificate of Incorporation or By-laws to appraisal rights in connection with the Master Recapitalization Agreement or the Transactions, including the Mergers.


FORWARD-LOOKING STATEMENTS

        Certain of the information contained in this Information Statement should be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which is subject to a number of risks and uncertainties. The preparation of forward-looking statements requires the use of estimates of future revenues, expenses, activity levels and economic and market conditions, many of which are outside the Company's control. The Company's results could be affected by the failure to achieve management's forecasts; the realization of risks and uncertainties associated with the Company's strategic, financial and operational plans; a downturn in the television broadcasting industry; changes to the regulatory environment for the television broadcasting industry; the introduction of competing products by competitors; the ability to attract and retain skilled employees with high-level competencies; economic, regulatory and political domestic and international conditions; and the impact of terrorist attacks. Other factors and assumptions not identified above are also involved in the preparation of forward-looking statements, and the failure of such other factors and

78


Table of Contents


assumptions to be realized may also cause actual results to differ materially from those discussed. The Company assumes any obligation to update such estimates to reflect actual results, changes in assumption or changes in other factors affecting such estimates other than as required by law.


STOCKHOLDERS SHARING AN ADDRESS

        Only one Information Statement is being delivered to multiple stockholders sharing an address unless the Company has received contrary instructions from one or more of the stockholders. The Company undertakes to deliver promptly, upon written or oral request, a separate copy of the Information Statement to a stockholder at a shared address to which a single copy of the Information Statement is delivered. A stockholder can notify the Company that the stockholder wishes to receive a separate copy of the Information Statement, or a future information statement, by written consent directed to General Counsel at 12700 Ventura Boulevard, Studio City, California 91604 or by telephone at 1-800-522-5131. Likewise, stockholders sharing an address who are receiving multiple copies of this Information Statement and wish to receive a single copy of future information statements may notify the Company at the address and telephone number listed above.


INFORMATION INCORPORATED BY REFERENCE

        The following documents that we previously filed with the Commission accompanies this Information Statement as Appendix B and Appendix D, and portions of the following documents are incorporated by reference in this Information Statement: the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009; and the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010.

        New material information with respect to matters addressed in this Information Statement, if any, will be provided in an amended Information Statement or a supplement for the Information Statement.


WHERE YOU CAN FIND MORE INFORMATION

        The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, proxy statements and other information with the SEC. The Company makes these reports, amendments, proxy statements and other information available free of charge to stockholders through its website, www.hallmarkchannel.com, as soon as reasonably practicable after it electronically files or furnishes such material with the SEC. You may also obtain such SEC filings from the SEC's website at http://www.sec.gov. You can also read and copy these materials at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information about the operation of the SEC's public reference room by calling the SEC at 1-800-SEC-0330.


CONCLUSION

        As a matter of regulatory compliance, we are providing this Information Statement to you which describes the purpose and effect of the above actions. Your consent to the above actions is not required and is not being solicited in connection with these actions. This Information Statement is intended to provide the Company's stockholders information required by the rules and regulations of the Exchange Act.

        WE ARE NOT ASKING YOU FOR A PROXY OR CONSENT AND YOU ARE REQUESTED NOT TO SEND US A PROXY OR CONSENT. THE ATTACHED MATERIAL IS FOR INFORMATIONAL PURPOSES ONLY.


 

 

By Order of the Board of Directors

 

 

/s/ BRIAN E. GARDNER


 

 

BRIAN E. GARDNER
Secretary
May 21, 2010

79



Appendix A


Table of Contents

CROWN MEDIA HOLDINGS, INC.

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




Table of Contents

TABLE OF CONTENTS

ARTICLE I.

 

DEFINITIONS

  1
 

Section 1.1.

 

Definitions

  1
 

Section 1.2.

 

Accounting Terms and Determinations

  7

ARTICLE II.

 

RECAPITALIZATION

 
7
 

Section 2.1.

 

Acknowledgement of Indebtedness

  7
 

Section 2.2.

 

Mergers and Recapitalization

  8
 

Section 2.3.

 

Reverse Stock Split

  8

ARTICLE III.

 

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 
9
 

Section 3.1.

 

Organization of the Company

  9
 

Section 3.2.

 

Authorization and Validity of Agreement

  9
 

Section 3.3.

 

Capitalization of the Company

  10
 

Section 3.4.

 

No Conflict or Violation; Consents

  11
 

Section 3.5.

 

Other Approvals

  11
 

Section 3.6.

 

SEC Reports and Other Information

  11
 

Section 3.7.

 

Litigation

  11
 

Section 3.8.

 

Brokers and Fees

  12

ARTICLE IV.

 

REPRESENTATIONS AND WARRANTIES OF CERTAIN ENTITIES

 
12
 

Section 4.1.

 

Representations and Warranties of HCC

  12

ARTICLE V.

 

CERTAIN COVENANTS AND AGREEMENTS

 
13
 

Section 5.1.

 

Conduct of Business

  13
 

Section 5.2.

 

Information and Access

  15
 

Section 5.3.

 

Notices of Certain Events

  16
 

Section 5.4.

 

Waiver Agreement and Interim Payment on the HCC Debt

  16
 

Section 5.5.

 

Information Statement

  16
 

Section 5.6.

 

Certain Provisions Relating to Consents

  17
 

Section 5.7.

 

Stockholder Approvals

  17
 

Section 5.8.

 

Commercially Reasonable Efforts

  18
 

Section 5.9.

 

Further Assurances

  18

ARTICLE VI.

 

MUTUAL CONDITIONS

 
18
 

Section 6.1.

 

No Injunction or Action

  18
 

Section 6.2.

 

Regulatory Compliance

  18

ARTICLE VII.

 

CONDITIONS TO THE DEBTORS' OBLIGATIONS

 
18
 

Section 7.1.

 

Representations and Warranties

  18
 

Section 7.2.

 

Compliance with Agreement

  18
 

Section 7.3.

 

Revolving Credit Facility

  19
 

Section 7.4.

 

Corporate Documents

  19

ARTICLE VIII.

 

CONDITIONS TO THE HCC LENDERS' OBLIGATIONS

 
19
 

Section 8.1.

 

Representations and Warranties

  19
 

Section 8.2.

 

Compliance with Agreement

  19
 

Section 8.3.

 

Proceedings

  19
 

Section 8.4.

 

Corporate Documents

  19
 

Section 8.5.

 

Effective Credit Agreement

  19

ARTICLE IX.

 

THE CLOSING

 
20
 

Section 9.1.

 

The Closing

  20
 

Section 9.2.

 

Deliveries by the Company at the Closing

  20

i


Table of Contents

 

Section 9.3.

 

Deliveries by HCC at the Closing

  20

ARTICLE X.

 

TERMINATION

 
21
 

Section 10.1.

 

Termination

  21
 

Section 10.2.

 

Effect of Termination

  21

ARTICLE XI.

 

MISCELLANEOUS PROVISIONS

 
21
 

Section 11.1.

 

Notices

  21
 

Section 11.2.

 

Amendments

  22
 

Section 11.3.

 

No Waiver

  22
 

Section 11.4.

 

Assignment and Parties in Interest

  22
 

Section 11.5.

 

Expenses

  22
 

Section 11.6.

 

Entire Agreement

  23
 

Section 11.7.

 

Descriptive Headings

  23
 

Section 11.8.

 

Counterparts

  23
 

Section 11.9.

 

Governing Law; Jurisdiction

  23
 

Section 11.10.

 

Construction

  24
 

Section 11.11.

 

Severability

  24
 

Section 11.12.

 

Specific Performance

  24

ii


Table of Contents

SCHEDULE

NUMBER   SCHEDULE NAME
  1.1(a)   Sample Calculation of the Conversion Price, the Conversion Price Shares and the Shares to be issued pursuant to Section 2.2(b)(iii)
  1.1(b)   Knowledge
  3.4   Conflicts or Violations
  3.7   Litigation
  3.8   Brokers

 

EXHIBIT   EXHIBIT NAME
  A   Form of Credit Agreement
  B   Form of Second Amended Charter
  C   Form of Certificate of Designation
  D   Form of Stockholders Agreement
  E   Form of HEIC Merger Agreement
  F   Form of HEH Merger Agreement
  G   Form of Third Amended Charter
  H   Form of Registration Rights Agreement
  I   Form of Tax Sharing Agreement Amendment

iii


Table of Contents

MASTER RECAPITALIZATION AGREEMENT

        THIS MASTER RECAPITALIZATION AGREEMENT (the "Agreement"), dated as of February 26, 2010, is entered into by and among Hallmark Cards, Incorporated, a Missouri corporation ("Hallmark Cards"), H C Crown Corp., a Delaware corporation ("HCC" and, together with Hallmark Cards, the "HCC Lenders"), Hallmark Entertainment Holdings, Inc., a Delaware corporation ("HEH"), Crown Media Holdings, Inc., a Delaware corporation (the "Company"), Crown Media United States, LLC, a Delaware limited liability company ("CMUS"), and the subsidiaries of the Company listed as Guarantors on the Credit Facility (the "Guarantors," and, together with the Company and CMUS, the "Debtors").


PRELIMINARY STATEMENT

        WHEREAS, pursuant to the Existing Credit Documents, the Debtors have substantial obligations owing to the HCC Lenders;

        WHEREAS, the Debtors and the HCC Lenders have entered into an Amended and Restated Waiver and Standby Purchase Agreement, dated as of March 10, 2008 (as amended through immediately prior to the execution hereof, the "Waiver Agreement"), pursuant to which the HCC Lenders extended certain accommodations to the Debtors;

        WHEREAS, the Waiver Agreement automatically terminates on May 1, 2010 and, as set forth herein, this Agreement amends the Waiver Agreement to provide, among other things, that the Waiver (as defined therein) shall terminate on August 31, 2010;

        WHEREAS, pursuant to the Waiver Agreement, each of the Debtors was obligated to use its commercially reasonable efforts to refinance the obligations that were the subject of the Waiver Agreement, and the Debtors have been unable to obtain such refinancing;

        WHEREAS, the Company desires to refinance the obligations subject to the Existing Credit Documents and to reduce the amount of its aggregate indebtedness by restructuring a portion of such obligations and exchanging the balance of such obligations for equity in the Company and, in connection therewith, to effect certain additional transactions, all on the terms set forth herein and in the Ancillary Documents;

        WHEREAS, the Company formed a special committee of the board of directors of the Company to negotiate and review the terms of the Transactions (the "Special Committee"), and the Special Committee has engaged its own counsel and financial advisors in connection therewith;

        WHEREAS, the Special Committee has unanimously recommended to the Board of Directors of the Company that the Board of Directors of the Company approve the Transactions and recommend such Transactions to the holders of Class A Common Stock not affiliated with HCC;

        WHEREAS, the boards of directors of the parties hereto have approved the terms of the Transactions, this Agreement and the Ancillary Documents;

        WHEREAS, immediately prior to the execution of this Agreement, the Company and Hallmark Entertainment Investments Co., a Delaware corporation ("HEIC") have entered into the HEIC Merger Agreement and the Company and HEH have entered into the HEH Merger Agreement;

        NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:


ARTICLE I.
DEFINITIONS

        Section 1.1. Definitions.    In addition to the terms defined elsewhere herein, the terms defined in the introductory paragraph and the Recitals to this Agreement shall have the respective meanings


Table of Contents

specified therein, and the following terms shall have the meanings specified below when used herein with initial capital letters:

            "10.25% Note" has the meaning set forth in Section 2.1.

            "2001 Note" has the meaning set forth in Section 2.1.

            "2005 Note" has the meaning set forth in Section 2.1.

            "2006 Note" has the meaning set forth in Section 2.1.

            "Affiliate" means "affiliate" as defined in Rule 405 promulgated under the Securities Act of 1933, as amended. For purposes of this Agreement, the Company and its Subsidiaries shall not be deemed to be Affiliates of HCC.

            "Agreement" has the meaning set forth in the preamble, and shall include all schedules and exhibits hereto.

            "Ancillary Documents" means the documents listed in Section 2.2, the Certificate of Designation, the Third Amended Charter, the Registration Rights Agreement and the Tax Sharing Agreement Amendment.

            "Business Day" means a day other than a Saturday, a Sunday or any other day on which commercial banks are not required or authorized to close in the City of New York.

            "Certificate of Designation" means the Form of Certificate of Designation attached hereto as Exhibit C.

            "Class A Common Stock" means the Company's Class A common stock, par value $0.01 per share.

            "Class B Common Stock" means the Company's Class B common stock, par value $0.01 per share.

            "Closing" has the meaning set forth in Section 9.1.

            "CMUS" has the meaning set forth in the preamble hereto.

            "Closing Date" has the meaning set forth in Section 9.1.

            "Common Stock" means the Company's Class A Common Stock, par value $.01 per share, the terms of which shall be as set forth in the Second Amended Charter.

            "Company" has the meaning set forth in the preamble hereto and, except where the context otherwise requires, includes the Company and the Company's Subsidiaries.

            "Company Organizational Documents" means the Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws, each as amended to the date hereof.

            "Contracts" as of any date means, collectively, all contracts, agreements, commitments, instruments and guaranties to which the Company or any of its Subsidiaries is a party as of such date.

            "Conversion Price" shall mean the amount equal to (a) the quantity of (i) the total HCC Debt as of the Date of Determination, less (ii) $500 million, divided by (b) the Conversion Price Shares. The Conversion Price shall be rounded to the nearest ten-thousandth. For the avoidance of doubt, Schedule 1.1(a) sets forth a sample calculation of the Conversion Price.

            "Conversion Price Shares" shall mean a notional number of shares of Common Stock which, when combined with the number of shares of Common Stock owned directly or indirectly by the

2


Table of Contents


    HCC Parties as of the Date of Determination (for purposes of such calculation (x) with respect to shares of Common Stock owned directly by HEIC, including only HEH's pro rata portion of the Common Stock owned by HEIC, and (y) excluding the shares of Common Stock that will be receivable by HCC upon conversion of the Series A Preferred Stock and pursuant to Section 2.2(b)(iii)), will equal 90.1% of the sum of (i) all outstanding shares of Common Stock on the Date of Determination prior to the Closing, (ii) the Conversion Price Shares and (iii) all shares potentially issuable upon exercise of all Outstanding Options as of the Date of Determination. The Conversion Price Shares shall be rounded to the nearest whole share. For the avoidance of doubt, Schedule 1.1(a) sets forth a sample calculation of the Conversion Price Shares.

            "Date of Determination" shall mean the Closing Date, provided that if the Closing Date occurs on or after March 31, 2010, the "Date of Determination" shall be deemed to be March 31, 2010.

            "Debtors" has the meaning set forth in the preamble hereto.

            "Designated Court" has the meaning set forth in Section 11.9.

            "DGCL" means the General Corporation Law of the State of Delaware.

            "Exchange Act" means the Securities Exchange Act of 1934, as amended.

            "Existing Credit Documents" means (a) that certain Credit, Security, Guaranty and Pledge Agreement, dated August 31, 2001, by and among the Company, its Subsidiaries named therein, the lenders named therein and The Chase Manhattan Bank (now known as JPMorgan Chase Bank) ("JPMorgan"), as administrative agent and issuing bank, (b) that certain Amended and Restated Subordination and Support Agreement, dated July 27, 2007, by and among the Company, Hallmark Cards and JPMorgan, (c) that certain Guarantee Agreement, dated March 2, 2009, between Hallmark Cards and JPMorgan, (d) the 10.25% Note, (e) the 2001 Note, (f) the 2005 Note, (g) the 2006 Note and (h) the Tax Sharing Agreement.

            "Governmental Entity" means any federal, state, local or foreign governmental, regulatory or administrative authority, branch, agency or commission or any court, tribunal or judicial body.

            "Guarantors" has the meaning set forth in the preamble hereto.

            "Hallmark Cards" has the meaning set forth in the preamble hereto.

            "HCC" has the meaning set forth in the preamble hereto.

            "HCC Debt" means (a) the aggregate principal amount of all Indebtedness, including accrued and unpaid interest thereon through the Closing Date, but excluding accrued but unpaid interest with respect to the 2001 Note, the 2005 Note and the 2006 Note; (b) all accounts payable and open intercompany accounts of the Company and its Subsidiaries owed to the HCC Lenders and their controlled Affiliates (other than the Company and its Subsidiaries); and (c) any amounts due to Hallmark Cards or its Affiliates under the Tax Sharing Agreement through December 31, 2009; provided that for the avoidance of doubt the following shall not constitute HCC Debt: (i) Reimbursement Obligations, (ii) Ordinary Course of Business Obligations, and (iii) any amounts due to Hallmark Cards or its Affiliates under the Tax Sharing Agreement accruing on or after January 1, 2010.

            "HCC Lenders" has the meaning set forth in the preamble hereto.

            "HCC Parties" means collectively the HCC Lenders and HEH.

            "HEH" has the meaning set forth in the preamble hereto.

            "HEH Merger Agreement" has the meaning set forth in Section 2.2.

            "HEIC" has the meaning set forth in the recitals hereto.

3


Table of Contents

            "HEIC Merger Agreement" has the meaning set forth in Section 2.2.

            "Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person, (a) the principal of and premium, if any, in respect of any indebtedness of such Person for money borrowed, (b) the principal, premium, if any, and interest of such Person with respect to obligations evidenced by bonds, debentures, notes or obligations incurred in connection with the acquisition of property, assets or businesses (other than trade payables which are not overdue or in default), (c) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto) but only to the extent of drawings thereunder, (d) every obligation of such Person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable or accrued liabilities arising in the Ordinary Course of Business which are not overdue or in default), (e) every capital lease obligation (determined in accordance with GAAP) of such Person, (f) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person, provided, however, that the amount of such Indebtedness shall be the lesser of (i) the fair market value of such asset at such date of determination and (ii) the amount of such Indebtedness of such other Persons, and (g) every obligation of the type referred to in clauses (a) through (f) of another Person the payment of which, in any case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise.

            "Information Statement" means an information statement prepared in accordance with the requirements of Regulation 240.14c-101 promulgated under the Securities Exchange Act of 1934, as amended.

            "Knowledge" as applied to the Company, means the actual knowledge, after reasonable inquiry, of any person listed on Schedule 1.1(b) hereto.

            "Legal Requirement" means any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, rule, ordinance, permit, principle of common law, regulation, statute, treaty or legally enforceable requirement enacted, issued, adopted, promulgated or applied by any Governmental Entity.

            "Lien" means any mortgage, pledge, security interest, encumbrance or title defect, lease, lien (statutory or other), conditional sale agreement, claim, charge, limitation or restriction.

            "Material Adverse Effect" means any change or effect that (a) has a materially adverse effect on the business, assets, properties, operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole; provided, however, with respect solely to subsection (a) of this definition, that no effect, change, event, occurrence, development, condition or state of facts arising or resulting from any of the following, either alone or in combination, shall constitute or be taken into account in determining whether there has been a Material Adverse Effect: (i) changes in general economic conditions or changes affecting the industry generally in which the Company and its Subsidiaries operate, except to the extent such changes have a disproportionate effect on the Company and its Subsidiaries, (ii) the announcement or performance of the Transactions, (iii) acts of war or terrorism or natural disasters, unless such acts of war or terrorism or natural disasters have a disproportionate effect on the Company and its Subsidiaries, (iv) the fact, in and of itself (and not the underlying causes thereof) that the Company failed to meet any projections, forecasts, or revenue or earnings predictions for any period, (v) changes in any applicable Legal Requirement or generally accepted accounting principles or the interpretation thereof, or (vi) any change, in and of itself (and not the underlying causes thereof) in the price of the common stock of the Company; (b) materially impairs the ability of any of the Debtors to perform its obligations under this Agreement; or (c) materially impairs the validity or enforceability of, or materially

4


Table of Contents


    impairs the security interests, rights, remedies or benefits available to the HCC Parties under, this Agreement.

            "Mergers" has the meaning set forth in Section 2.2.

            "New Credit Agreement" has the meaning set forth in Section 2.2.

            "New Debt" has the meaning set forth in Section 2.2.

            "New Securities" has the meaning set forth in Section 2.2.

            "New Stockholders Agreement" has the meaning set forth in Section 2.2.

            "Ordinary Course of Business" means an action which is both: (a) consistent with the past practices of the Company and is taken in the ordinary course of the normal day-to-day operations of the Company; and (b) similar in nature and magnitude to actions customarily taken, without any authorization by the board of directors, in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as the Company.

            "Ordinary Course Of Business Obligations" means all obligations of the Company and its Subsidiaries owed to Hallmark Cards and its controlled Affiliates (other than the Company and its Subsidiaries) relating to (x) the licensing of programming or intellectual property or (y) the provisions of goods or services on an arms' length basis, and in either case first accruing on or after January 1, 2010 (including pursuant to agreements existing prior to such date).

            "Outstanding Options" has the meaning set forth in Section 3.3.

            "Permit" means any permit, approval, consent, authorization, license, variance, or permission required by a Governmental Entity under any Legal Requirement.

            "Permitted Liens" means (a) Liens for utilities and current Taxes not yet due and payable, (b) statutory Liens of landlords, banks (and rights of set-off), of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law (other than any such Lien imposed pursuant to Section 401(a)(29) or 430(k) of the Internal Revenue Code of 1986, as amended, or by the Employee Retirement Income Security Act of 1974, as amended), in each case incurred in the ordinary course of business (i) for amounts not yet overdue or (ii) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of five days) are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts, (c) Liens for Taxes being contested in good faith by appropriate proceedings and for which appropriate reserves have been included on the Company's balance sheet, (d) easements, restrictive covenants and similar encumbrances or impediments against any assets or properties of the Company and which individually or in the aggregate do not materially interfere with the business of the Company or its Subsidiaries or the operation of the property to which they apply or materially detract from the value of the Company's or any of its Subsidiaries' assets, (e) minor irregularities and defects of title which individually or in the aggregate do not materially interfere with the business of the Company or its Subsidiaries or the operation of the property to which they apply or materially detract from the value of the Company's or any of its Subsidiaries' assets, (f) Liens disclosed on the existing title policies, title commitments and/or surveys which have been previously provided or made available to a party hereto, none of which materially interfere with the business of the Company or its Subsidiaries or the operation of the property to which they apply or materially detract from the value of the Company's or any of its Subsidiaries' assets, (g) with respect to real property that is leased by the Company or its Subsidiaries, any Liens or other matters caused by or placed upon real property by the owners thereof, which would not otherwise be in violation of such owner's obligations under the applicable lease, other than as a result of the Company's or its Subsidiaries' breach of or default under the

5


Table of Contents


    lease in respect of such leased real property, (h) purported Liens evidenced by the filing of precautionary UCC financing statements relating solely to operating leases or consignments of personal property entered into in the ordinary course of business and (i) any Liens securing the Company's existing revolving credit facility with JPMorgan Chase Bank, N.A. or any replacement facility in respect thereof.

            "Person" means any individual, partnership, corporation, trust, association, limited liability company, Governmental Entity or any other entity.

            "Preferred Shares" has the meaning set forth in Section 2.2.

            "Recapitalization" has the meaning set forth in Section 2.2.

            "Recommendation" has the meaning set forth in Section 3.2.

            "Registration Rights Agreement" has the meaning set forth in Section 9.2(e).

            "Reimbursement Obligations" means all obligations of the Company and its Subsidiaries to reimburse Hallmark Cards and its controlled Affiliates (other than the Company and its Subsidiaries) for obligations which are primarily the obligation of the Company and its Subsidiaries, but which have been satisfied by Hallmark Cards or its controlled Affiliates on or after January 1, 2010 (including pursuant to agreements existing prior to such date) pursuant to any guarantees, letters of credit, make-whole agreements, co-obligor arrangements or similar arrangement or agreement.

            "Released Matters" has the meaning set forth in Section 2.4.

            "Released Parties" has the meaning set forth in Section 2.4.

            "Representatives" has the meaning set forth in Section 5.2.

            "Reverse Stock Split" has the meaning set forth in Section 2.3.

            "Revolver" has the meaning set forth in Section 7.3.

            "SEC" has the meaning set forth in Section 3.5.

            "SEC Report" has the meaning set forth in Section 3.5.

            "Second Amended Charter" means the Form of Second Amended and Restated Certificate of Incorporation attached hereto as Exhibit B.

            "Series A Preferred Stock" means the Company's Series A Convertible Preferred Stock, par value $.01 per share, the terms of which shall be as set forth in Certificate of Designation.

            "Special Committee" has the meaning set forth in the recitals hereto.

            "Subsidiary" means "subsidiary" as defined in Rule 405 promulgated under the Securities Act of 1933, as amended.

            "Tax Return" means any report, return, information return, forms, declarations, claims for refund, statements or other information (including any amendments thereto and including any schedule or statement thereto) required to be supplied to a Governmental Entity in connection with Taxes.

            "Tax Sharing Agreement" means the Federal Income Tax Sharing Agreement between HCC and Crown Holdings dated as of March 11, 2003, as amended to date.

            "Tax Sharing Agreement Amendment" has the meaning set forth in Section 9.2(f).

6


Table of Contents

            "Taxes" means all federal, state, local, foreign and other taxes, assessments and water and sewer charges and rents, including without limitation, income, gross receipts, excise, employment, sales, use, transfer, license, payroll, franchise, severance, stamp, withholding, Social Security, unemployment, real property, personal property, property gains, registration, capital stock, value added, single business, occupation, workers' compensation, alternative or add-on minimum, estimated, or other tax, including without limitation any interest, penalties or additions thereto.

            "Third Amended Charter" means the Form of Third Amended and Restated Certificate of Incorporation attached hereto as Exhibit H.

            "Transactions" means all of the transactions contemplated by this Agreement and by the Ancillary Documents.

            "Waiver Agreement" has the meaning set forth in the recitals hereto.

        Section 1.2. Accounting Terms and Determinations.    All references in this Agreement to "generally accepted accounting principles" or "GAAP" means generally accepted accounting principles in effect in the United States of America at the time of application thereof, applied on a consistent basis. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles, applied on a consistent basis.


ARTICLE II.
RECAPITALIZATION

        Section 2.1. Acknowledgement of Indebtedness.    

            (a)   Each of the Company and CMUS acknowledges that it is validly indebted to HCC pursuant to the Promissory Note, dated as of December 14, 2001, of the Company, and guaranteed by CMUS, in the original principal amount of $75 million payable to HCC (the "2001 Note"), and that the outstanding amount of the 2001 Note (including accrued interest and interest which has been added to principal): (i) was $110,048,399 as of December 31, 2009 and (ii) is estimated to be $108,581,366 as of March 31, 2010 (not including interest that is required to be paid in cash prior to Closing).

            (b)   The Company acknowledges that it is validly indebted to HCC pursuant to the 10.25% Note, and that the outstanding principal amount of the 10.25% Senior Unsecured Discount Note, issue date August 5, 2003, of the Company, in the initial accreted value of $400 million, payable to HCC (the "10.25% Note") (including accrued interest and interest which has been added to principal): (i) was $758,755,048 as of December 31, 2009 and (ii) is estimated to be $778,012,072 as of March 31, 2010 (including interest that is required to be paid in kind prior to Closing).

            (c)   The Company acknowledges that it is validly indebted to HCC pursuant to the Promissory Note, dated as of March 21, 2006, of the Company in the original principal amount of $70,414,087.87 payable to HCC (formerly payable to Hallmark Entertainment Holdings, Inc.) (the "2006 Note"), and that the outstanding amount of the 2006 Note (including accrued interest and interest which has been added to principal): (i) was $62,844,768 as of December 31, 2009 and (ii) is estimated to be $62,006,997 as of March 31, 2010 (not including interest that is required to be paid in cash prior to Closing).

            (d)   CMUS acknowledges that it is validly indebted to HCC pursuant to the Promissory Note, dated as of October 1, 2005, of CMUS, in the original principal amount of $132,785,424, payable to HCC (formerly payable to Hallmark Entertainment Holdings, Inc.) (the "2005 Note"), and that the outstanding amount of the 2005 Note (including accrued interest and interest which has been

7


Table of Contents

    added to principal): (i) was $172,407,147 as of December 31, 2009 and (ii) is estimated to be $170,108,821 as of March 31, 2010 (not including interest that is required to be paid in cash prior to Closing).

            (e)   The Company acknowledges that it and its Subsidiaries were validly indebted to HCC and its Affiliates with respect to the Tax Sharing Agreement as of December 31, 2009 in the amount of $8,525,319 and that such amount of indebtedness HCC and its Affiliates is not expected to change through March 31, 2010.

            (f)    The Company acknowledges that it and its Subsidiaries are validly indebted to HCC and its Affiliates with respect to accounts payable and open intercompany accounts as of December 31, 2009 in the amount of $15,233,814 and that any change to such amount of indebtedness to HCC and its Affiliates through March 31, 2010, if any, is expected to be immaterial.

        Section 2.2. Mergers and Recapitalization.    (a) On the Closing Date the following transactions shall occur in the following order:

            (i)    First, the Company shall file the Second Amended Charter and then the Certificate of Designation with the Secretary of State of the State of Delaware.

            (ii)   Second, the HCC Lenders shall exchange the HCC Debt for the following (the "Recapitalization"):

              (A)  $315,000,000 principal amount of indebtedness of the Debtors (the "New Debt") on the terms and subject to the conditions set forth in the Credit Agreement in the form attached hereto as Exhibit A (including the exhibits thereto, the "New Credit Agreement").

              (B)  185,000 shares of the Series A Preferred Stock, with an initial liquidation preference of $185,000,000, issued to HCC (the "Preferred Shares");

              (C)  A number of shares of the Common Stock (the "Common Shares" and, together with the Preferred Shares, the "New Securities") issued to HCC equal to (x) the quantity of the HCC Debt as of the Closing Date less $500 million, divided by (y) the Conversion Price, such result rounded to the nearest whole share (for the avoidance of doubt, Schedule 1.1(a) sets forth a sample calculation of such number of shares of Common Stock), and HCC and the Company shall enter into the stockholders agreement in the form attached hereto as Exhibit D (the "New Stockholders Agreement").

              (D)  A cash payment equal to all accrued but unpaid interest on the 2001 Note, the 2005 Note and the 2006 Note.

            (iii)  Third, HEIC shall be merged with and into the Company on the terms and subject to the conditions set forth in the merger agreement in the form attached hereto as Exhibit E (the "HEIC Merger Agreement"), which the Company and HEIC executed immediately prior to the execution of this Agreement.

            (iv)  Fourth, HEH shall be merged (together with the merger described in Section 2.2(c), the "Mergers") with and into the Company on the terms and subject to the conditions set forth in the merger agreement in the form attached hereto as Exhibit F (the "HEH Merger Agreement"), which the parties executed immediately prior to the execution of this Agreement.

        (b)   As a result of the Transactions, immediately following the Closing of the Transactions, all of the HCC Debt, except to the extent converted and continued as New Debt, shall be extinguished and discharged.

        Section 2.3. Reverse Stock Split.    At any time prior to December 31, 2013, at the request of the Special Committee or any other special committee of the Company's Board of Directors comprised of

8


Table of Contents


disinterested directors who are independent of the HCC Parties, the Company shall file the Third Amended Charter with the Secretary of State of the State of Delaware no later than three (3) Business Days following such request. The exact ratio of the reverse stock split referenced in the Third Amended Charter shall be determined by the Board of Directors (upon the recommendation of the Special Committee or such other special committee) immediately prior to the filing of the Third Amended Charter and shall be included in a public announcement to all stockholders distributed on the date of such filing.


ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

        The Company hereby represents and warrants to the HCC Lenders and HEH as follows:

        Section 3.1. Organization of the Company.    Each of the Company and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate, limited liability company or limited partnership power (as the case may be) to own its properties and assets and to conduct its business as now conducted. Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation, limited liability company or partnership (as the case may be) and is in good standing in every jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a Material Adverse Effect.

        Section 3.2. Authorization and Validity of Agreement.    

            (a)   Each Debtor has all requisite power and authority to enter into this Agreement and to carry out its obligations hereunder.

            (b)   As of the date of this Agreement, the Special Committee has received: (x) Morgan Stanley & Co.'s advice and recommendation regarding the Transactions, and (y) the opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. to the effect that, subject to certain assumptions, qualifications, limitations and other matters, the aggregate consideration to be issued or paid by the Company or its wholly owned subsidiary, CMUS, in exchange for the HCC Debt in the Recapitalization pursuant to this Agreement and the outstanding shares of common stock of HEIC and HEH in the Mergers pursuant to the HEIC Merger Agreement and the HEH Merger Agreement is, in the aggregate, fair to the Company from a financial point of view. The Special Committee has unanimously passed resolutions: (i) determining that the terms of the Transactions are fair to, and in the best interests of, the Company and its stockholders (other than the HCC Parties); and (ii) recommending (the "Recommendation") to the Company's Board of Directors that such Board: (x) approve the execution, delivery and performance of this Agreement and the Ancillary Documents and the consummation of the Transactions and (y) declare this Agreement (and, to the extent applicable, the Ancillary Agreements) advisable.

            (c)   The Company's Board of Directors has adopted resolutions reflecting the Recommendation by the Special Committee.

            (d)   The affirmative vote of the holders of a majority of the voting power of the issued and outstanding shares of the Class A Common Stock and the Class B Common Stock voting together as a single class (and, in the case of the Second Amended Charter, voting separately by class) is the only vote required by the stockholders of the Company to approve the Transactions and adopt this Agreement under the DGCL and the Company Organizational Documents, and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance of this Agreement.

9


Table of Contents

            (e)   This Agreement has been duly executed by each Debtor and, assuming due execution and delivery by the HCC Lenders, shall constitute its valid and binding obligation, enforceable against it in accordance with its terms, subject to (i) the effect of bankruptcy, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) general equitable principles (whether considered in a proceeding in equity or at law).

        Section 3.3. Capitalization of the Company.    

            (a)   The authorized capital stock of the Company consists of (i) 200,000,000 shares of Class A Common Stock, of which 74,117,654 shares are outstanding, (ii) 120,000,000 shares of Class B Common Stock, of which 30,670,422 shares are outstanding, and (iii) 10,000,000 shares of preferred stock, par value $.01 per share, none of which is issued or outstanding. All outstanding capital stock of the Company has been duly authorized and validly issued, is fully paid and nonassessable and is not subject to and was not issued in violation of any preemptive or similar right, purchase option, call or right of first refusal or similar right, and no personal liability attaches to the ownership thereof. The capital stock described as outstanding in clauses (i) and (ii) above are the sole outstanding shares of capital stock of the Company. As of the date hereof, there are options to acquire 87,238 shares of Class A Common Stock outstanding (the "Outstanding Options"). The number of Outstanding Options is expected to be reduced to 85,813 Outstanding Options after March 17, 2010 as a result of the anticipated expiration of 1,425 Outstanding Options. Except as set forth in the preceding sentence and for this Agreement, there are no outstanding options, warrants, agreements, conversion rights, preemptive rights or other rights to subscribe for, purchase or otherwise acquire any capital stock of the Company.

            (b)   Assuming the Closing Date is April 30, 2010, immediately following the consummation of the transactions contemplated by Section 2.2, the authorized capital stock of the Company will consist of (i) 500,000,000 shares of Common Stock, par value $.01 per share, of which 354,715,466 shares will be outstanding (excluding 85,813 shares which may be issued upon the exercise of Outstanding Options), and (ii) 1,000,000 shares of preferred stock, par value $.01 per share, of which 400,000 will be designated as Series A Preferred Stock, of which 185,000 will be outstanding. The capital stock described as outstanding in clauses (i) and (ii) above will be the sole outstanding shares of capital stock of the Company at such time, and, except for the rights under this Agreement and for Outstanding Options to the extent not surrendered, forfeited, expired or exercised prior to such date, there will be no outstanding options, warrants, agreements, conversion rights, preemptive rights or other rights to subscribe for, purchase or otherwise acquire any capital stock of the Company.

            (c)   The shares of Common Stock to be issued to HCC pursuant to the terms of this Agreement or upon conversion of the Series A Preferred Stock, when so issued will be duly authorized and validly issued, will be fully paid and nonassessable and will not be subject to (except to the extent expressly set forth in the New Stockholders Agreement) and will not have been issued in violation of any preemptive or similar right, purchase option, call or right of first refusal or similar right, and no personal liability will attach to the ownership thereof.

            (d)   The shares of Series A Preferred Stock to be issued to HCC pursuant to the terms of this Agreement, when so issued will be duly authorized and validly issued, will be fully paid and nonassessable, will be entitled to all of the rights provided for in the Certificate of Designation and will not be subject to and will not have been issued in violation of any preemptive or similar right, purchase option, call or right of first refusal or similar right, and no personal liability will attach to the ownership thereof.

10


Table of Contents

        Section 3.4. No Conflict or Violation; Consents.    

            (a)   The execution, delivery and performance by the Debtors of this Agreement does not and will not (i) violate or conflict with any provision of any Company Organizational Document or any of the organizational documents of the Subsidiaries of the Company, (ii) violate any Legal Requirement or (iii) except as set forth on Schedule 3.4, violate or result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contract or Permit or result in the creation or imposition of any Lien upon any of the assets, properties or rights of either of the Company or any of its Subsidiaries or result in or give to others any rights of cancellation, modification, amendment, acceleration, revocation or suspension of any of the Contracts, Permits or obligations thereunder.

            (b)   Except for the approval of the Company's stockholders as described in Section 3.2, no consent, waiver, authorization or approval of any Governmental Entity or any other Person, and no declaration or notice to or filing or registration with any Governmental Entity or any other Person, is required in connection with the execution and delivery of this Agreement by the Debtors or the performance by the Company or its Subsidiaries of their obligations hereunder.

        Section 3.5. Other Approvals.    

            (a)    Section 203.    The Board of Directors has taken all action necessary to render the limitations on business combinations contained in Section 203 of the DGCL inapplicable to this Agreement, the Ancillary Documents and the Transactions. Neither the execution and delivery of this Agreement nor the consummation of Transactions will prohibit for any period of time, or impose any stockholder approval requirement with respect to, the Common Stock to be issued to HCC.

            (b)    Takeover Laws.    Other than as described in Section 3.5(a), no anti-takeover Legal Requirement prohibits the consummation of the Transactions or imposes any additional stockholder approvals or conditions with respect to the Transactions or the Common Stock.

        Section 3.6. SEC Reports and Other Information.    Since December 31, 2005, the Company, to the Company's Knowledge, has filed, with the Securities and Exchange Commission (the "SEC"), all filings required by the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder (the "SEC Reports"). As of their respective dates, each of the SEC Reports (a) complied as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, other than any misstatements or omissions in an SEC filing that were corrected in a subsequent SEC Report filed prior to the date hereof. The Company, to the Company's Knowledge, is in compliance in all material respects with the applicable listing and corporate governance rules and regulations of the Nasdaq Global Market. All financial projections and other forecasts furnished by the Company to HCC or any of its Affiliates or to the Special Committee and its advisors were prepared in good faith based on reasonable assumptions and represent the Company's good faith estimate of future results based on information available as of the date such information was furnished.

        Section 3.7. Litigation.    Except as set forth in Schedule 3.7, there are no claims, actions, suits or other proceedings pending or, to the Company's Knowledge, threatened before any Governmental Entity that would prevent the consummation of all or any part of the Transactions or otherwise relating to this Agreement or the Transactions.

11


Table of Contents

        Section 3.8. Brokers and Fees.    Except to the extent set forth in Schedule 3.8, no broker, finder, financial advisor or similar intermediary has acted for or on behalf of, or is entitled to any broker's, finder's or similar fee, success or contingency fee or other commission from, the Company or its Subsidiaries in connection with this Agreement or the Transactions.


ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF CERTAIN ENTITIES

        Section 4.1. Representations and Warranties of HCC.    HCC hereby represents and warrants to the Company with respect to Hallmark Cards, HCC and HEH as follows:

            (a)    Organization.    Each such Person is duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power to own its properties and assets and to conduct its business as now conducted. Each such Person is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, materially impair such Person's ability to consummate the Transactions.

            (b)    Authorization and Validity of Agreement.    Each such Person has all requisite power and authority to enter into this Agreement and to carry out its obligations hereunder. Each of the HCC Parties has taken all necessary corporate action to approve the execution of this Agreement and the Transactions. This Agreement has been duly executed by each such Person and, assuming due execution and delivery by the other parties hereto, shall constitute its valid and binding obligation, enforceable against it in accordance with its terms, subject to (i) the effect of bankruptcy, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) general equitable principles (whether considered in a proceeding in equity or at law).

            (c)    Investment Intent.    The New Debt, Common Stock and Series A Preferred Stock will be acquired hereunder solely for the account of HCC for investment, and not with a view to the resale or distribution thereof in violation of the Securities Act of 1933, as amended.

            (d)    Ownership.    As of the date hereof, the HCC Lenders own directly or indirectly 69,997,656 shares of Class A Common Stock (including, for these purposes, shares of Class A Common Stock issuable upon conversion of shares of Class B Common Stock) of the Company (including for purposes hereof with respect to HEIC only HEH's pro rata portion of the shares of the Company's common stock owned by HEIC).

            (e)    Indebtedness.    None of the Company or its Subsidiaries has any outstanding Indebtedness to Hallmark Cards or its controlled Affiliates, other than (i) prior to the Closing, the HCC Debt, (ii) accrued but unpaid interest through the Closing Date with respect to the 2001 Note, the 2005 Note and the 2006 Note, and (iii) for the avoidance of doubt, (x) Reimbursement Obligations, (y) Ordinary Course of Business Obligations, and (z) any amounts due to Hallmark Cards or its Affiliates under the Tax Sharing Agreement accruing on or after January 1, 2010.

            (f)    Consents and Approvals; No Violations.    None of the execution, delivery or performance of this Agreement or the HEH Merger Agreement by HEH will: (i) conflict with or result in any breach of any provision of the organizational documents of HEH, (ii) require any filing by HEH with, notice to, or permit, authorization, consent or approval of, any Governmental Entity other than the Secretary of State of the State of Delaware, (iii) result in a violation or breach by HEH of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions

12


Table of Contents


    of any agreement or other instrument or obligation to which HEH is a party or by which its properties or assets may be bound, or (iv) violate any Legal Requirements, excluding from the foregoing clauses (ii), (iii) and (iv) such filings, notices, permits, authorizations, consents, approvals, violations, breaches or defaults which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of HEH to perform its obligations under this Agreement or the HEH Merger Agreement.

            (g)    No Liabilities.    Except for (a) liabilities incurred pursuant to the transactions contemplated by this Agreement and the HEH Merger Agreement, and (b) liabilities or obligations discharged or paid in full prior to the date of this Agreement in the ordinary course of business consistent with past practice, HEH does not have any liabilities or obligations of any nature whatsoever (whether accrued, absolute, matured, determined, contingent or otherwise) other than non-material liabilities related to the maintenance of its existence as a corporation. There are no proceedings pending or, to the knowledge of the HCC Lenders, threatened against HEH, other than any such proceedings that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company following the Mergers. Neither HEH nor any of its properties is or are subject to any order, writ, judgment, injunction, decree or award, except for those that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company following the Mergers.


ARTICLE V.
CERTAIN COVENANTS AND AGREEMENTS

        Section 5.1. Conduct of Business.    

            (a)   From the date hereof through the Closing Date, the Company shall, and shall cause its Subsidiaries to:

              (i)    operate only in the Ordinary Course of Business and continue to maintain, in all material respects, its assets, properties, rights and operations in accordance with present practices in a condition suitable for their current use;

              (ii)   use commercially reasonable efforts to keep available generally the services of its present officers and employees and preserve generally the present relationships with Persons having business dealings with it;

              (iii)  use commercially reasonable efforts to keep in full force and effect insurance comparable in amount and scope to coverage maintained by it (or on behalf of it) on the date hereof;

              (iv)  keep its books of account, files and records in the Ordinary Course of Business;

              (v)   pay in cash, when due, all accrued but unpaid interest on the 2001 Note, the 2005 Note and the 2006 Note;

              (vi)  file, when due or required, all SEC Reports, all Tax Returns and other reports required to be filed and pay when due all Taxes lawfully levied or assessed against it, unless the validity thereof is contested in good faith and by appropriate proceedings diligently conducted; and

              (vii) inform HCC of the occurrence of any event which could reasonably be expected to result in a breach of any representation or warranty contained in Article III.

            (b)   From the date hereof through the Closing Date, except as expressly contemplated by this Agreement, the Company shall not, and shall not permit its Subsidiaries to:

              (i)    make any change in any Company Organizational Document;

13


Table of Contents

              (ii)   sell, assign, lease, transfer, abandon, sublease or otherwise convey its assets, properties or rights, other than in the Ordinary Course of Business;

              (iii)  incur, or suffer to exist, any Lien on the assets of the Company other than Permitted Liens;

              (iv)  acquire, lease, sublease, license or dispose of any material assets or properties other than in accordance with past practices, including, if applicable, upon approval by a duly authorized committee of the Company's Board of Directors;

              (v)   settle, release or forgive any material claim or litigation or waive any material right for an amount greater than $1,000,000 in the aggregate;

              (vi)  make, change or revoke, or permit to be made, changed or revoked, without the consent of HCC, any material election or method of accounting with respect to Taxes;

              (vii) enter into, or permit to be entered into, any closing or other agreement or settlement with respect to Taxes affecting or relating to the Company;

              (viii)  enter into, amend or terminate any material lease or any material Contract or commitment outside of the Ordinary Course of Business or except in accordance with past practices, including, if applicable, upon approval by a duly authorized committee of the Company's Board of Directors;

              (ix)  enter into any employment Contract with any director, officer or employee of the Company or make any payment, advance or loan to, or enter into any material transaction of any other nature with, any director, officer or employee of the Company, other than the payment, in the Ordinary Course of Business, of salary, bonus and fringe benefits to the directors, officers and employees of the Company or its Subsidiaries required pursuant to any documentation filed with the SEC prior to the date of this Agreement;

              (x)   issue, sell or pledge, or authorize or propose the issuance, sale or pledge of additional shares or units of any class of capital stock, membership interests or partnership interests, or securities convertible into or exchangeable for shares or units of capital stock, membership interests or partnership interests, or any rights, warrants or options to acquire any such shares or units of capital stock, membership interests or partnership interests, or other convertible securities of the Company or its Subsidiaries;

              (xi)  redeem, retire, repurchase or otherwise acquire, directly or indirectly, or split, combine or reclassify any shares of the capital stock of the Company or its Subsidiaries, or declare, set aside for payment or pay any dividend or distribution, payable in cash, stock, property or otherwise, with respect to any of the capital stock, membership interests or partnership interests of the Company or its Subsidiaries;

              (xii) (A) except as may be required by applicable Legal Requirement, or, in respect of any severance agreement, as may be required by any existing employee benefit plan or employee pension plan (but without regard to any changes to such plans after the date hereof), enter into any new (or amend any existing) employee benefit plan, or materially amend any such plan or agreement; (B) except with respect to an employee or consultant first hired subsequent to the date of this Agreement, enter into any new (or amend any existing) employment, severance or consulting agreement; (C) except as may be required by any existing employee benefit plan or employee pension plan (but without regard to any changes to such plans after the date hereof), pay or agree to pay any pension, retirement allowance or other employee benefit (and, in the case of clauses (A), (B) and (C) of this subsection, other than in accordance with past practices, including, if applicable, upon approval by a duly authorized committee of the Company's Board of Directors); (D) increase in any manner the

14


Table of Contents


      rate or terms of salary, wage, bonus or other compensation of any director, officer or employee, except, in each case, as required by law, required pursuant to pre-existing contractual provisions or, with respect to annual performance bonuses and salary increases, to the extent made in the Ordinary Course of Business; or (E) grant any stock-based or other incentive compensation other than in the Ordinary Course of Business;

              (xiii)  make, enter into, modify, amend, terminate or waive any right or remedy, in any manner that would be reasonably expected to have a Material Adverse Effect, under any Contract;

              (xiv) make or commit to make any capital expenditures or programming acquisitions which are not in the Ordinary Course of Business;

              (xv) incur any Indebtedness (other than pursuant to refinancing the Company's existing revolving credit facility with JPMorgan Chase Bank, N.A.) or on or after March 31, 2010 pay, redeem, retire, repurchase or otherwise satisfy, in whole or in part, the HCC Debt;

              (xvi) enter into an agreement or adopt a plan with respect to any merger, consolidation, liquidation or business combination involving the Company or its Subsidiaries or any acquisition or disposition of all or substantially all of the assets, properties or rights or any securities of the Company or its Subsidiaries;

              (xvii)  acquire (whether by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof;

              (xviii)  except for travel and other business expense-related advances to employees made in the Ordinary Course of Business and intercompany loans, make any loans, advances or capital contributions to, or investments in, any Person;

              (xix) make or change any Tax election, change an annual accounting period, adopt or change any accounting method except as required by GAAP, file any amended Tax Return, enter into any closing agreement, settle any material Tax claim or assessment relating to the Company or any of its Subsidiaries or surrender any right to claim a refund of Taxes;

              (xx) take any action that would cause any of the representations and warranties made by the Company in this Agreement not to remain true and correct; or

              (xxi) commit to do any of the foregoing or authorize or enter into any Contract to do any of the actions prohibited by the foregoing.

        Section 5.2. Information and Access.    Upon reasonable advance notice, the Company shall, and shall cause its Subsidiaries to, afford to the officers, directors, employees, accountants, counsel, investment bankers, financial advisors and other representatives (collectively, "Representatives") of the HCC Lenders reasonable access throughout the period prior to the Closing Date, to all of its employees, agents, accountants, properties, books, contracts, commitments and records (including, but not limited to, Tax Returns) and, during such period, the Company shall, and shall cause its Subsidiaries to, furnish promptly to the HCC Lenders and their Representatives, (i) access to each report, schedule and other document filed or received by the Company or any of the Company's Subsidiaries pursuant to the requirements of federal or state securities laws or filed with or sent to the SEC or any other federal or state regulatory agency or commission and (ii) access to all information concerning the Company, the Company's Subsidiaries and their respective directors, officers, stockholders, operations, facilities, properties and such other matters as may be reasonably requested by the HCC Lenders or their Representatives in connection with any filings, applications or approvals required or contemplated by this Agreement or for any other reason related to the Transactions; provided, that all such access shall be coordinated through the Company or its designated representatives, in accordance with such reasonable procedures as the Company may establish. During

15


Table of Contents

any visit to the business or property sites of the Company or any of the Company's Subsidiaries, the HCC Lenders shall, and shall cause their Representatives accessing such properties to, conduct itself in a manner that is consistent with such reasonable procedures as are established by the Company and would not be reasonably expected to interfere with the operation of the Company's business. The Company acknowledges that time is of the essence with respect to its compliance with its covenants in this Section 5.2. No investigation pursuant to this Section 5.2 shall affect any representation, warranty or covenant of the Company in this Agreement or any condition on the obligations of the HCC Lenders in this Agreement.

        Section 5.3. Notices of Certain Events.    The Company shall promptly notify the HCC Lenders of (i) any communication from any Person alleging that the consent of such Person (or another Person) is or may be required in connection with the Transactions (and the response thereto from the Company or its Representatives), (ii) any communication from any Governmental Entity in connection with the Transactions (and the response thereto from the Company or its Representatives), (iii) any claims, actions, suits or other proceedings commenced or, to the Company's Knowledge, threatened before any Governmental Entity that would prevent the consummation of all or any part of the Transactions or otherwise relating to this Agreement or the Transactions (and the response thereto from the Company or its Representatives), (iv) any material events, changes, discussions, notices, changes or developments relating to the litigation set forth on Schedule 3.7 and (v) any event, change, occurrence, circumstance or development between the date of this Agreement and the Closing Date which causes or is reasonably likely to cause the conditions set forth in Article VIII of this Agreement not to be satisfied or result in such satisfaction being materially delayed; provided, however, that the delivery of any notice pursuant to this Section 5.3 shall not, and shall not be deemed to, cure any breach of any representation or warranty requiring disclosure of such matter at or prior to the date of this Agreement or affect any of the closing conditions or otherwise limit or affect the remedies available. With respect to any of the foregoing, the Company will consult with HCC and its Affiliates and their Representatives so as to permit HCC and its Affiliates and their Representatives to cooperate to take appropriate measures to avoid or mitigate any adverse consequences that may result from any of the foregoing.

        Section 5.4. Waiver Agreement and Interim Payment on the HCC Debt.    

            (a)   Section 2(c) of the Waiver Agreement shall be amended by replacing the first sentence thereof with the following:

        This Waiver shall terminate automatically on August 31, 2010.

            (b)   Section 7(e) of the Waiver Agreement shall be amended to add the following as the last sentence thereof:

        Notwithstanding the foregoing, no amounts otherwise due and payable pursuant to this Section 7(e) for the year ended December 31, 2009 shall become due and payable; provided, that such amounts shall become due and payable on August 31, 2010 if the "Closing" under the Master Recapitalization Agreement, dated February 26, 2010, shall not have occurred by such date.

            (c)   From the date hereof through the Closing, the Debtors shall pay interest on the 2001 Note, the 2005 Note, and the 2006 Note in cash when due, and all other interest on the HCC Debt shall accrue and be added to principal.

            (d)   Hallmark Cards will use its best efforts to ensure that the Company will have continued access to up to $30 million under the Company's existing revolving credit facility with JPMorgan Chase Bank, N.A. (or any other revolving credit facility) while the Waiver Agreement is in effect.

        Section 5.5. Information Statement.    The Company will use its best efforts to prepare and file with the SEC as promptly as is reasonably practicable (but in any event not later than March 20, 2010)

16


Table of Contents

the Information Statement in a form that complies in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. HCC and its Affiliates shall furnish to the Company all information requested concerning itself which is required or customary for inclusion in the Information Statement. The Company and HCC each agrees to respond as promptly as is practicable to any comments of the SEC on the Information Statement, and the Company agrees to mail the Information Statement to all of the Company's stockholders promptly after the Company learns that the Information Statement will not be reviewed or that the SEC staff has no further comments thereon. The Company covenants and agrees that the Information Statement and any amendment thereof or supplement thereto to be sent to the stockholders of the Company in connection with the Transactions will comply in all material respects with the applicable requirements of the Exchange Act and the rules and regulations thereunder. The information provided by any party hereto for use in or incorporation by reference in the Information Statement shall be true and correct in all material respects, at the date mailed to stockholders of the Company, without omission of any material fact which is required to make such information not false or misleading. All financial projections and other forecasts prepared by the Company for use in or incorporation by reference in the Information Statement were, or shall be, as applicable, prepared in good faith based on reasonable assumptions and represent the Company's good faith estimate of future results based on information available as of the date of the Information Statement. No representation, covenant or agreement is made by any party hereto with respect to information supplied in writing by any other party specifically for inclusion in the Information Statement. If at any time prior to the Closing Date any information relating to the Company or HCC, or any of their respective Affiliates, officers or directors, should be discovered by the Company or HCC which should be set forth in an amendment or supplement to the Information Statement, so that the Information Statement would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party which discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by Law, disseminated to the shareholders of the Company.

        Section 5.6. Certain Provisions Relating to Consents.    The Company shall use commercially reasonable efforts prior to and after the Closing Date to obtain all consents that are required in connection with the transactions contemplated by this Agreement.

        Section 5.7. Stockholder Approvals.    The Second Amended Charter and the Third Amended Charter having been approved by the Company's Board of Directors, and the HEH Merger Agreement and the HEIC Merger Agreement having each been approved by the board of directors of each of the applicable constituent corporations and executed and delivered by each of the applicable constituent corporations:

            (a)   HEH as: (i) a stockholder of HEIC hereby approves the HEIC Merger Agreement and the consummation of the transactions contemplated thereby and intends that this Agreement shall constitute its written consent as a stockholder of HEIC to such matters pursuant to Section 228 of the DGCL; and (ii) a stockholder of the Company immediately following the HEIC Merger hereby approves the HEH Merger Agreement, the Third Amended Charter and the consummation of the transactions contemplated thereby and the share issuances contemplated by this Agreement, and intends that this Agreement shall constitute its written consent as a stockholder of the Company to such matters pursuant to Section 228 of the DGCL.

            (b)   HCC as: (i) a stockholder of HEH hereby approves the HEH Merger Agreement and the consummation of the transactions contemplated thereby and intends that this Agreement shall constitute its written consent as a stockholder of HEH to such matters pursuant to Section 228 of the DGCL; and (ii) as a stockholder of the Company (both presently and as a successor to HEH) hereby approves the Second Amended Charter, the HEIC Merger Agreement, the HEH Merger

17


Table of Contents


    Agreement, the Third Amended Charter and the consummation of the transactions contemplated thereby and the share issuances contemplated by this Agreement, and intends that this Agreement shall constitute its written consent as a stockholder of the Company to such matters pursuant to Section 228 of the DGCL.

        Section 5.8. Commercially Reasonable Efforts.    Upon the terms and subject to the conditions of this Agreement, each of the parties hereto shall use commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable consistent with applicable law to consummate and make effective in the most expeditious manner practicable the Transactions, including, without limitation, obtaining all necessary actions or nonactions, waivers, consents and approvals from all applicable Governmental Entities in connection with the Transactions.

        Section 5.9. Further Assurances.    Upon the request of HCC or any of its Affiliates at any time after the Closing Date, the Company shall forthwith execute and deliver such further instruments of assignment, transfer, conveyance, endorsement, direction or authorization and other documents as HCC or its Affiliate may reasonably request in order to perfect title of such entity and its successors and assigns to the New Debt, Series A Preferred Stock or Common Stock or otherwise to effectuate the purposes of this Agreement.


ARTICLE VI.
MUTUAL CONDITIONS

        The respective obligations of each party to consummate the Transactions is subject to the satisfaction (unless waived in writing by the party against whom enforcement is being sought) of each of the following conditions on or prior to the Closing Date:

        Section 6.1. No Injunction or Action.    No order, statute, rule, regulation, executive order, stay, decree, judgment or injunction shall have been enacted, entered, promulgated or enforced by any court or other Governmental Entity which prohibits or prevents the consummation of the Transactions which has not been vacated, dismissed or withdrawn prior to the Closing Date.

        Section 6.2. Regulatory Compliance.    Twenty (20) calendar days shall have elapsed since the date on which the Company shall have mailed the Information Statement to all of its stockholders as required by the Exchange Act.


ARTICLE VII.
CONDITIONS TO THE DEBTORS' OBLIGATIONS

        The obligation of each Debtor to consummate the Transactions is subject to the satisfaction (unless waived in writing by the Company with the consent of the Special Committee) of each of the following conditions on or prior to the Closing Date:

        Section 7.1. Representations and Warranties.    The representations and warranties of the HCC Lenders contained in this Agreement which are qualified as to materiality shall be true and correct on and as of the Closing Date as though such representations and warranties were made anew on and as of the Closing Date, and all other representations and warranties of the HCC Lenders contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though such representations and warranties were made anew on and as of the Closing Date. HCC shall have delivered to the Company a certificate of its President or a Vice President, dated the Closing Date, to the foregoing effect.

        Section 7.2. Compliance with Agreement.    Each HCC Lender shall have performed and complied, in all material respects, with all covenants to be performed or complied with by it on or prior to the

18


Table of Contents


Closing Date. HCC shall have delivered to the Company a certificate of its President or a Vice President, dated the Closing Date, to the foregoing effect.

        Section 7.3. Revolving Credit Facility.    The Company shall have obtained a revolving credit facility from a third-party lender (the "Revolver") (with a term of not less than 360 days from the Closing Date) with availability of at least $30 million and on other terms and conditions reasonably acceptable to the Company, and Hallmark Cards shall have guaranteed, or caused one or more of its Affiliates to guarantee, the Revolver.

        Section 7.4. Corporate Documents.    The Company shall have received from HCC certified copies of the resolutions duly adopted by the board of directors of HCC and its Affiliates party hereto, as applicable, approving the execution and delivery of this Agreement and the Ancillary Documents and the consummation of the Transactions, and such resolutions shall be in full force and effect as of the Closing Date.


ARTICLE VIII.
CONDITIONS TO THE HCC LENDERS' OBLIGATIONS

        The obligation of each HCC Lender to consummate the Transactions is subject to the satisfaction (unless waived in writing by HCC) of each of the following conditions on or prior to the Closing Date:

        Section 8.1. Representations and Warranties.    The representations and warranties of the Debtors contained in this Agreement which are qualified as to materiality shall be true and correct on and as of the Closing Date as though such representations and warranties were made anew on and as of the Closing Date, and all other representations and warranties of the Debtors contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though such representations and warranties were made anew on and as of the Closing Date. The Company shall have delivered to HCC a certificate of its President or a Vice President, dated the Closing Date, to the foregoing effect.

        Section 8.2. Compliance with Agreement.    Each Debtor shall have performed and complied, in all material respects, with all covenants to be performed or complied with by it on or prior to the Closing Date. The Company shall have delivered to HCC a certificate of its President or a Vice President, dated the Closing Date, to the foregoing effect.

        Section 8.3. Proceedings.    Hallmark Cards shall not have delivered a written notice to the Company certifying that Hallmark Cards, in its sole discretion (but only after consultation with outside legal counsel), shall have determined that the status of any pending or threatened litigation (including, without limitation, the action styled S. Muoio & Co. LLC v. Abbott et al, C.A. No. 4729-CC (Del. Ch.)) or regulatory proceeding involving the Company or its Subsidiaries in connection with this Agreement and/or the Transactions shall be unsatisfactory to Hallmark Cards.

        Section 8.4. Corporate Documents.    HCC shall have received from the Company certified copies of the resolutions duly adopted by the board of directors or similar governing body of each Debtor approving the execution and delivery of this Agreement and the Ancillary Documents and the consummation of the Transactions, and such resolutions shall be in full force and effect as of the Closing Date.

        Section 8.5. Effective Credit Agreement.    All conditions to the effectiveness of the New Credit Agreement shall have been satisfied or waived by the party or parties, as applicable, entitled to the benefit thereof.

19


Table of Contents


ARTICLE IX.
THE CLOSING

        Section 9.1. The Closing.    The Closing of the transactions contemplated hereby (the "Closing") shall be held no later than ten (10) Business Days after each of the conditions precedent set forth in Articles VI, VII and VIII have been satisfied or waived by the party entitled to the benefit thereof or on such other date as the Company and HCC shall agree (the "Closing Date"). The Closing shall be held at the offices of Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019 or at such other place as the parties may mutually agree.

        Section 9.2. Deliveries by the Company at the Closing.    At the Closing, the Company shall deliver, or cause to be delivered, to HCC, copies of the following items:

            (a)   the certificates referred to in Sections 8.1 and 8.2, duly executed by the Company;

            (b)   the certified resolutions referred to in Section 8.4;

            (c)   the New Credit Agreement and all documents and agreements contemplated by the Credit Agreement, duly executed by the Debtors party thereto;

            (d)   the Revolving Credit Agreement, duly executed by the Company and the lender thereunder;

            (e)   the Registration Rights Agreement in the form attached hereto as Exhibit H (the "Registration Rights Agreement"), duly executed by the Company;

            (f)    the Amendment to the Tax Sharing Agreement in the form attached hereto as Exhibit I (the "Tax Sharing Agreement Amendment"), duly executed by the Company;

            (g)   evidence of filing of the Second Amended Charter with the Secretary of State of the State of Delaware;

            (h)   evidence of filing of the Certificate of Designation with the Secretary of State of the State of Delaware;

            (i)    stock certificates representing the New Securities to be issued pursuant to Section 2.2 hereof, duly executed by the Company; and

            (j)    all other previously undelivered documents that the Company is required to deliver to HCC or its Affiliates pursuant to this Agreement.

        Section 9.3. Deliveries by HCC at the Closing.    At the Closing, HCC shall deliver, or cause to be delivered, to the Company, the following items:

            (a)   the certificates referred to in Sections 7.1 and 7.2, duly executed by HCC;

            (b)   the certified resolutions referred to in Section 7.4;

            (c)   the New Credit Agreement, duly executed by HCC;

            (d)   the Registration Rights Agreement, duly executed by HCC;

            (e)   the Tax Sharing Agreement Amendment, duly executed by Hallmark Cards; and

            (f)    all other previously undelivered documents that HCC is required to deliver to the Company pursuant to this Agreement.

20


Table of Contents


ARTICLE X.
TERMINATION

        Section 10.1. Termination.    Anything in this Agreement to the contrary notwithstanding, this Agreement and the Transactions may be terminated in any of the following ways at any time before the Closing and in no other manner:

            (a)   By mutual written consent of all of the parties hereto;

            (b)   By either HCC or the Company upon written notice if a Governmental Entity of competent jurisdiction shall have enacted, issued or entered any restraining order, preliminary or permanent injunction or similar order or legal restraint or prohibition that enjoins or otherwise prohibits consummation of all or any part of the Transactions; or

            (c)   After the later of (i) June 30, 2010 and (ii) 45 days following receipt of notice that the Information Statement will not be reviewed by the SEC or that the SEC staff has no further comments thereon, by HCC or the Company (if such terminating party or any of its Affiliates is not then in default of any obligation hereunder), if the Closing has not occurred on or before such date;

provided, however, that the termination of this Agreement by the Company pursuant to this Section 10.1 shall not be effective unless it is first approved by the Special Committee.

        Section 10.2. Effect of Termination.    In the event this Agreement is terminated pursuant to Section 10.1, all further obligations of the parties hereunder shall terminate, except that Section 5.4 and Articles X and XI shall survive termination and except that nothing in this Section 10.2 shall relieve any party hereto of any liability for breach of any of the covenants or any of the representations or warranties contained in this Agreement prior to such termination.


ARTICLE XI.
MISCELLANEOUS PROVISIONS

        Section 11.1. Notices.    All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (a) when delivered personally to the recipient, (b) when sent to the recipient by telecopy (receipt electronically confirmed by sender's telecopy machine) if during normal business hours of the recipient, otherwise on the next Business Day, (c) one (1) Business Day after the date when sent to the recipient by reputable express courier service (charges prepaid), or (d) seven (7) Business Days after the date when mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the parties at the addresses indicated below:

If to the Debtors:   Crown Media Holdings, Inc.
12700 Ventura Boulevard
Studio City, California 91604
Attention: Chief Executive Officer


With a copy to:
(which shall not constitute notice)


 


Crown Media Holdings, Inc.
12700 Ventura Boulevard
Studio City, California 91604
Attention: Chief Financial Officer

21


Table of Contents


 

 

Crown Media Holdings, Inc.
12700 Ventura Boulevard
Studio City, California 91604
Attention: General Counsel


 


 


Richards, Layton & Finger, P.A.
920 N. King Street
Wilmington, Delaware 19801
Attention: Mark J. Gentile
Facsimile No. (302) 498-7722


If to the HCC Lenders:


 


Hallmark Cards, Incorporated
2501 McGee Trafficway
Kansas City, MO 64108
Attention: Chief Financial Officer
MD 319


With a copy to:
(which shall not constitute notice)


 


Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
Attention: Maurice M. Lefkort
Facsimile No. (212) 728-8111

or to such other address as either party hereto may, from time to time, designate in writing delivered pursuant to the terms of this Section.

        Section 11.2. Amendments.    The terms, provisions and conditions of this Agreement may not be changed, modified or amended in any manner except by an instrument in writing duly executed by all of the parties hereto. Any change, modification or amendment by the Company shall only be effective with the consent of the Special Committee.

        Section 11.3. No Waiver.    No failure on the part of the parties hereto to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.

        Section 11.4. Assignment and Parties in Interest.    

            (a)   Neither this Agreement nor any of the rights, duties, or obligations of any party hereunder may be assigned or delegated (by operation of law or otherwise) by any of the parties hereto except with the prior written consent of the other parties hereto; provided, however, that prior to or after the Closing, the HCC Lenders may assign any or all of their rights hereunder to any of their Affiliates, provided that no such assignment shall relieve such parties of their obligations hereunder.

            (b)   Except as provided in Section 2.3, this Agreement shall not confer any rights or remedies upon any person or entity other than the parties hereto and their respective permitted successors and assigns.

        Section 11.5. Expenses.    Except as expressly set forth in this Agreement, each party to this Agreement shall bear all legal, accounting, investment banking and other expenses incurred by it or on its behalf in connection with this Agreement and the Transactions.

22


Table of Contents

        Section 11.6. Entire Agreement.    This Agreement and the Ancillary Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof, supersedes and is in full substitution for any and all prior agreements and understandings among them relating to such subject matter, and no party shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any warranties, representations, indemnities, covenants, or agreements except as specifically set forth herein. The exhibits and schedules to this Agreement are hereby incorporated and made a part hereof and are an integral part of this Agreement.

        Section 11.7. Descriptive Headings.    The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.

        Section 11.8. Counterparts.    For the convenience of the parties, any number of counterparts of this Agreement may be executed by any one or more parties hereto, and each such executed counterpart shall be, and shall be deemed to be, an original, but all of which shall constitute, and shall be deemed to constitute, in the aggregate but one and the same instrument. Facsimile signatures will be treated as originals.

        Section 11.9. Governing Law; Jurisdiction.    

            (a)   This Agreement and the legal relations between the parties hereto shall be governed by and construed in accordance with the laws of the State of Delaware, applicable to contracts made and performed therein.

            (b)   Any and all claims arising out of, relating to or in connection with this Agreement or any of the Transactions or the subject matter hereof, shall be brought exclusively in the Court of Chancery of the State of Delaware or, if under applicable law exclusive jurisdiction over the matter is vested in the federal courts, the United States District Court for the District of Delaware (the "Designated Court"). Each of the parties hereto hereby irrevocably submits with regard to any such action or proceeding for itself and in respect of its property, generally and unconditionally, to the personal jurisdiction of the Designated Court and agrees that it will not bring any action whether in tort, contract or otherwise arising out of, relating to or in connection with this Agreement or any of the Transactions or the subject matter hereof in any court other than the Designated Court. Each of the parties hereto hereby irrevocably waives, and agrees not to assert as a defense, counterclaim or otherwise, in any action or proceeding with respect to this Agreement, (a) any claim that it is not personally subject to the jurisdiction of the Designated Court, (b) any claim that it or its property is exempt or immune from jurisdiction of the Designated Court or from any legal process commenced in such the Designated Court (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) and (c) to the fullest extent permitted by applicable law, any claim that (i) the suit, action or proceeding in such Designated Court is brought in an inconvenient forum, (ii) the venue of such suit, action or proceeding is improper or (iii) this Agreement, or the subject matter hereof, may not be enforced in or by such Designated Court.

            (c)   Each party acknowledges and agrees that any controversy which may arise under this Agreement is likely to involve complicated and difficult issues, and, therefore, each such party hereby irrevocably and unconditionally waives any right such party may have to a trial by jury in respect of any litigation directly or indirectly arising out of or relating to this Agreement or the Transactions. Each party certifies and acknowledges that (i) no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver, (ii) each party understands and has considered the implications of this waiver, (iii) each party makes this waiver voluntarily, and

23


Table of Contents


    (iv) each party has been induced to enter into this agreement by, among other things, the mutual waivers and certifications in this Section 11.9.

        Section 11.10. Construction.    The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. Any references to any federal, state, local or foreign statute or law will also refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Unless the context otherwise requires: (a) a term has the meaning assigned to it by this Agreement; (b) including means "including but not limited to"; (c) "or" is disjunctive but not exclusive; (d) words in the singular include the plural, and in the plural include the singular; and (e) "$" means the currency of the United States of America. No specific provision, representation or warranty shall limit the applicability of a more general provision, representation or warranty. It is the intent of the parties that each representation, warranty, covenant, condition and agreement contained in this Agreement shall be given full, separate, and independent effect and that such provisions are cumulative.

        Section 11.11. Severability.    In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible and be valid and enforceable.

        Section 11.12. Specific Performance.    Without limiting or waiving in any respect any rights or remedies of the HCC Lenders under this Agreement now or hereinafter existing at law or in equity or by statute, each of the parties hereto shall be entitled to seek specific performance of the obligations to be performed by the other in accordance with the provisions of this Agreement.

[Remainder of page intentionally left blank.]

24


Table of Contents

        IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first written above.


HALLMARK PARTIES

 

HALLMARK CARDS, INCORPORATED

 

 

By:

 

/s/ TIMOTHY GRIFFITH

Name: TIMOTHY GRIFFITH
Title:
EXECUTIVE VICE PRESIDENT—CFO

 

 

H C CROWN CORP.

 

 

By:

 

/s/ TIMOTHY GRIFFITH

Name: TIMOTHY GRIFFITH
Title:
VICE PRESIDENT

 

 

HALLMARK ENTERTAINMENT HOLDINGS, INC.

 

 

By:

 

/s/ TIMOTHY GRIFFITH

Name: TIMOTHY GRIFFITH
Title:
PRESIDENT

THE DEBTORS

 

CROWN MEDIA HOLDINGS, INC.

 

 

By:

 

/s/ CHARLES STANFORD

Name: CHARLES STANFORD
Title:
EXECUTIVE VICE PRESIDENT

 

 

CROWN MEDIA UNITED STATES, LLC

 

 

By:

 

/s/ CHARLES STANFORD

Name: CHARLES STANFORD
Title:
VICE PRESIDENT

 

 

CM INTERMEDIARY, LLC

 

 

By:

 

/s/ CHARLES STANFORD

Name: CHARLES STANFORD
Title:
VICE PRESIDENT

 

 

CITI TEEVEE, LLC

 

 

By:

 

/s/ CHARLES STANFORD

Name: CHARLES STANFORD
Title:
VICE PRESIDENT

 

 

DOONE CITY PICTURES, LLC

 

 

By:

 

/s/ CHARLES STANFORD

Name: CHARLES STANFORD
Title:
VICE PRESIDENT

Table of Contents

Schedule 1.1(a)

Sample Calculation of the

Conversion Price, the Conversion Price Shares and
the Shares to be issued pursuant to Section 2.2(b)(iii)

Assumptions:

Closing Date: April 30, 2010

HCC DebtDetermination is the HCC Debt as of the Determination Date: $1,142,468,389.

HCC DebtClosing is the HCC Debt as of the Closing Date: $1,149,011,446.

Step One: Calculate the Conversion Price Shares:

Conversion Price Shares + HCC SharesDetermination= 90.1% (Shares OutstandingDetermination + Conversion Price Shares + Option SharesDetermination)

Where:

HCC SharesDetermination are the shares owned directly or indirectly by the HCC Parties on the Date of Determination calculated pursuant to the definition of Conversion Price Shares = 69,997,656.

Shares OutstandingDetermination are the shares outstanding on the Date of Determination prior to the Closing = 104,788,076.

Option SharesDetermination = shares issuable upon exercise of all Outstanding Options on the Date of Determination = 85,813.

Solving that formula yields Conversion Price Shares of 247,411,294.

Step Two: Calculate the Conversion Price = (HCC DebtDetermination-500,000,000)/Conversion Price Shares

Solving the formula yields a Conversion Price of $2.5968.

Step Three: Calculate the number of shares of Common Stock to be issued pursuant to Section 2.2(b)(iii).

= (HCC DebtClosing -500,000,000)/Conversion Price

Solving the formula yields 249,927,390 shares of Common Stock to be issued pursuant to Section 2.2(b)(iii).


Table of Contents

Schedule 1.1(b)

Knowledge

William Abbott, President & Chief Executive Officer

Charles Stanford, Executive Vice President & General Counsel

Brian Stewart, Executive Vice President & Chief Financial Officer


Table of Contents

Schedule 3.4

Conflicts or Violations

None.


Table of Contents

Schedule 3.7

Litigation

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

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


Table of Contents

Schedule 3.8

Brokers

Morgan Stanley & Co.

Houlihan Lokey Howard & Zukin


Table of Contents


Exhibit A

CREDIT AGREEMENT

DATED AS OF                        , 2010

AMONG

CROWN MEDIA HOLDINGS, INC.

AS BORROWER

AND

HC CROWN CORP.,

AS LENDER

AND

EACH OF THE CREDIT
PARTIES IDENTIFIED ON
THE SIGNATURE PAGES HERETO


Table of Contents

TABLE OF CONTENTS

 
   
   
  Page

1.

  DEFINITIONS   1

2.

 

THE LOANS

 
12

  Section 2.1  

The Term A Loan

  12

  Section 2.2  

The Term B Loan

  12

  Section 2.3  

Deemed Making of the Loans

  12

  Section 2.4  

Notes; Repayment

  12

  Section 2.5  

Interest on Loans

  13

  Section 2.6  

Default Interest

  13

  Section 2.7  

Prepayment of Loans. Voluntary

  14

  Section 2.8  

Prepayment of Loans. Mandatory

  14

  Section 2.9  

Application of Mandatory and Voluntary Prepayments

  15

  Section 2.10  

Manner of Payments

  15

  Section 2.11  

United States Withholding

  15

  Section 2.12  

Debt Exchange Transaction

  16

  Section 2.13  

Change in Circumstances

  16

3.

 

REPRESENTATIONS AND WARRANTIES

 
17

  Section 3.1  

Corporate Existence and Power

  17

  Section 3.2  

Authority and No Violation

  17

  Section 3.3  

Governmental and Other Approvals

  17

  Section 3.4  

Financial Statements

  18

  Section 3.5  

No Material Adverse Change

  18

  Section 3.6  

Subsidiaries

  18

  Section 3.7  

Intellectual Property

  18

  Section 3.8  

Fictitious Names

  18

  Section 3.9  

Title to Properties

  19

  Section 3.10  

Litigation

  19

  Section 3.11  

Regulations T, U and X

  19

  Section 3.12  

Investment Company Act

  19

  Section 3.13  

Binding Agreements

  19

  Section 3.14  

Taxes

  19

  Section 3.15  

Compliance with ERISA and Applicable Law

  19

  Section 3.16  

Indebtedness; Guaranties; Liens

  20

  Section 3.17  

Security Interest

  20

  Section 3.18  

Disclosure

  20

  Section 3.19  

Environmental Liabilities

  20

  Section 3.20  

Compliance with Laws

  21

  Section 3.21  

Bank Accounts

  21

  Section 3.22  

Solvency

  21

  Section 3.23  

Fundamental Documents

  21

  Section 3.24  

Agreements

  21

  Section 3.25  

Licensed Rights

  21

4.

 

CONDITIONS TO EFFECTIVENESS

 
22

  Section 4.1  

Conditions Precedent to Effectiveness

  22

i


Table of Contents

 
   
   
  Page

5.

 

AFFIRMATIVE COVENANTS

  23

  Section 5.1  

Financial Statements and Reports

  23

  Section 5.2  

Corporate Existence

  24

  Section 5.3  

Maintenance of Properties

  25

  Section 5.4  

Notice of Material Events

  25

  Section 5.5  

Insurance

  25

  Section 5.6  

Music

  26

  Section 5.7  

Copyrights and Trademarks

  26

  Section 5.8  

Books and Records

  27

  Section 5.9  

Observance of Agreements

  27

  Section 5.10  

Laboratories; No Removal

  27

  Section 5.11  

Taxes and Charges in Ordinary Course of Business

  28

  Section 5.12  

Liens

  28

  Section 5.13  

ERISA Compliance and Reports

  28

  Section 5.14  

Subsidiaries

  28

  Section 5.15  

Environmental Laws

  29

  Section 5.16  

Further Assurances; Security Interests

  29

  Section 5.17  

Bank Accounts

  30

  Section 5.18  

Credit Ratings

  30

6.

 

NEGATIVE COVENANTS

 
30

  Section 6.1  

Limitations on Indebtedness

  30

  Section 6.2  

Limitations on Liens

  30

  Section 6.3  

Guaranties

  31

  Section 6.4  

Limitations on Investments

  32

  Section 6.5  

Restricted Payments

  32

  Section 6.6  

Limitations on Sale of Assets

  32

  Section 6.7  

Receivables

  33

  Section 6.8  

Tax Shelters, Sale and Leaseback etc

  33

  Section 6.9  

Places of Business; Change of Name

  33

  Section 6.10  

Limitations on Capital Expenditures

  33

  Section 6.11  

Transactions with Affiliates

  33

  Section 6.12  

Prohibition of Amendments or Waivers

  33