CRWN » Topics » Liquidity

These excerpts taken from the CRWN 10-K filed Mar 5, 2009.

Liquidity

        As of December 31, 2008, the Company had $2.7 million in cash and cash equivalents on hand and $21.4 million of current borrowing capacity under the bank credit facility. Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts supplemented with the borrowing capacity available under the bank credit facility and forbearance by Hallmark Cards and its affiliates. The Company's management anticipates that the principal uses of cash up to March 31, 2010, will include the payment of operating expenses, accounts payable and accrued expenses, programming costs, interest and repayment of principal under the bank credit facility and interest of approximately $20.0 million to $23.0 million due under certain notes to the Hallmark Cards affiliates.

        Operating activities for the years ended December 31, 2007 and 2008, yielded positive cash flow. However, there can be no assurance that the Company's operating activities will continue to generate positive cash flow.

        The Company's principal sources of funds are cash on hand; cash generated by operations and amounts available under the Company's revolving bank credit facility through March 31, 2010. Another significant aspect of the Company's liquidity is the deferral of payments on obligations owed to Hallmark Cards and its subsidiaries. In March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement (called as amended the "Waiver Agreement") which changed the maturity date of three obligations to December 31, 2009, and deferred payments under these and certain other obligations. Under an amendment of the Waiver Agreement in March 2009, the deferred payments under such obligations are extended to March 31, 2010, and additionally, payments, which may become due in 2009 from the Company to Hallmark Cards under the Tax Sharing Agreement, are added to the payments deferred until March 31, 2010.

        The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through March 31, 2010, when combined with the deferral of any required payments on related-party debt, any 2009 tax sharing payments and related interest on the 10.25%

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Table of Contents


CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2006, 2007 and 2008

1. Business and Organization (Continued)


Senior Secured Note described under the Waiver Agreement, will be sufficient to fund the Company's operations and enable the Company to meet its liquidity needs through March 31, 2010.

        The sufficiency of the existing sources of liquidity to fund the Company's operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the year ended December 31, 2008, and maintaining or increasing advertising revenue. A significant decline in the popularity of the Hallmark Channel, a further economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company's liquidity and its ability to fund the current level of operations. During the last three quarters of 2008, the Company experienced a softening of advertising rates in the direct response and scatter market. The Company expects this softening to continue throughout 2009 and has identified a number of contingency cost cutting measures that could be implemented in 2009 depending on market conditions, such as decreases in the number of marketing promotions and original movies produced.

        In March 2009, effective April 1, 2009, the bank credit facility's maturity date was extended to March 31, 2010, and the bank's lending commitment was set at $45.0 million. The Company's ability to pay amounts outstanding on the maturity date is highly dependent upon the Company's ability to generate sufficient, timely cash flow from operations between January 1, 2009 and March 31, 2010. There is uncertainty in the U.S. economy and the advertising market so it is possible that the cash flow may be less than the expectations of the Company's management.

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

        Because of the Company's possible inability to meet its obligations when they come due on and after March 31, 2010, and through December 31, 2010, the Company anticipates that prior to March 31, 2010, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including restructuring of the debt if possible, refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives. If the current credit market conditions continue, a restructuring or refinancing could be difficult.

Liquidity

        As of December 31, 2008, the Company had $2.7 million in cash and cash equivalents on hand and $21.4 million of current borrowing capacity under the bank credit facility. Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts supplemented with the borrowing capacity available under the bank credit facility and forbearance by Hallmark Cards and its affiliates. The Company's management anticipates that the principal uses of cash up to March 31, 2010, will include the payment of operating expenses, accounts payable and accrued expenses, programming costs, interest and repayment of principal under the bank credit facility and interest of approximately $20.0 million to $23.0 million due under certain notes to the Hallmark Cards affiliates.

        Operating activities for the years ended December 31, 2007 and 2008, yielded positive cash flow. However, there can be no assurance that the Company's operating activities will continue to generate positive cash flow.

        The Company's principal sources of funds are cash on hand; cash generated by operations and amounts available under the Company's revolving bank credit facility through March 31, 2010. Another significant aspect of the Company's liquidity is the deferral of payments on obligations owed to Hallmark Cards and its subsidiaries. In March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement (called as amended the "Waiver Agreement") which changed the maturity date of three obligations to December 31, 2009, and deferred payments under these and certain other obligations. Under an amendment of the Waiver Agreement in March 2009, the deferred payments under such obligations are extended to March 31, 2010, and additionally, payments, which may become due in 2009 from the Company to Hallmark Cards under the Tax Sharing Agreement, are added to the payments deferred until March 31, 2010.

        The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through March 31, 2010, when combined with the deferral of any required payments on related-party debt, any 2009 tax sharing payments and related interest on the 10.25%

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Table of Contents


CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2006, 2007 and 2008

1. Business and Organization (Continued)


Senior Secured Note described under the Waiver Agreement, will be sufficient to fund the Company's operations and enable the Company to meet its liquidity needs through March 31, 2010.

        The sufficiency of the existing sources of liquidity to fund the Company's operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the year ended December 31, 2008, and maintaining or increasing advertising revenue. A significant decline in the popularity of the Hallmark Channel, a further economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company's liquidity and its ability to fund the current level of operations. During the last three quarters of 2008, the Company experienced a softening of advertising rates in the direct response and scatter market. The Company expects this softening to continue throughout 2009 and has identified a number of contingency cost cutting measures that could be implemented in 2009 depending on market conditions, such as decreases in the number of marketing promotions and original movies produced.

        In March 2009, effective April 1, 2009, the bank credit facility's maturity date was extended to March 31, 2010, and the bank's lending commitment was set at $45.0 million. The Company's ability to pay amounts outstanding on the maturity date is highly dependent upon the Company's ability to generate sufficient, timely cash flow from operations between January 1, 2009 and March 31, 2010. There is uncertainty in the U.S. economy and the advertising market so it is possible that the cash flow may be less than the expectations of the Company's management.

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

        Because of the Company's possible inability to meet its obligations when they come due on and after March 31, 2010, and through December 31, 2010, the Company anticipates that prior to March 31, 2010, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including restructuring of the debt if possible, refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives. If the current credit market conditions continue, a restructuring or refinancing could be difficult.

Liquidity



        As of December 31, 2008, the Company had $2.7 million in cash and cash equivalents on hand and $21.4 million of
current borrowing capacity under the bank credit facility. Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts
supplemented with the borrowing capacity available under the bank credit facility and forbearance by Hallmark Cards and its affiliates. The Company's management anticipates that the principal uses of
cash up to March 31, 2010, will include the payment of operating expenses, accounts payable and accrued expenses, programming costs, interest and repayment of principal under the bank credit
facility and interest of approximately $20.0 million to $23.0 million due under certain notes to the Hallmark Cards affiliates.



        Operating
activities for the years ended December 31, 2007 and 2008, yielded positive cash flow. However, there can be no assurance that the Company's operating activities will
continue to generate positive cash flow.



        The
Company's principal sources of funds are cash on hand; cash generated by operations and amounts available under the Company's revolving bank credit facility through March 31,
2010. Another significant aspect of the Company's liquidity is the deferral of payments on obligations owed to Hallmark Cards and its subsidiaries. In March 2008, the Company and Hallmark Cards
entered into an Amended and Restated Waiver Agreement (called as amended the "Waiver Agreement") which changed the maturity date of three obligations to December 31, 2009, and deferred payments
under these and certain other obligations. Under an amendment of the Waiver Agreement in March 2009, the deferred payments under such obligations are extended to March 31, 2010, and
additionally, payments, which may become due in 2009 from the Company to Hallmark Cards under the Tax Sharing Agreement, are added to the payments deferred until March 31, 2010.



        The
Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through March 31, 2010, when combined with the
deferral of any required payments on related-party debt, any 2009 tax sharing payments and related interest on the 10.25%



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HREF="#bg75701a_main_toc">Table of Contents





CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the Years Ended December 31, 2006, 2007 and 2008




1. Business and Organization (Continued)






Senior
Secured Note described under the Waiver Agreement, will be sufficient to fund the Company's operations and enable the Company to meet its liquidity needs through March 31, 2010.



        The
sufficiency of the existing sources of liquidity to fund the Company's operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the year
ended December 31, 2008, and maintaining or increasing advertising revenue. A significant decline in the popularity of the Hallmark Channel, a further economic decline in the advertising
market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company's liquidity and its ability to fund
the current level of operations. During the last three quarters of 2008, the Company experienced a softening of advertising rates in the direct response and scatter market. The Company expects this
softening to continue throughout 2009 and has identified a number of contingency cost cutting measures that could be implemented in 2009 depending on market conditions, such as decreases in the number
of marketing promotions and original movies produced.



        In
March 2009, effective April 1, 2009, the bank credit facility's maturity date was extended to March 31, 2010, and the bank's lending commitment was set at
$45.0 million. The Company's ability to pay amounts outstanding on the maturity date is highly dependent upon the Company's ability to generate sufficient, timely cash flow from operations
between January 1, 2009 and March 31, 2010. There is uncertainty in the U.S. economy and the advertising market so it is possible that the cash flow may be less than the expectations of
the Company's management.



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




        Because
of the Company's possible inability to meet its obligations when they come due on and after March 31, 2010, and through December 31, 2010, the Company anticipates
that prior to March 31, 2010, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark
Cards. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including restructuring of the debt if possible, refinancing the
bank credit facility, raising additional capital through the issuance of equity
or debt securities, or other strategic alternatives. If the current credit market conditions continue, a restructuring or refinancing could be difficult.




Liquidity



        As of December 31, 2008, the Company had $2.7 million in cash and cash equivalents on hand and $21.4 million of
current borrowing capacity under the bank credit facility. Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts
supplemented with the borrowing capacity available under the bank credit facility and forbearance by Hallmark Cards and its affiliates. The Company's management anticipates that the principal uses of
cash up to March 31, 2010, will include the payment of operating expenses, accounts payable and accrued expenses, programming costs, interest and repayment of principal under the bank credit
facility and interest of approximately $20.0 million to $23.0 million due under certain notes to the Hallmark Cards affiliates.



        Operating
activities for the years ended December 31, 2007 and 2008, yielded positive cash flow. However, there can be no assurance that the Company's operating activities will
continue to generate positive cash flow.



        The
Company's principal sources of funds are cash on hand; cash generated by operations and amounts available under the Company's revolving bank credit facility through March 31,
2010. Another significant aspect of the Company's liquidity is the deferral of payments on obligations owed to Hallmark Cards and its subsidiaries. In March 2008, the Company and Hallmark Cards
entered into an Amended and Restated Waiver Agreement (called as amended the "Waiver Agreement") which changed the maturity date of three obligations to December 31, 2009, and deferred payments
under these and certain other obligations. Under an amendment of the Waiver Agreement in March 2009, the deferred payments under such obligations are extended to March 31, 2010, and
additionally, payments, which may become due in 2009 from the Company to Hallmark Cards under the Tax Sharing Agreement, are added to the payments deferred until March 31, 2010.



        The
Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through March 31, 2010, when combined with the
deferral of any required payments on related-party debt, any 2009 tax sharing payments and related interest on the 10.25%



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HREF="#bg75701a_main_toc">Table of Contents





CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the Years Ended December 31, 2006, 2007 and 2008




1. Business and Organization (Continued)






Senior
Secured Note described under the Waiver Agreement, will be sufficient to fund the Company's operations and enable the Company to meet its liquidity needs through March 31, 2010.



        The
sufficiency of the existing sources of liquidity to fund the Company's operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the year
ended December 31, 2008, and maintaining or increasing advertising revenue. A significant decline in the popularity of the Hallmark Channel, a further economic decline in the advertising
market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company's liquidity and its ability to fund
the current level of operations. During the last three quarters of 2008, the Company experienced a softening of advertising rates in the direct response and scatter market. The Company expects this
softening to continue throughout 2009 and has identified a number of contingency cost cutting measures that could be implemented in 2009 depending on market conditions, such as decreases in the number
of marketing promotions and original movies produced.



        In
March 2009, effective April 1, 2009, the bank credit facility's maturity date was extended to March 31, 2010, and the bank's lending commitment was set at
$45.0 million. The Company's ability to pay amounts outstanding on the maturity date is highly dependent upon the Company's ability to generate sufficient, timely cash flow from operations
between January 1, 2009 and March 31, 2010. There is uncertainty in the U.S. economy and the advertising market so it is possible that the cash flow may be less than the expectations of
the Company's management.



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




        Because
of the Company's possible inability to meet its obligations when they come due on and after March 31, 2010, and through December 31, 2010, the Company anticipates
that prior to March 31, 2010, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark
Cards. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including restructuring of the debt if possible, refinancing the
bank credit facility, raising additional capital through the issuance of equity
or debt securities, or other strategic alternatives. If the current credit market conditions continue, a restructuring or refinancing could be difficult.




This excerpt taken from the CRWN 10-Q filed Nov 6, 2008.

Liquidity

 

As of September 30, 2008, the Company had $4.3 million in cash and cash equivalents on hand and $14.8 million of current borrowing capacity under the bank credit facility.  Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts supplemented with the borrowing capacity available under the bank credit facility and forbearance by Hallmark Cards and its affiliates.

 

Operating activities for the year ended December 31, 2007, yielded positive cash flow as have the nine months ended September 30, 2008.  However, there can be no assurance that the Company’s operating activities will continue to generate positive cash flow.

 

The Company’s principal sources of funds are cash on hand, cash generated by operations and amounts available under the Company’s revolving bank credit facility through May 31, 2009.  Another significant aspect of the Company’s liquidity is the deferral of payments on obligations owed to Hallmark Cards and its subsidiaries.  In March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement which changed the maturity date of three obligations and deferred payments under certain obligations.  Under an amendment in October 2008, the deferred payments under these obligations were extended to October 1, 2009. However, under the Waiver Agreement, interest on the 2001, 2005 and 2006 Notes that accrues from November 16, 2008, through December 31, 2008,  is payable in cash in January 2009; subsequent quarterly accrued interest is payable in cash 5 days after each quarterly period.  See Note 6 Related Party Long-Term Obligations – Waiver and Standby Purchase Agreement.

 

The Waiver Agreement requires that Excess Cash Flow as defined in the Waiver Agreement be used to make payments due under the bank credit facility or to pay obligations subject to the Waiver Agreement.  The Company has budgeted and anticipates that it will have substantial Excess Cash Flow for the year ended December 31, 2008 and that this amount will be used to make a reduction in the bank credit facility during the first quarter of 2009.  See Note 6.  However, the existence and amounts of any Excess Cash Flow depend on the Company’s results and cash flow for the remainder of 2008.

 

The Company may incur a tax liability to Hallmark Cards in 2009 pursuant to the Tax Sharing Agreement that could result in a cash amount being payable to Hallmark Cards in the second quarter of 2009 unless Hallmark Cards agrees to defer any such tax liability. Additionally, we expect to repay the remaining balance under the Tax Note before its due date of July 27, 2009, through non-cash sources. See Note 7 Related Party Transactions – Tax Sharing Agreement.

 

The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through May 31, 2009, when combined with the deferral of any required payments on related-party debt and related interest described under the Waiver Agreement, and, if necessary, Hallmark Cards’ purchase of any outstanding indebtedness under the bank credit facility in May 2009 as described

 

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below, will be sufficient to fund the Company’s operations and enable the Company to meet its liquidity needs through October 1, 2009.

 

In March 2008, the bank credit facility’s was extended to May 31, 2009, and the bank’s lending commitment was reduced to $50.0 million on September 30, 2008, at which time the Company owed $35.2 million on the facility. The bank’s commitment will decrease further to $45.0 million on March 31, 2009.  Such decrease was made in accordance with the March 2008 amendment to the bank credit facility.  The Company plans to use cash flows from operations to reduce outstanding borrowings under the facility and expects this cash flow to be sufficient to maintain outstanding borrowings under the commitment levels throughout the remaining term of the facility.  Accordingly, the Company’s ability to comply with the scheduled reduction in the Bank credit facility and to pay any amounts outstanding upon the maturity is highly dependent upon the Company’s ability to generate sufficient cash flows from operations between September 30, 2008, and May 31, 2009.  See Note 5 Credit Facility.

 

The Company will endeavor to extend or refinance the bank credit facility prior to or upon its maturity.  Any such extension or refinancing could require the continuation of a letter of credit from Hallmark Cards in support of the bank credit facility or other steps by the Company and, thus, is not assured.  Upon maturity of the credit facility on May 31, 2009, if the facility has not been paid in full, renewed or replaced (1) JP Morgan Chase Bank, N.A., would have the right to draw down on Hallmark Cards’ irrevocable letter of credit or (2) Hallmark Cards could purchase the interest of the lending bank in the facility.  In either case, Hallmark Cards would have all the obligations and rights of the lending bank under the bank credit facility and could demand payment of outstanding amounts at any time after October 1, 2009 under the terms of the Waiver Agreement.  Upon maturity of the credit facility on May 31, 2009, if not paid in full, renewed or replaced, the lending bank could forego drawing down on Hallmark Cards irrevocable letter of credit and, alternatively, foreclose on the Company’s assets. Such foreclosure proceedings would adversely affect our ability to continue our operations. However, prior to any such possible foreclosure, if the Company had not secured a refinancing of the credit facility or alternative financing, the Company would require Hallmark Cards to exercise its option, pursuant to the terms of the Waiver Agreement, to purchase all of the outstanding indebtedness under the credit facility. The amount purchased would then be subject to terms of the Waiver Agreement.

 

The sufficiency of the existing sources of liquidity to fund the Company’s operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the nine months ended September 30, 2008, and continuing growth in advertising revenue. A significant decline in the popularity of the Hallmark Channel, a significant economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company’s liquidity and its ability to fund the current level of operations.  During the second and third quarters of 2008 the Company experienced a softening of advertising rates in the direct response and scatter market.  Despite the significant decline in economic conditions nationally, and within the advertising industry, these conditions did not materially impact the Company’s ability to fund current and expected levels of cash needed for operations.  The Company expects this softening to continue through at least the second quarter of 2009, but, similarly, does not currently expect these changing market conditions to materially impact the Company’s ability to pay its obligations as they become due.

 

       The Company’s long-term obligations include notes payable to Hallmark Cards or affiliates of Hallmark Cards which are the subject of the Waiver Agreement.  These obligations include Notes issued in 2001, 2005 and 2006 which mature on December 31, 2009, and amounts currently due under these notes at September 30, 2008, are $337.0 million Additionally, at September 30, 2008, non-interest bearing unpaid accrued service fees and unreimbursed expenses of $14.8 million were included in payable to affiliates on the accompanying condensed consolidated balance sheet.

 

Because of the Company’s possible inability to meet its obligations when they come due on and after October 1, 2009 and through December 31, 2009, the Company anticipates that prior to October 1, 2009, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit facility, raising

 

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additional capital through the issuance of equity or debt securities, or other strategic alternatives. If the current credit market conditions continue, a refinancing could be difficult.

 

Upon maturity of the bank credit facility on May 31, 2009, the Company will not have a comparable credit facility.  In that case, the Company would be solely dependent upon day-to-day operating cash receipts to meets its cash requirements.

 

This excerpt taken from the CRWN 10-Q filed Aug 6, 2008.

Liquidity

 

As of June 30, 2008, the Company had $277,000 in cash and cash equivalents on hand and borrowing capacity under the bank credit facility of $5.5 million.  Day-to-day cash disbursement requirements have typically been satisfied with cash on hand and operating cash receipts supplemented with the borrowing capacity available under the bank credit facility.

 

Operating activities for the year ended December 31, 2007, yielded positive cash flow as have the first two quarters of 2008.  However, there can be no assurance that the Company’s operating activities will continue to generate positive cash flow.

 

In March 2008, the bank credit facility was extended to May 31, 2009, and the bank’s lending commitment was reduced to $90.0 million.  This commitment decreased to $60.0 million on June 30, 2008, at which time the Company owed $54.5 million. The bank’s commitment will decrease further to $50.0 million on September 30, 2008, and $45.0 million on March 31, 2009.  The Company believes that its ability to comply with the scheduled reductions in borrowing capacity and to pay any amount outstanding upon maturity is highly dependent upon its ability to generate cash flows from operations between June 30, 2008, and the respective dates on which the commitment will be reduced or otherwise expire.  See Note 5.

 

Also in March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement which changed the maturity date of three obligations and deferred payments under certain obligations.  See Note 6.

 

Previously, the Company’s tax sharing agreement with Hallmark Cards has also been a source of cash from financing activities. More recently, benefits to the Company under the tax sharing agreement have been used to reduce amounts owed to Hallmark Cards and its affiliates.  Nonetheless, pursuant to the provisions of the tax sharing agreement, the Company may be required to pay cash to Hallmark Cards as early as May 2009.

 

The Company’s recurring net loss situation necessitates that we continue to monitor and control all areas of expenses, including programming, marketing and distribution.  The Company anticipates that its principal uses of cash during the next twelve months will continue to include the payment of operating expenses, accounts payable and accrued expenses, license fees for programming, interest and repayment of principal

 

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under its bank credit facility, interest under certain notes payable to Hallmark Cards affiliates and payments under the tax sharing agreement with Hallmark Cards. If the Company has excess cash flows, as defined in the Waiver Agreement, for the year ended December 31, 2008, the Company will be required to use such excess cash flow in the first quarter of 2009 to reduce debt under the bank credit facility or obligations to Hallmark Cards and its affiliates.  See Note 6.

 

The sufficiency of the existing sources of liquidity to fund the Company’s operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the six months ended June 30, 2008, and continuing growth in advertising revenue. A significant decline in the popularity of the Hallmark Channel, a significant economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company’s liquidity and its ability to fund the current level of operations.  During the second quarter of 2008 the Company experienced a softening of advertising rates in the scatter market.  The Company expects this softening to continue through the fourth quarter of 2008.

 

The Company will endeavor to extend or refinance the bank credit facility prior to or upon its maturity.  Any such extension or refinancing could require the continuation of a letter of credit from Hallmark Cards in support of the bank credit facility or other steps by the Company and, thus, is not assured.  Upon maturity of the credit facility on May 31, 2009, without payment in full, renewal or replacement, JP Morgan Chase Bank, N.A., will have the right to forego a call on Hallmark Cards’ irrevocable letter of credit and instead initiate foreclosure against the Company’s assets. Such foreclosure proceedings would adversely affect our ability to continue our operations. However, prior to any such possible foreclosure, if the Company had not secured a refinancing of the credit facility or alternative financing, the Company would require Hallmark Cards to exercise its option, pursuant to the terms of the Waiver Agreement, to purchase all of the outstanding indebtedness under the credit facility. The credit facility would then be subject to terms of the Waiver Agreement.

 

The 2001, 2005 and 2006 notes mentioned below mature on December 31, 2009. Amounts currently due under these notes are $105.4 million, $165.1 million and $60.2 million, respectively. The Tax Note in the amount of $11.1 million matures on July 27, 2009. Additionally, at June 30, 2008, non-interest bearing unpaid accrued service fees and unreimbursed expenses of $14.6 million were included in payable to affiliates on the accompanying consolidated balance sheet. Finally, VISN owns a $25.0 million company obligated mandatorily redeemable preferred membership interest in Crown Media United States that is redeemable no later than December 31, 2010.

 

Because of the Company’s possible inability to meet its obligations when they come due on May 31, 2009 and later dates in 2009 through December 31, 2009, the Company anticipates that prior to May 2009, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards described in the Notes below. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives.

 

The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through May 31, 2009, when combined with the deferral of any required payments on related-party debt and related interest described below, and, if necessary, Hallmark Cards’ purchase of the outstanding indebtedness under the bank credit facility in May 2009 as described below, will be sufficient to fund the Company’s operations and enable the Company to meet its liquidity needs through June 30, 2009.

 

Finally, if the Company fulfills its obligation to repay the bank credit facility by May 31, 2009, but thereafter, does not have a comparable credit facility, the Company will be solely dependent upon day-to-day operating cash receipts to meets its cash disbursement requirements.

 

8



This excerpt taken from the CRWN 10-Q filed May 7, 2008.

Liquidity

 

As of March 31, 2008, the Company had $3.0 million in cash and cash equivalents on hand. As of March 31, 2008, the Company had borrowed $71.7 million from the $90.0 million revolving bank credit facility.  In March 2008, the bank credit facility was extended until May 31, 2009, and the committed amount of the facility was reduced to $90.0 million.  This commitment will decrease to $60.0 million on June 30, 2008, and thereafter, to $50.0 million on September 30, 2008, and $45.0 million on March 31, 2009.  The Company will use cash flows from operations to reduce outstanding borrowings under the facility and expects these reductions to be sufficient to maintain outstanding borrowings below the commitment levels throughout the term of the facility. See Note 5.

 

The Company’s principal sources of funds are cash on hand, cash generated by operations and amounts available under the Company’s revolving bank credit facility through May 31, 2009.  In addition, in March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement which changes the maturity date of three obligations and defers payments under certain obligations.  See Note 6.  Previously, the Company’s tax sharing agreement with Hallmark Cards has also been a source of cash. However, we do not expect to receive or pay any cash related to this agreement in the next twelve months.

 

The Company expects to continue making investments in programming, marketing and distribution during 2008. However, the Company’s recurring loss situation has demanded that all areas of expenses, including programming, marketing and distribution be closely monitored and controlled.

 

The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through May 31, 2009, when combined with the deferral of any required payments on related-party debt and related interest mentioned below, will be sufficient to fund the Company’s operations and meet its liquidity needs through March 31, 2009.  The Company anticipates that its principal uses of cash during the next twelve months will continue to include the payment of operating expenses, accounts payable and accrued expenses, license fees for programming, interest and repayment of principal under its bank credit facility and interest under certain notes payable to Hallmark Cards affiliates.

 

The sufficiency of the existing sources of liquidity to fund the Company’s operations is dependent upon maintaining subscriber revenue at or above the amount of such revenue for the quarter ended March 31, 2008, and continuing growth in advertising revenue. A significant decline in the popularity of the Hallmark

 

7



 

Channel, an adverse modification to any of the Company’s distribution agreements, an economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company’s liquidity and its ability to fund the current level of operations.

 

The Company will endeavor to extend or refinance the bank credit facility prior to or upon its maturity.  Any such extension or refinancing could require a continuation of a letter of credit from Hallmark Cards in support of the bank credit facility or other steps by the Company and, thus, is not assured.  If the Company is not able to arrange for the extension, refinancing or replacement of the bank credit facility prior to its maturity and either (1) the bank draws down on Hallmark Cards’ irrevocable letter of credit or (2) Hallmark Cards purchases the interests of the lending bank, Hallmark Cards would have all obligations and rights of the lending banks under the bank credit facility. In that event, Hallmark Cards could demand payment of outstanding amounts at any time after March 31, 2009, under the terms of the Waiver Agreement described below.

 

Upon maturity of the credit facility on May 31, 2009, without renewal or replacement, JP Morgan Chase Bank, N.A., will have the right to forego a call on Hallmark Cards’ irrevocable letter of credit and instead initiate foreclosure against the Company’s assets. Such foreclosure proceedings would adversely affect our ability to continue our operations. However, prior to any such possible foreclosure, if the Company had not secured a refunding of the credit facility or alternative financing, the Company would require Hallmark Cards to exercise its option, pursuant to the terms of the Waiver Agreement, to purchase all of the outstanding indebtedness under the credit facility. The credit facility would then be subject to terms of the Waiver Agreement.

 

Because of the Company’s possible inability to meet its obligations when they come due on March 31, 2009 and later dates in 2009 through December 31, 2009, the Company anticipates that prior to March 2009, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards described in the Notes below. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives.

 

These excerpts taken from the CRWN 10-K filed Mar 12, 2008.

Liquidity

        As of December 31, 2007, the Company had $2.0 million in cash and cash equivalents on hand. As of December 31, 2007, the Company had borrowed $69.5 million from the $130.0 million revolving bank credit facility. In March 2008, the bank credit facility was extended until May 31, 2009, and the committed amount of the facility was reduced to $90.0 million. This commitment will decrease to $60.0 million on June 30, 2008, and thereafter, to $50.0 million on September 30, 2008, and $45.0 million on March 31, 2009. The Company will use cash flows from operations to reduce outstanding borrowings under the facility and expects these reductions to be sufficient to maintain outstanding borrowings below the commitment levels throughout the term of the facility. See Note 9.

        The Company's principal sources of funds are cash on hand, cash generated by operations and amounts available under the Company's revolving bank credit facility through May 31, 2009. In addition, in March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement which changes the maturity date of three obligations and defers payments under certain obligations. See Note 10. Previously, the Company's tax sharing agreement with Hallmark Cards has also been a source of cash. However, we do not expect to receive or pay any cash related to this agreement in the next twelve months.

        The Company expects to continue making investments in programming, marketing and distribution during 2008. However, the Company's recurring loss situation has demanded that all areas of expenses, including programming, marketing and distribution be closely monitored and controlled.

        The Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through May 31, 2009, when combined with the deferral of any required payments on related-party debt and related interest mentioned below, will be sufficient to fund the Company's operations and meet its liquidity needs through March 31, 2009. The Company anticipates that its principal uses of cash during the next twelve months will continue to include the payment of operating expenses, accounts payable and accrued expenses, license fees for programming, interest and repayment of principal under its bank credit facility and interest under certain notes payable to Hallmark Cards affiliates.

        The sufficiency of the existing sources of liquidity to fund the Company's operations is dependent upon continued growth in subscriber revenue and advertising revenue. A significant decline in the popularity of the Hallmark Channel, an adverse modification of any of the Company's significant

F-12


CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended December 31, 2005, 2006 and 2007

1. Business and Organization (Continued)


distribution agreements, an economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could negatively impact the Company's liquidity and its ability to fund the current level of operations.

        The Company will endeavor to extend or refinance the bank credit facility prior to or upon its maturity. Any such extension or refinancing could require a continuation of a letter of credit from Hallmark Cards in support of the bank credit facility or other steps by the Company and, thus, is not assured. If the Company is not able to arrange for the extension, refinancing or replacement of the bank credit facility prior to its maturity and either (1) the bank draws down on Hallmark Cards' irrevocable letter of credit or (2) Hallmark Cards purchases the interests of the lending bank, Hallmark Cards would have all obligations and rights of the lending banks under the bank credit facility. In that event, Hallmark Cards could demand payment of outstanding amounts at any time after March 31, 2009, under the terms of the Waiver Agreement described below.

        Upon maturity of the credit facility on May 31, 2009, without renewal or replacement, JP Morgan Chase Bank, N.A., will have the right to forego a call on Hallmark Cardsf irrevocable letter of credit and instead initiate foreclosure against the Company's assets. Such foreclosure proceedings would adversely affect our ability to continue our operations. However, prior to any such possible foreclosure, if the Company had not secured a refunding of the credit facility or alternative financing, the Company would require Hallmark Cards to exercise its option, pursuant to the terms of the Waiver Agreement, to purchase all of the outstanding indebtedness under the credit facility. The credit facility would then be subject to terms of the Waiver Agreement.

        Because of the Company's possible inability to meet its obligations when they come due on March 31, 2009 and later dates in 2009 through December 31, 2009, the Company anticipates that prior to March 2009, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards described in the Notes below. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives.

Liquidity



        As of December 31, 2007, the Company had $2.0 million in cash and cash equivalents on hand. As of December 31, 2007, the Company had borrowed
$69.5 million from the $130.0 million revolving bank credit facility. In March 2008, the bank credit facility was extended until May 31, 2009, and the committed amount of the
facility was reduced to $90.0 million. This commitment will decrease to $60.0 million on June 30, 2008, and thereafter, to $50.0 million on September 30, 2008, and
$45.0 million on March 31, 2009. The Company will use cash flows from operations to reduce outstanding borrowings under the facility and expects these reductions to be sufficient to
maintain outstanding borrowings below the commitment levels throughout the term of the facility. See Note 9.




        The
Company's principal sources of funds are cash on hand, cash generated by operations and amounts available under the Company's revolving bank credit facility through May 31,
2009. In addition, in March 2008, the Company and Hallmark Cards entered into an Amended and Restated Waiver Agreement which changes the maturity date of three obligations and defers payments under
certain obligations. See Note 10. Previously, the Company's tax sharing agreement with Hallmark Cards has also been a source of cash. However, we do not expect to receive or pay any cash
related to this agreement in the next twelve months.



        The
Company expects to continue making investments in programming, marketing and distribution during 2008. However, the Company's recurring loss situation has demanded that all areas of
expenses, including programming, marketing and distribution be closely monitored and controlled.



        The
Company believes that cash on hand, cash generated by operations, and borrowing availability under its bank credit facility through May 31, 2009, when combined with the
deferral of any required payments on related-party debt and related interest mentioned below, will be sufficient to fund the Company's operations and meet its liquidity needs through March 31,
2009. The Company anticipates that its principal uses of cash during the next twelve months will continue to include the payment of operating expenses, accounts payable and accrued expenses, license
fees for programming, interest and repayment of principal under its bank credit facility and interest under certain notes payable to Hallmark Cards affiliates.



        The
sufficiency of the existing sources of liquidity to fund the Company's operations is dependent upon continued growth in subscriber revenue and advertising revenue. A significant
decline in the popularity of the Hallmark Channel, an adverse modification of any of the Company's significant



F-12








CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the Years Ended December 31, 2005, 2006 and 2007



1. Business and Organization (Continued)






distribution
agreements, an economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse changes in operating conditions could
negatively impact the Company's liquidity and its ability to fund the current level of operations.




        The
Company will endeavor to extend or refinance the bank credit facility prior to or upon its maturity. Any such extension or refinancing could require a continuation of a letter of
credit from Hallmark Cards in support of the bank credit facility or other steps by the Company and, thus, is not assured. If the Company is not able to arrange for the extension, refinancing or
replacement of the bank credit facility prior to its maturity and either (1) the bank draws down on Hallmark Cards' irrevocable letter of credit or (2) Hallmark Cards purchases the
interests of the lending bank, Hallmark Cards would have all obligations and rights of the lending banks under the bank credit facility. In that event, Hallmark Cards could demand payment of
outstanding amounts at any time after March 31, 2009, under the terms of the Waiver Agreement described below.




        Upon
maturity of the credit facility on May 31, 2009, without renewal or replacement, JP Morgan Chase Bank, N.A., will have the right to forego a call on Hallmark Cardsf
irrevocable letter of credit and instead initiate foreclosure against the Company's assets. Such foreclosure proceedings would adversely affect our ability to continue our operations. However, prior
to any such possible foreclosure, if the Company had not secured a refunding of the credit facility or alternative financing, the Company would require Hallmark Cards to exercise its option, pursuant
to the terms of the Waiver Agreement, to purchase all of the outstanding indebtedness under the credit facility. The credit facility would then be subject to terms of the Waiver Agreement.




        Because
of the Company's possible inability to meet its obligations when they come due on March 31, 2009 and later dates in 2009 through December 31, 2009, the Company
anticipates that prior to March 2009, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark
Cards described in the Notes below. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit
facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives.




This excerpt taken from the CRWN 10-Q filed Nov 8, 2007.

Liquidity

 

As of September 30, 2007, the Company had $3,000 in cash and cash equivalents on hand. As of September 30, 2007, the Company had borrowed $80.9 million from a $130.0 million revolving bank credit facility, which matures May 31, 2008.

 

The Company’s principal sources of funds are cash on hand, cash generated by operations and amounts available under the Company’s revolving bank credit facility. Previously, the Company’s tax sharing agreement with Hallmark Cards has also been a source of cash. However, we do not expect to receive or pay any cash related to this agreement in the next twelve months.

 

The sufficiency of the existing sources of liquidity to fund the Company’s operations is dependent upon continued growth in subscriber revenue and advertising revenue. Any decline in the popularity of the Hallmark Channel, any significant future adverse modifications to the Company’s distribution agreements, an economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse operating conditions would negatively impact the Company’s liquidity and its ability to fund the current level of operations.

 

The Company expects to continue making investments in programming, marketing and distribution. However, the Company’s recurring loss situation has demanded that all areas of expenses, including programming, marketing and distribution be closely monitored and controlled.

 

The Company currently believes that cash on hand, cash generated by operations and borrowing availability under its bank credit facility, when combined with the deferral of any required payments on related-party debt and related interest mentioned below, will be sufficient to fund the Company’s operations and meet its liquidity needs through November 15, 2008.  The Company anticipates that its principal uses of cash during the next twelve months will continue to include the payment of operating expenses, accounts payable and accrued expenses, license fees for programming, and interest under its bank credit facility. This paragraph is qualified in its entirety with respect potential consequences of the Put Right described below.

 

The Company intends to extend or refinance the Bank credit facility prior to or upon its maturity. Any such extension or refinancing might require a continuation of a letter of credit from Hallmark Cards or other steps by the Company and, thus, is not assured. If the Company is not able to arrange for the extension, refinancing or replacement of the bank credit facility prior to its maturity and either (1) the bank draws down on the irrevocable letter of credit provided by Hallmark Cards in support of the bank credit facility or

 

7



 

(2) Hallmark Cards purchases the interests of the lending banks, Hallmark Cards would have all obligations and rights of the lending banks under the bank credit facility. In that event, Hallmark Cards could demand payment of outstanding amounts at any time after November 15, 2008, under the terms of the waiver and standby purchase agreement (“Waiver Agreement”) described below.

 

Upon maturity of the credit facility on May 31, 2008, the lending group led by JP Morgan Chase has the right to elect to forego the receipt of cash to pay the principal amount of the credit facility in full, which is provided for under the terms of an irrevocable letter of credit provided by Hallmark Cards, and instead may elect to initiate a process to foreclose on the Company’s assets. Such foreclosure proceedings would adversely affect our ability to continue our operations. Prior to any such possible foreclosure proceedings, however, the Company, if it has not secured an extension of the credit facility or alternative financing, would cause Hallmark Cards pursuant to the terms of the Waiver Agreement to exercise its option to purchase all of the outstanding indebtedness under the credit facility and the credit facility would then be subject to terms of the Waiver Agreement.

 

Because of the Company’s possible inability to meet its obligations when they come due in November 2008, the Company anticipates that prior to November 15, 2008, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards described in the Notes below. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, or other strategic alternatives.

 

This excerpt taken from the CRWN 10-Q filed Aug 8, 2007.

Liquidity

As of June 30, 2007, the Company had $6.9 million in cash and cash equivalents on hand. As of June 30, 2007, the Company had borrowed $91.6 million from a $130.0 million revolving bank credit facility, which matures May 31, 2008.

The Company’s principal sources of funds are cash on hand, cash generated by operations and amounts available under the Company’s revolving bank credit facility. The Company’s tax sharing agreement with Hallmark Cards has previously also been a source of cash. However, we do not expect to receive or pay any cash related to this agreement in the next twelve months.

As of the date of this report, we believe that it is reasonably possible that the Put Right described in Note 11 below regarding shares of our Class A common stock owned by National Interfaith Cable Coalition, Inc. (“NICC”) will be exercisable between August 30, 2007, and November 1, 2007.  In such event, we also believe that it would be reasonably possible that NICC would exercise the Put Right upon which we would be required to buy all such shares (4.4 million shares as of June 30, 2007) at the then current market value.  NICC’s exercise of the Put Right would cost the Company approximately $28.8 million, based on the closing stock price of Class A common stock on August 3, 2007, of $6.61.  We likely would need to finance such a redemption using funds obtained from outside sources.  It is also possible that NICC and its affiliates might sell our shares on the open market or otherwise decide not to exercise the Put Right.  Our liquidity during the remainder of 2007 and our discussions and expectations regarding liquidity through August 15, 2008, are highly dependent upon our ability to raise capital through external sources in the event NICC exercises the Put Right.

The Company believes that, under the Put Right, NICC could not require us to buy approximately 634,000 additional Crown shares that NICC invested in HEIC to facilitate the Company’s participation in the tax sharing agreement.  However, if the Company negotiated a redemption of such shares, the Company would require an additional $4.2 million of funding, based on the August 3, 2007 price.

There is no certainty that the Put Right will be exercised.  However, the Company has commenced a preliminary analysis of funding alternatives.  Among the Company’s considerations is the effect, if any, that a funding alternative may have on the Company’s ability to continue participation in the tax sharing agreement with Hallmark Cards.  If the Company is unable to continue participation in the tax sharing agreement, the Company would not receive any benefit from tax operating loss carryforwards until such time as the Company reports taxable income.

The Company currently has $38.4 million of unused revolving credit capacity. The Company’s ability to borrow additional amounts under the current credit facility is not limited or restricted as long as no covenants, representations or warranties are violated. The Company was in compliance with these covenants at June 30, 2007.

7




The sufficiency of the existing sources of liquidity to fund the Company’s operations is dependent upon continued growth in subscriber revenue and advertising revenue. Any decline in the popularity of the Hallmark Channel, any significant future adverse modifications to the Company’s distribution agreements, an economic decline in the advertising market, an increase in program acquisition costs, an increase in competition or other adverse operating conditions would negatively impact the Company’s liquidity and its ability to fund the current level of operations

The Company expects to continue making investments in programming, marketing and distribution. However, the Company’s recurring loss situation has demanded that all areas of expenses, including programming, marketing and distribution be closely monitored and controlled.

The Company anticipates that its principal uses of funds for 2007 will continue to include the payment of operating expenses, accounts payable and accrued expenses, license fees for programming, and interest under its bank credit facility.

The Company currently believes that cash on hand, cash generated by operations and borrowing availability under its bank credit facility, when combined with the deferral of any required payments on related-party debt and related interest mentioned below, will be sufficient to fund the Company’s operations and meet its liquidity needs through August 15, 2008.  This statement is qualified with respect to the possible exercise of the Put Right described above.

The Company intends to extend or refinance the Bank credit facility prior to or upon its maturity. Any such extension or refinancing might require a continuation of a letter of credit from Hallmark Cards or other steps by the Company and, thus, is not assured. If the Company is not able to arrange for the extension, refinancing or replacement of the bank credit facility prior to its maturity and either (1) the bank draws down on the irrevocable letter of credit provided by Hallmark Cards in support of the bank credit facility or (2) Hallmark Cards purchases the interests of the lending banks, Hallmark Cards would have all obligations and rights of the lending banks under the bank credit facility. In that event, Hallmark Cards could demand payment of outstanding amounts at any time after August 15, 2008, under the terms of the waiver and standby purchase agreement (“Waiver Agreement”) described below.

Upon maturity of the credit facility on May 31, 2008, the lending group led by JP Morgan Chase has the right to elect to forego the receipt of cash to pay the principal amount of the credit facility in full, which is provided for under the terms of an irrevocable letter of credit provided by Hallmark Cards, and instead may elect to initiate a process to foreclose on the Company’s assets. Such foreclosure proceedings, would adversely affect our ability to continue our operations. Prior to any such possible foreclosure proceedings, however, the Company, if it has not secured an extension of the credit facility or alternative financing, would cause Hallmark Cards pursuant to the terms of the Waiver Agreement to exercise its option to purchase all of the outstanding indebtedness under the credit facility and the credit facility would then be subject to terms of the Waiver Agreement.

Due to the Company’s possible inability to meet its obligations when they come due in August 2008, the Company anticipates that prior to August 15, 2008, it will be necessary to either extend or refinance (i) the bank credit facility and (ii) the promissory notes payable to affiliates of Hallmark Cards described in the Notes below. As part of a combination of actions and in order to obtain additional funding, the Company may consider various alternatives, including refinancing the bank credit facility, raising additional capital through the issuance of equity or debt securities, a sale of certain assets or other strategic alternatives.

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