Hallmark Channel Parent Restating 3Q Figures

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Crown Media Holdings Inc., parent of Hallmark Channel, plans to restate its third-quarter cash-flow statement, and it will therefore seek an extension to file its annual report, the company said in a securities filing Tuesday.

In an 8-K filing, Crown said its auditors determined that the inclusion of a noncash transaction in its statement of cash flows for the nine months ended Sept. 30, relating to a tax-sharing arrangement with Hallmark Cards Inc., wasn’t in accordance with generally accepted accounting principles.

Hallmark Cards owns a majority stake in Crown Media.

Hallmark Cards and Crown have a tax-sharing agreement whereby Hallmark Cards is able to use a percentage of Crown’s net losses to offset its tax payments. Based on that agreement, Hallmark Cards reimburses Crown for the amount of those losses -- 75% in cash, with the remaining 25% of the tax benefits applied as an offset against any loans owed to Hallmark or its subsidiaries -- according to the filing with the Securities and Exchange Commission.

The filing said that in the third quarter of 2005, that remaining 25% amounted to about $45 million, of which Hallmark applied $30 million to offset debt owed by Crown. But Crown presented that amount inappropriately as a cash transaction when it should have been accounted for as a noncash deal.

As a result, Crown said it will amend its third-quarter financial statement, changing the line item “Proceeds from tax-sharing agreement with Hallmark Cards” under “Cash flows from financing activities” from $56.1 million to $26.1 million and changing the “Decrease in payable to affiliates” under “Cash flows from operating activities” from $34.2 million to $4.2 million.

In a press release, Crown said the restatement won’t change its unaudited condensed balance sheet as of Sept. 30 or the unaudited condensed statements of operations and comprehensive loss for the three months and nine months ended Sept. 30.

As a result of the need to restate the financial statement, Crown plans to file notice with the SEC seeking an extension to file its annual report, its 10-K, no later than March 31.

Crown is in the process of trying to find a buyer, or a strategic partner, for Hallmark Channel.