UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
001-34102
(Commission File Number)
RHI ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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36-4614616
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(State or Other Jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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1325 Avenue of Americas, 21st Floor
New York, NY 10019
(Address of principal executive offices)
Registrants telephone number: (212) 977-9001
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
The number of shares of the registrants common stock, par value $0.01 per share, outstanding
as of November 10, 2009 was 13,505,100.
RHI ENTERTAINMENT, INC.
INDEX
2
Part 1. Financial Information
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Balance Sheets
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September 30,
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December 31,
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2009
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2008
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(In thousands, except per share data)
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ASSETS
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Cash
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$
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3,248
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$
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22,373
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Accounts receivable, net of allowance for doubtful
accounts and discount to present value of $6,190 and
$11,933, respectively
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107,822
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180,125
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Film production costs, net
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789,404
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780,122
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Property and equipment, net
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418
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370
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Prepaid and other assets, net
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21,688
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28,928
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Intangible assets, net
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1,395
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2,264
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Total assets
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$
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923,975
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$
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1,014,182
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LIABILITIES AND STOCKHOLDERS EQUITY
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Accounts payable and accrued liabilities
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$
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41,967
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$
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51,477
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Accrued film production costs
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152,064
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195,328
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Debt
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589,589
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576,789
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Deferred revenue
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17,168
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13,530
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Total liabilities
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800,788
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837,124
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Stockholders equity
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Common stock, par value $0.01 per share;125,000
shares authorized and 13,505 shares issued and
outstanding
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$
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135
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$
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135
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Additional paid-in capital
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150,435
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149,609
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Accumulated deficit
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(74,262
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)
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(36,195
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)
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Accumulated other comprehensive loss
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(5,228
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)
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(11,387
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)
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Total RHI Entertainment, Inc. stockholders equity
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71,080
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102,162
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Non-controlling interest in consolidated entity
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52,107
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74,896
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Total stockholders equity
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123,187
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177,058
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Total liabilities and stockholders equity
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$
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923,975
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$
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1,014,182
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See accompanying notes to unaudited condensed consolidated financial statements.
3
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Operations
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(Successor)
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(Predecessor)
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Three Months
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Three Months
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Nine Months
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Period from
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Period from
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Ended
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Ended
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Ended
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June 23, 2008 to
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January 1, 2008 to
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September 30, 2009
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September 30, 2008
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September 30, 2009
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September 30, 2008
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June 22, 2008
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(In thousands, except per share data)
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Revenue
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Production revenue
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$
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2,576
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$
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21,833
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$
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14,408
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$
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22,765
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$
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6,602
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Library revenue
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6,932
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31,693
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30,786
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33,182
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66,643
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Total revenue
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9,508
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53,526
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45,194
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55,947
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73,245
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Cost of sales (including film
production cost impairment charges
of $6,957 during the three and nine
months ended September 30, 2009)
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17,680
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38,247
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49,605
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39,550
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49,396
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Gross (loss) profit
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(8,172
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)
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15,279
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(4,411
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)
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16,397
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23,849
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Other costs and expenses:
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Selling, general and
administrative
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8,565
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9,814
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26,453
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10,546
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25,802
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Amortization of intangible assets
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270
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314
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869
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350
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671
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Fees paid to related parties:
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Management fees
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287
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Termination fee
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6,000
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(Loss) income from operations
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(17,007
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)
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5,151
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(31,733
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)
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(499
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)
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(2,911
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)
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Other (expense) income:
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Interest expense, net
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(12,446
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)
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(9,855
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)
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(32,513
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)
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(10,674
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)
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(21,559
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)
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Interest income
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1
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17
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5
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20
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34
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Other income (expense), net
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934
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(1,001
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)
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(713
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)
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(934
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)
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706
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Loss before income taxes and
non-controlling interest in
loss of consolidated entity
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(28,518
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)
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(5,688
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)
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(64,954
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)
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(12,087
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)
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(23,730
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)
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Income tax (provision) benefit
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(503
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)
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(389
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)
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(1,021
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)
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(472
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)
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1,518
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Loss before non-controlling
interest in loss of
consolidated entity
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(29,021
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)
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(6,077
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)
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(65,975
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)
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(12,559
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)
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(22,212
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)
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Non-controlling interest in loss of
consolidated entity
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12,275
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2,570
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27,907
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5,312
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Net loss
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$
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(16,746
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)
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$
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(3,507
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)
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$
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(38,068
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)
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$
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(7,247
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)
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$
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(22,212
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)
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Loss per Share:
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Basic
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$
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(1.24
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)
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$
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(0.26
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)
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$
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(2.82
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)
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$
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(0.54
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)
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N/A
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Diluted
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$
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(1.24
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)
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$
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(0.26
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)
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$
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(2.82
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)
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$
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(0.54
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)
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N/A
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Weighted Average Shares Outstanding:
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Basic
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13,505
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13,500
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13,505
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13,500
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N/A
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Diluted
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13,505
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13,500
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13,505
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13,500
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N/A
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See accompanying notes to unaudited condensed consolidated financial statements.
4
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
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(Successor)
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(Predecessor)
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Nine Months
|
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Period from
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Period from
|
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Ended
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June 23, 2008 to
|
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January 1, 2008 to
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September 30, 2009
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September 30, 2008
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June 22, 2008
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(In thousands)
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Cash flows from operating activities
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Net loss
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$
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(38,068
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)
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$
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(7,247
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)
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$
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(22,212
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)
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Adjustments to reconcile net loss to net cash used in
operating activities:
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Amortization of film production costs
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31,920
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34,308
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43,579
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Non-controlling interest in loss of consolidated entity
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(27,907
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)
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(5,312
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)
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Amortization of interest rate swap value
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7,003
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Film production cost impairment charges
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6,957
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|
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(Decrease) increase of accounts receivable reserves
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(5,743
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)
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1,498
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4,370
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Amortization of deferred debt financing cost
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2,534
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|
909
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549
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Deferred income taxes
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2,284
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|
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(277
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)
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(1,558
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)
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Share-based compensation
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1,431
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|
|
528
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|
|
|
926
|
|
Amortization of intangible assets
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|
|
869
|
|
|
|
350
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|
|
|
671
|
|
Realized loss on interest rate swaps
|
|
|
848
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets
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|
164
|
|
|
|
57
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|
|
|
93
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|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
355
|
|
Change in operating assets and liabilities:
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|
|
|
|
|
|
|
|
|
|
|
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Decrease (increase) in accounts receivable
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78,046
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|
|
|
(23,576
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)
|
|
|
(4,694
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)
|
Decrease (increase) in prepaid and other assets
|
|
|
2,422
|
|
|
|
3,056
|
|
|
|
(2,457
|
)
|
Additions to film production costs
|
|
|
(44,259
|
)
|
|
|
(61,837
|
)
|
|
|
(54,909
|
)
|
(Decrease) increase in accounts payable and accrued
liabilities
|
|
|
(10,588
|
)
|
|
|
(2,336
|
)
|
|
|
6,327
|
|
(Decrease) increase in accrued film production costs
|
|
|
(43,264
|
)
|
|
|
25,889
|
|
|
|
(997
|
)
|
Increase (decrease) in deferred revenue
|
|
|
3,638
|
|
|
|
3,416
|
|
|
|
(2,374
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(31,713
|
)
|
|
|
(30,574
|
)
|
|
|
(32,331
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(212
|
)
|
|
|
(77
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(212
|
)
|
|
|
(77
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
|
|
|
|
189,000
|
|
|
|
|
|
Payment of offering costs and fees
|
|
|
|
|
|
|
(15,016
|
)
|
|
|
|
|
Borrowings from credit facilities
|
|
|
13,800
|
|
|
|
157,679
|
|
|
|
80,093
|
|
Repayments of credit facilities
|
|
|
(1,000
|
)
|
|
|
(284,900
|
)
|
|
|
(44,708
|
)
|
Deferred debt financing costs
|
|
|
|
|
|
|
(4,626
|
)
|
|
|
|
|
Second lien pre-payment penalty
|
|
|
|
|
|
|
(2,600
|
)
|
|
|
|
|
Member capital contributions
|
|
|
|
|
|
|
|
|
|
|
29,135
|
|
Distribution to KRH
|
|
|
|
|
|
|
(35,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,800
|
|
|
|
3,837
|
|
|
|
64,520
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(19,125
|
)
|
|
|
(26,814
|
)
|
|
|
32,108
|
|
Cash, beginning of period
|
|
|
22,373
|
|
|
|
33,515
|
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
3,248
|
|
|
$
|
6,701
|
|
|
$
|
33,515
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
32,583
|
|
|
$
|
12,418
|
|
|
$
|
23,845
|
|
Cash paid for income taxes
|
|
|
1,183
|
|
|
|
424
|
|
|
|
1,968
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
RHI ENTERTAINMENT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Business and Organization
On January 12, 2006, Hallmark Entertainment Holdings, LLC (Hallmark) sold its 100% interest in
Hallmark Entertainment, LLC (Hallmark Entertainment or the Initial Predecessor Company) to HEI
Acquisition, LLC. HEI Acquisition, LLC was immediately merged with and into Hallmark Entertainment
and its name was changed to RHI Entertainment, LLC (RHI LLC or the Predecessor Company). Subsequent
to the transaction, RHI LLCs sole member was RHI Entertainment Holdings, LLC (Holdings), a limited
liability company controlled by affiliates of Kelso & Company L.P. (Kelso). RHI LLC is engaged in
the development, production and distribution of made-for-television movies, mini-series and other
television programming.
On June 23, 2008, RHI Entertainment, Inc. (RHI Inc. or the Successor Company) completed its
initial public offering (the IPO). RHI Inc. was incorporated for the sole purpose of becoming the
managing member of RHI Entertainment Holdings II, LLC and had no operations prior to the IPO.
Immediately preceding the IPO, Holdings changed its name to KRH Investments LLC (KRH). KRH then
contributed its 100% ownership interest in RHI LLC to a newly formed limited liability company
named RHI Entertainment Holdings II, LLC (Holdings II) in consideration for 42.3% of the common
membership units in Holdings II and Holdings IIs assumption of all of KRHs obligations under its
financial advisory agreement with Kelso. Upon completion of the IPO, the net proceeds received were
contributed by RHI Inc. to Holdings II in exchange for 57.7% (13,500,100) of the common membership
units in Holdings II. Upon completion of the IPO, RHI Inc. became the sole managing member of
Holdings II and holds a majority of the economic interests. KRH is the non-managing member of
Holdings II and holds a minority of the economic interests. To the extent that distributions are
made, they will be in accordance with the relative economic interests of RHI Inc. and KRH in
Holdings II. RHI Inc. holds a number of common membership units in Holdings II equal to the number
of outstanding shares of RHI Inc. common stock.
The Company has incurred net losses and has had negative cash flows from operations in each of
the past three years and for the three and nine months ended September 30, 2009 and, at September
30, 2009, has an accumulated deficit of $74.3 million. The ability to meet debt and other
obligations and to reduce the Companys total debt depends on its future operating performance and
on economic, financial, competitive and other factors. As of September 30, 2009, the Company had
$3.2 million of cash compared to $22.4 million of cash at December 31, 2008. As of September 30,
2009, the Company had $7.0 million available under its revolving credit facility, net of an
outstanding letter of credit, subject to the terms and conditions of that facility. The decrease in
cash reflects production spending during the nine months ended September 30, 2009. Historically,
the Company has financed its operations with funds from operations, capital contributions from our
owners and the use of credit facilities.
Management is continually reviewing its operations for opportunities to adjust the timing of
expenditures to ensure that sufficient resources are maintained. The timing surrounding the
commencement of production of movies and mini-series is the most significant item the Company can
alter in terms of managing its resources. In addition to the seven films that were delivered
during the nine months ended September 30, 2009, the Company has films in various stages of
production and currently expects to deliver approximately 27 films in 2009. The Companys
production partners have financed a substantial portion of the cost for each 2009 film through the
use of new or existing credit facilities of their own. In connection with these financings, the
Company has consented to its production partners pledging as collateral the associated distribution
contracts they have with RHI. Although a majority of the films are in production in the summer
months so that they can be delivered late in the third quarter and during the fourth quarter, a
portion of the funding for these films has been paid and, consistent with prior periods, a portion
has been deferred to future periods to better match the cash inflows related to sales of this
product. As such, the Companys net production funding requirements for the balance of 2009 are not
significant relative to the remaining film deliveries. If the Companys production partners cannot
finance a substantial portion of a films cost through the use of new or existing credit facilities
of their own, management may decide not to develop or produce that film. As a result, the number of
films produced may be further reduced, which could have an adverse impact on the Companys
production revenue. In addition, given overall market conditions and recent sales activity,
discussions are underway with certain of these project lenders about the timing of certain of these
deferred production payments due in 2010. Depending on sales activity during the fourth quarter of
2009, certain of these payments may need to be extended beyond 2010.
Each quarter the Company reviews ultimate revenues associated with its films. As discussed in
note 6, this analysis resulted in a reduction of ultimate revenues and an impairment charge during
the periods ended September 30, 2009. Given the seasonal nature of its business, management
continues to review the ultimate revenue associated with its films in the fourth quarter. Any
further reduction in the ultimate revenue of our films and/or an impairment of certain films in the
library could result in additional net losses for the year ended December 31, 2009. Such losses
and associated write-down of assets, if substantial, and/or an inability to meet its fourth quarter
income projections could cause the Company to be in default of the Minimum Consolidated Tangible
Net Worth covenant (Net Worth Covenant) contained in its First Lien Credit Agreement. While the
Company is unable at this time to determine whether any such default will occur, the Company has
begun discussions with its administrative agent and the other lenders in its bank syndicate to
address this possibility. In the event of an imminent or actual default of the Net Worth Covenant,
management cannot assure you that the Company and its lenders will reach an agreement on an
appropriate accommodation, including a possible waiver and/or amendment of the Net Worth Covenant.
If there is a default under the Net Worth Covenant and an amendment or waiver cannot be obtained,
the Company would be in default under its First Lien Credit Agreement which would also cause a
default under its Second Lien Credit Agreement if the loans under its First Lien Credit Agreement
were accelerated. Management cannot give assurances that an accommodation can be obtained on
satisfactory terms or at all. Any such accommodation, if reached, would likely result in
alterations to the terms of the Companys First Lien Credit Facility, including additional fees and
a higher interest rate.
6
Each year the Company commissions an independent valuation of its film library in accordance
with the covenants in its credit agreements. This valuation, which is typically conducted in the
first quarter of each year, includes a determination of the value of the non-contracted portion of
the film library i.e., the value of the rights that are not encumbered by any existing licenses
and therefore are available for license to third parties. The Companys First Lien Credit
Agreement provides that the amount of money that the Company may borrow is a formula based on
certain asset values, including the value of the non-contracted portion of the film library. This
formula is called a borrowing base. In its borrowing base formula, the Company receives a
library advance rate of 55%, meaning that 55% of the value of the non-contracted portion of the film library is included in
the calculation of its borrowing base. It is possible that when this independent valuation is
completed the non-contracted portion of the film library may be valued at a lower valuation than
the valuation currently used in the Companys borrowing base, which could potentially result in a
reduction in the borrowing base, thereby restricting the Companys ability to draw on its full
First Lien Credit Facilities. The Company also needs to address an additional issue with the
lenders concerning the borrowing base and the allowable level of certain receivables in the
borrowing base calculation related to a major customer. Failure to favorably resolve this issue
could result in an approximate $32 million reduction of the borrowing base as of December 31, 2009.
The resolution of the issue regarding the borrowing base is important to maintain the full
availability of the First Lien Credit Facilities. If the Companys drawings under the revolving
portion of its First Lien Credit Facility exceed the amount of the borrowing base, the Company
would be required to make an immediate prepayment in the amount that its drawings exceed the
borrowing base and, if the Company failed to do so, it would be in default under its First Lien
Credit Agreement. While the Company at this time does not know the result of the independent
valuation or its potential impact on the borrowing base, and the Company is likewise unable to
determine at this time whether it can resolve the borrowing base issue noted above, management has
begun discussions with its administrative agent and other lenders in its bank syndicate to
address these matters. If an agreement cannot be reached, the Company would be
unable to draw on its full borrowing capacity. There can be no assurance that an accommodation,
if necessary, can be obtained on satisfactory terms or at all. Any such accommodation is likely to
result in alterations to the terms of our First Lien and Second Lien Credit Facilities, including
additional fees and a higher interest rate.
As noted above, discussions are underway with certain of these project lenders concerning
deferred production payments and the Company has had and will continue to have discussions with the
lenders in its bank syndicate regarding at least two financial covenants. Although there can be no
assurance as to the outcome, pending the favorable resolution of these matters, management believes
that the cash on hand, available borrowings under our credit facility and projected cash flows from
operations will be sufficient to satisfy the Companys financial obligations through at least the
next twelve months.
(2) Basis of Presentation
The financial information presented herein has been prepared according to U.S. generally
accepted accounting principles. In managements opinion, the information presented herein reflects
all adjustments necessary to fairly present the financial position and results of operations of the
Predecessor Company and Successor Company (collectively, the Company).
The consolidated financial statements of the Predecessor Company include the accounts of RHI
LLC and its consolidated subsidiaries. The consolidated financial statements of the Successor
Company include the accounts of RHI Inc. and its consolidated subsidiary, Holdings II (which
consolidates RHI LLC). All intercompany accounts and transactions have been eliminated.
The unaudited financial statements as of September 30, 2009 (Successor) and for the three
months ended September 30, 2009 and 2008 (Successor), the nine months ended September 30, 2009
(Successor), the period from June 23, 2008 to September 30, 2008 (Successor) and the period from
January 1, 2008 to June 22, 2008 (Predecessor) include, in the opinion of management, all
adjustments consisting only of normal recurring adjustments, which the company considers necessary
for a fair presentation of the financial position and results of operations of the Company for
these periods. Results for the aforementioned periods are not necessarily indicative of the results
to be expected for the full year.
(3) Summary of Significant Accounting Policies
For a complete discussion of the Companys accounting policies, refer to the consolidated
financial statements and related notes included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2008, which was filed with the SEC on March 5, 2009.
(a) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires the Company to make estimates and assumptions that affect the reported amounts
in the financial statements and footnotes thereto. Actual results could differ from those
estimates.
(b) Comprehensive Loss
Comprehensive loss consists of net loss and other gains/losses (comprised of unrealized
gains/losses associated with the Companys interest rate swaps) affecting stockholders equity
that, under U.S. generally accepted accounting principles, are excluded from net loss.
Comprehensive loss for the three months ended September 30, 2009 and 2008 (Successor), the nine
months ended September 30, 2009 (Successor), the period from June 23, 2008 to September 30, 2008
(Successor) and the period from January 1, 2008 to June 22, 2008 (Predecessor) were $(16.7)
million, $(3.2) million, $(36.0) million, $(7.8) million, and $(21.0) million, respectively.
(c) Segment Information
The Company operates in a single segment: the development, production and distribution of
made-for-television movies, mini-series and other television programming. Long-lived assets located
in foreign countries are not material. Revenue earned from foreign licensees represented
approximately 28%, 46%, 29%, 46% and 24% of total revenue for the three months ended September 30,
2009 and 2008 (Successor), the nine months ended September 30, 2009 (Successor), the period from
June 23, 2008 to September 30, 2008 (Successor) and the period from January 1, 2008 to June 22,
2008 (Predecessor), respectively. These revenues, generally denominated in U.S. dollars, were
primarily from sales to customers in Europe.
7
(d) New Accounting Pronouncements Adopted
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the Codification or ASC) as the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The Codification is effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company adopted the Codification as of July 1, 2009 and all
subsequent filings will reference the Codification as the single source of authoritative
literature.
In September 2006, the FASB modified GAAP by establishing accounting and reporting standards
regarding fair value measurements, which are included in FASB ASC 820. The standards define fair
value, establish a framework for measuring fair value in generally accepted accounting principles
and expand disclosures about fair value measurements. FASB ASC 820 refers to fair value as the
price that would be received from the sale of an asset or paid to transfer a liability in an
orderly transaction between market participants in the market in which the reporting entity does
business. It also clarifies the principle that fair value should be based on the assumptions market
participants would use when pricing the asset or liability. The new standards were effective for
financial statements issued with fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years, however, the effective date was deferred until fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities. The
company adopted the new standards effective January 1, 2009 for nonfinancial assets and
nonfinancial liabilities, which did not have an impact on its consolidated financial statements.
In November 2007, the FASBs Emerging Issues Task Force (EITF) reached a consensus on
accounting for collaboration arrangements as discussed in FASB ASC 808. The consensus provides
guidance on how the parties to a collaborative agreement should account for costs incurred and
revenue generated on sales to third parties, how sharing payments pursuant to a collaboration
agreement should be presented in the income statement and certain related disclosure questions. The
consensus was adopted by the company as of January 1, 2009 and had no impact on its consolidated
financial statements.
In December 2007, the FASB issued new standards for accounting and reporting on business
combinations as discussed in FASB ASC 805. The new standards require an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. The new standards are effective
for the company for business combinations for which the acquisition date is on or after January 1,
2009. The standards were adopted by the Company as of January 1, 2009 and had no impact on its
consolidated financial statements.
In December 2007, the FASB modified GAAP by establishing accounting and reporting standards
for non-controlling (minority) interests as discussed in FASB ASC 810-10-65. The new standards were
effective for fiscal years beginning after December 15, 2008. The new standards were applied
prospectively; however, certain disclosure requirements require retrospective
treatment. The new standards were adopted by the Company on January 1, 2009. As a result of the adoption, the
companys non-controlling interest is now classified as a separate component of equity, not as a
liability as it was previously presented.
In March 2008, the FASB issued new requirements for disclosures about derivative instruments
and hedging activities as discussed in FASB ASC 815-10. The new requirements require companies with
derivative instruments to disclose information that should enable financial statement users to
understand how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for, and how derivative instruments and related hedged items
affect a companys financial position, financial performance, and cash flows. Entities shall select
the format and the specifics of disclosures relating to their volume of derivative activity that
are most relevant and practicable for their individual facts and circumstances. The new
requirements expand the current disclosure framework and are effective prospectively for all
periods beginning on or after November 15, 2008. The requirements were adopted by the Company as of
January 1, 2009. See Note 7 for the required disclosures.
In May 2009, the FASB issued new standards for accounting and reporting subsequent events as
discussed in FASB ASC 855-10. The new standards address the accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. They also set forth: the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. The new standards also require companies to disclose
the date through which subsequent events have been evaluated and whether that date is the date the
financial statements were issued or the date the financial statements were available to be issued.
The new standards are effective for interim and annual financial periods ending after June 15, 2009
and are to be applied prospectively. The Company adopted the standards as of April 1, 2009.
Subsequent events have been evaluated through November 10, 2009, the date the financial statements
were issued.
(4) Loss Per Share, Basic and Diluted
Basic loss per share is computed on the basis of the weighted average number of common shares
outstanding. Diluted loss per share is computed on the basis of the weighted average number of
common shares outstanding plus the effect of potentially dilutive common stock options and
restricted stock using the treasury stock method. Since the Company has a net loss for the periods
presented, outstanding common stock options and restricted stock units are anti-dilutive. As of
September 30, 2009, the Company has no potentially dilutive securities outstanding. The weighted
average number of basic and diluted shares outstanding for the three and nine months ended
September 30, 2009 (Successor) was 13,505,100.
8
(5) Non-Controlling Interest
As discussed in Note 2, Basis of Presentation, RHI Inc. consolidates the financial results of
Holdings II and its wholly-owned subsidiary, RHI LLC. The 42.3% minority interest of Holdings II
(9,900,000 membership units) held by KRH is recorded as non-controlling interest in the
consolidated entity, which results in an associated reduction in additional paid-in capital of RHI
Inc. The non-controlling interest in the consolidated entity on the consolidated balance sheet was
established in accordance with FASB ASC 974-810-30, Treatment of Minority Interests in Certain
Real Estate Investment Trusts by multiplying the net equity of Holdings II (after reflecting the
contributions of KRH and RHI Inc. and costs related to the offering and reorganization) by KRHs
percentage ownership in Holdings II. The non-controlling interest in loss of consolidated entity on
the consolidated statement of operations represents the portion of Holdings IIs net loss
attributable to KRH.
The non-controlling interest associated with the initial investment by RHI Inc. in Holdings II
and subsequent transactions are calculated as follows (in thousands):
|
|
|
|
|
Total Holdings II members equity as of June 22, 2008
|
|
$
|
108,766
|
|
RHI Entertainment Inc. investment in Holdings II
|
|
|
173,984
|
|
Non-controlling interest associated with distribution to KRH
|
|
|
(34,972
|
)
|
|
|
|
|
Total post-IPO Holdings II members equity
|
|
|
247,778
|
|
Non-controlling interest of KRH
|
|
|
42.3
|
%
|
|
|
|
|
Initial allocation of non-controlling interest in consolidated entity
|
|
|
104,810
|
|
Non-controlling interest in share-based compensation
|
|
|
473
|
|
Non-controlling interest in unrealized loss on interest rate swaps
|
|
|
(3,853
|
)
|
|
|
|
|
Non-controlling interest allocation for the period from June 23, 2008 to December 31, 2008
|
|
|
(3,380
|
)
|
Non-controlling interest in loss of consolidated entity for the period from June 23, 2008 to December 31, 2008
|
|
|
(26,534
|
)
|
|
|
|
|
Non-controlling interest in consolidated entity as of December 31, 2008
|
|
$
|
74,896
|
|
|
|
|
|
|
Non-controlling interest in share-based compensation
|
|
|
605
|
|
Non-controlling interest in unrealized gain on interest rate swaps
|
|
|
1,551
|
|
Non-controlling interest in amortization of the fair market value of interest rate swaps de-designated as hedges
|
|
|
2,962
|
|
|
|
|
|
Non-controlling interest allocation for the nine months ended September 30, 2009
|
|
|
5,118
|
|
Non-controlling interest in loss of consolidated entity for the nine months ended September 30, 2009
|
|
|
(27,907
|
)
|
|
|
|
|
Non-controlling interest in consolidated entity as of September 30, 2009
|
|
$
|
52,107
|
|
|
|
|
|
(6) Film Production Costs, Net
Film production costs are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Completed films
|
|
$
|
1,015,847
|
|
|
$
|
984,805
|
|
Crown Film Library
|
|
|
145,368
|
|
|
|
145,290
|
|
Films in process and development
|
|
|
22,676
|
|
|
|
18,012
|
|
|
|
|
|
|
|
|
|
|
|
1,183,891
|
|
|
|
1,148,107
|
|
Accumulated amortization
|
|
|
(394,487
|
)
|
|
|
(367,985
|
)
|
|
|
|
|
|
|
|
|
|
$
|
789,404
|
|
|
$
|
780,122
|
|
|
|
|
|
|
|
|
9
The following table illustrates the amount of overhead and interest costs capitalized to film
production costs as well as amortization expense associated with completed films and the Crown Film
Library (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
Predecessor
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Period from
|
|
Period from
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
June 23, 2008 to
|
|
January 1, 2008 to
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
September 30, 2009
|
|
September 30, 2008
|
|
June 22, 2008
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Overhead costs
capitalized
|
|
$
|
2,434
|
|
|
$
|
3,434
|
|
|
$
|
7,219
|
|
|
$
|
3,714
|
|
|
$
|
6,775
|
|
Interest capitalized
|
|
|
194
|
|
|
|
165
|
|
|
|
451
|
|
|
|
191
|
|
|
|
313
|
|
Amortization of
completed films
|
|
|
5,769
|
|
|
|
31,258
|
|
|
|
25,699
|
|
|
|
32,200
|
|
|
|
40,595
|
|
Amortization of
Crown Film Library
|
|
|
193
|
|
|
|
981
|
|
|
|
804
|
|
|
|
1,072
|
|
|
|
2,608
|
|
Quarterly, the Company assesses market conditions, sales data, pricing and other factors to
determine if any changes have occurred that could cause a reduction in the expected ultimate
revenue for its films. If the Company determines that the above noted factors indicate a potential
reduction in ultimate revenues and/or film impairment, further analysis is performed. In light of
continued weakness in market prices and sales volume, which
was further confirmed at the MIPCOM
sales conference in October, the ultimate revenue analysis completed
by the Company as
of September 30, 2009, resulted in a reduction of the ultimate revenues for certain
films in its library. A reduction in the ultimate revenue associated with a film results in a
higher rate of amortization over that films remaining accounting life and causes a reduction in
that films prospective profit margin. The reduction in ultimate revenues resulted in an increase
to our film cost amortization for the three and nine months ended September 30, 2009 of $0.4
million related to films for which revenue has been recognized during these periods. Additionally,
the reduction in ultimate revenues resulted in a decrease in the fair value of certain films to an
amount below their net book value. As a result, impairment charges were recorded for 30 films totaling $7.0
million during the three and nine months ended September 30, 2009 to reduce the net book value of
those films to an amount approximating their fair value.
Given
the seasonal nature of its business, when the Company reviews the ultimate
revenue associated with its films in the fourth quarter, it will benefit from additional
data points, including current market conditions, library sales activity during the fourth quarter,
the delivery of the remainder of its annual film slate and the results of the annual independent
valuation of the Companys film library. The Company expects to complete this work during the fourth quarter of 2009.
Approximately 38% of completed film production costs have been amortized through September 30,
2009. The Company further anticipates that approximately 6% of completed film production costs will
be amortized through September 30, 2010. The Company anticipates that approximately 34% of
completed film production costs as of September 30, 2009 will be amortized over the next three
years and that approximately 80% of film production costs will be amortized within five years. The
Crown Film Library has a remaining amortization period of 17 years and 3 months as of September 30,
2009.
(7) Debt
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
First Lien Term Loan
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Revolver
|
|
|
339,589
|
|
|
|
326,789
|
|
Second Lien Term Loan
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
$
|
589,589
|
|
|
$
|
576,789
|
|
|
|
|
|
|
|
|
The Company has two credit agreements. The Companys first lien credit agreement, as amended
(the First Lien Credit Agreement), is comprised of two facilities: (i) a $175.0 million term loan
(First Lien Term Loan) and (ii) a $350.0 million revolving
10
credit facility, including a letter of
credit sub-facility (Revolver). The Companys second lien credit agreement, as amended (Second Lien
Credit Agreement), is comprised of a seven-year $75.0 million term loan (Second Lien Term Loan).
The First Lien Term Loan amortizes in three installments of 10%, 20% and 70% on April 13,
2011, 2012 and 2013, respectively and bears interest at the Alternate Base Rate (ABR) or LIBOR plus
an applicable margin of 1.00% or 2.00% per annum, respectively. The maturity date of the Revolver
is April 13, 2013, and the Revolver bears interest at either the ABR or LIBOR plus an applicable
margin of 1.00% or 2.00% per annum, respectively. The Second Lien Term Loan matures on June 23,
2015 and bears interest at ABR or LIBOR plus an applicable margin of 6.50% or 7.50% per annum,
respectively.
Interest payments for all loans are due, at the Companys election, according to interest
periods of one, two or three months. The Revolver also requires an annual commitment fee of 0.375%
on the unused portion of the commitment. At September 30, 2009, the interest rates associated with
the First Lien Term Loan, Revolver and Second Lien Term Loan were 2.25%, 2.42%, and 7.91%,
respectively. At September 30, 2009, the Company had availability of $7.0 million under its
revolver, net of $3.4 million of stand-by letters of credit outstanding.
The First Lien Credit Agreement and Second Lien Credit Agreement, as amended, include
customary affirmative and negative covenants, including among others: (i) limitations on
indebtedness, (ii) limitations on liens, (iii) limitations on investments, (iv) limitations on
guarantees and other contingent obligations, (v) limitations on restricted junior payments and
certain other payment restrictions, (vi) limitations on consolidation, merger, recapitalization or
sale of assets, (vii) limitations on transactions with affiliates, (viii) limitations on the sale
or discount of receivables, (ix) limitations on lines of business, (x) limitations on production
and acquisition of product and (xi) certain reporting requirements. Additionally, the First Lien
Credit Agreement includes a Minimum Consolidated Tangible Net Worth covenant (as defined therein)
and both the First Lien Credit Agreement and the Second Lien Credit Agreement contain a Coverage
Ratio covenant (as defined therein). The First Lien Credit Agreement and Second Lien Credit
Agreement also include customary events of default, including among others, a change of control
(including the disposition of capital stock of subsidiaries that guarantee the credit agreement).
On March 2, 2009, the Company further amended its First Lien Credit Agreement to revise a
consolidated net worth covenant. The amended covenant excludes the Companys intangible assets and
interest rate swaps and any impact they may have on the Companys balance sheet and statement of
operations in the annual determination of Consolidated Tangible Net Worth (as defined in the First
Lien Credit Agreement). The amendment was effective as of December 31, 2008.
The Company was in compliance with all financial covenants as of September 30, 2009. Refer to
Managements Discussion and
Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources for further discussion
concerning the Companys liquidity and financial covenants.
Interest Rate Swaps
The Company utilizes derivative financial instruments to reduce interest rate risk. The
Company does not hold or issue derivative financial instruments for trading purposes. The interest
rate swaps held by the Company initially were designated as cash flow hedges and qualified for
hedge accounting in accordance with the Change in Variable Cash Flows Method in FASB ASC
815-30-35. The critical terms of the interest rate swaps and hedged variable-rate debt coincided
and cash flows due to the hedge exactly offset cash flows resulting from fluctuations in the
variable rates.
Under hedge accounting, changes in the fair value of the interest rate swaps are reported as a
component of accumulated other comprehensive loss in the Companys consolidated balance sheet. The
fair value of the swap contracts and any amounts payable to or receivable from counterparties are
reflected as assets or liabilities in the Companys consolidated balance sheet.
As of December 31, 2008, the Company had two identical interest rate swap agreements to manage
its exposure to interest rate movements associated with $435.0 million of its credit facilities by
effectively converting its variable rate to a fixed rate. These interest rate swaps provided for
the exchange of variable rate payments for fixed rate payments. The variable rate was based on
three month LIBOR and the fixed rate was 4.98%. The interest rate swaps were scheduled to terminate
on April 27, 2010. The aggregate fair market value of the interest rate swaps was approximately
$(19.7) million as of December 31, 2008.
On April 21, 2009, the Company amended its existing interest rate swap agreements and
de-designated them as cash flow hedges. As a result of the de-designation, the fair market value of
the swaps immediately preceding the amendments will be amortized as interest expense in the
consolidated statement of operations during the period from April 21, 2009 through April 27, 2010,
the maturity date of the original swaps. As of April 21, 2009, the fair value of the interest rate
swaps recorded in accumulated other comprehensive loss was $(16.1) million and $4.0 million and
$7.0 million was amortized as interest expense during the three and nine months ended September 30,
2009, respectively. The difference in fair value of $(4.0) million between the original swaps and
the amended swaps on the date of the amendment was immediately recognized as Other income (expense),
net in the consolidated statement of operations.
11
The amended interest rate swap agreements are with three counterparties and continue to cover
$435.0 million of the Companys credit facilities and provide for the exchange of variable rate
payments for fixed rate payments. The variable rates are based on one month LIBOR and the weighted
average fixed rate is 3.81%. The amended interest rate swaps terminate on April 27, 2010 ($90.3
million), June 27, 2011 ($39.6 million) and April 27, 2012 ($305.1 million). The amended interest
rate swaps have not been designated as cash flow hedges and, therefore, changes to their fair value
are recorded as Other income (expense), net in the consolidated statement of operations. For the
three and nine months ended September 30, 2009, the change in fair value of the amended interest
rate swaps recorded to Other income (expense), net was $0.5 million and $3.2 million, respectively.
As of September 30, 2009, the fair market value of the interest rate swaps was approximately
$(16.9) million, which is recorded in Accounts payable and accrued liabilities.
The Company is exposed to credit loss in the event of non-performance by the counterparties to
the interest rate swap agreements. However, the Company does not anticipate non-performance by the
counterparties.
(8) Related Party Transactions
In 2006, the Company agreed to pay Kelso an annual management fee of $600,000 in connection
with planning, strategy, oversight and support to management (financial advisory agreement). This
management fee was paid on a quarterly basis. A total of $287,000 of this management fee was
recorded as management fees paid to related parties in the unaudited consolidated statements of
operations for the period from January 1, 2008 to June 22, 2008 (Predecessor). Concurrent with the
closing of the IPO, the Company paid Kelso $6.0 million in exchange for the termination of its fee
obligations under the existing financial advisory agreement.
In August 2008, certain affiliates of Kelso guaranteed $20.0 million of the Second Lien Term
Loans held by JPMorgan Chase Bank, N.A. (JPM) (but not any subsequent assignee) and also agreed to
purchase the loans from JPM on December 7, 2008 if JPM had not sold such loans to third parties or
if the loans had not otherwise been repaid by that date. In September 2008, $5.0 million of these
loans were syndicated to California Bank and Trust, a member of the Companys first lien credit
syndicate. The remaining $15.0 million in loans continued to be guaranteed by affiliates of Kelso,
as the requirement to purchase had been extended until May 6, 2009, at which time affiliates of
Kelso purchased the loans from JPM.
(9) Share-based Compensation
On February 9, 2009, the Company granted stock options and RSUs to its chief executive officer
and its newly appointed Chairman of the Board of Directors (Chairman). The Companys chief
executive officer was granted 550,000 non-qualified stock options and 150,000 restricted stock
units (RSUs). The Companys Chairman was granted 350,000 non-qualified stock options and 350,000
RSUs. All stock options granted to both the Chairman and chief executive officer have an exercise
price equal to $4.04 per share, the closing price per share of the Companys common stock on
February 9, 2009 (the date of grant) and expire 10 years from the date of grant. Subject to each
recipients continued service with the Company, as of each applicable vesting date, 33
1
/
3
% of the stock options and RSUs will generally vest on each
of the first three anniversaries of the date of grant. With respect to each of the stock options
and restricted stock units, (i) 1/3 of the shares that become vested on each anniversary date will
become exercisable (with respect to shares subject to stock options) or transferable (with respect
to shares subject to RSUs) immediately upon vesting, (ii) 1/3 of the shares that become vested on
each anniversary will become exercisable or transferable, as applicable, upon the attainment of a
$9.00 stock price performance hurdle and (iii) 1/3 of the shares that become vested on each
anniversary will become exercisable or transferable, as applicable, upon the attainment of a $14.00
stock price performance hurdle. The stock options and RSUs provide for accelerated vesting if there
is a change in control (as defined in the RSU and stock option agreements). The RSUs were valued at
$4.04 per share based on the closing price of the Companys stock on the date of grant. The stock
options granted were valued using a Monte Carlo simulation model and have grant date fair values
associated with each vesting tranche ranging from $2.05 $2.45 per share.
Additionally, on February 9, 2009, the Companys Chairman and chief executive officer were
provided with certain distribution rights under the Second Amended and Restated Limited Liability
Company Agreement of KRH. The Companys chief executive officer forfeited 500 Value Units (profit
interest in KRH) and certain distribution rights in exchange for his new distribution rights. These
Value Unit and distribution right adjustments only impact the return to, and only dilute the
interests of, the owners of KRH, and will not impact the return to, or dilute the interest of, the
direct holders of the Companys common stock.
On June 12, 2009, the Company granted stock options and RSUs to Jeffrey C. Bloomberg, its
newly appointed member of the board of directors, and certain other newly hired employees. A total
of 31,000 non-qualified stock options and 31,000 RSUs were granted. All stock options granted have
an exercise price of $3.16, the closing price per share of the Companys common stock on June 12,
2009 (the date of grant) and expire 10 years from the date of grant. The stock options and RSUs
granted to Mr. Bloomberg vest on the first anniversary of the grant date while the stock options and RSUs granted to the
employees vest in one-third increments on the anniversary of the grant date in each of the three
years following the grant. The stock options and RSUs provide for accelerated
12
vesting if there is
a change in control (as defined in the RSU and stock option agreements). The RSUs were valued at
$3.16 per share based on the closing price of the Companys stock on the date of grant. The stock
options granted were valued using a Black-Scholes option pricing model and have a grant date fair
value of $1.37 per share.
(10) Commitments and Contingencies
The Company is involved in various legal proceedings and claims incidental to the normal
conduct of its business. Although it is impossible to predict the outcome of any outstanding legal
proceedings, the Company believes that such outstanding legal proceedings and claims, individually
and in the aggregate, are not likely to have a material effect on its financial position or results
of operations.
Putative Shareholder Class Action Lawsuit
On October 9, 2009, RHI Entertainment, Inc. and two of its officers were named as defendants
in a putative shareholder class action filed in the United States District Court for the Southern
District of New York (the Lawsuit), alleging violations of federal securities laws by issuing a
registration statement in connection with the Companys June 2008 initial public offering that
contained untrue statements of material facts and omitted other facts necessary to make certain
statements not misleading. The central allegation of the Lawsuit is that the registration statement
overstated the number of made-for-television (MFT) movies and mini-series the Company expected to
develop, produce and distribute in 2008, while it failed to disclose that the Company would not be
able to complete the expected number of MFT movies and miniseries in 2008 due to the declining
state of the credit markets and other negative factors then impacting the Companys business. The
Lawsuit seeks unspecified damages and interest. The Company believes that the Lawsuit has no merit
and intends to defend itself and its officers vigorously.
ION Settlement
On July 15, 2009, RHI Entertainment Distribution, LLC entered into a settlement agreement and
release (the Settlement Agreement) to resolve a dispute with one of the Companys distribution
partners, ION Media Networks, Inc. (ION), in connection with a lawsuit filed against the Company on
June 8, 2009. The lawsuit was filed in the United States Bankruptcy Court for the Southern District
of New York (the Court) and alleged that the Company breached the license agreement dated June
29, 2007, as amended on December 1, 2007 (the License Agreement), pursuant to which the Company
licensed to ION certain programming for broadcast on IONs television network, and ION provided to
RHI Entertainment Distribution the exclusive right to air such programming during certain time
periods and to receive the revenue from the sale of all but two minutes of advertising inventory
per broadcast hour during which the Companys programming aired.
The Settlement Agreement became effective on August 10, 2009 (the Effective Date), which was
two business days after it was approved by the Court. In connection with the Settlement Agreement,
the Company made a one-time payment of $2.5 million to ION on
August 10, 2009 (the Settlement
Payment). Under the Settlement Agreement, once the Settlement Payment was made to ION, the License
Agreement terminated and neither party has any further obligations to the other under such License
Agreement. Under the Settlement Agreement the parties released each other from any claims under the
License Agreement and ION dismissed its lawsuit against the Company.
The Settlement Payment represents the net amounts owed to ION by the Company associated with
the Companys final $3.5 million minimum guarantee payment and $3.3 million of minimum advertising
spending commitments net of $4.3 million owed by ION to the Company related to the Companys June
30, 2009 accounts receivable balance associated with advertising sales of the Companys programming
on ION. A net gain of approximately $1.0 million was recorded for the three and nine months ended
September 30, 2009, resulting from the settlement of any assets and liabilities related to the
License.
13
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion may contain forward-looking statements that reflect RHI Entertainment
Inc.s (RHI Inc) current views with respect to, among other things, future events and financial
performance. RHI Inc. generally identifies forward-looking statements by terminology such as
outlook, believes, expects, potential, continues, may, will, could, should,
seeks, approximately, predicts, intends, plans, estimates, anticipates or the
negative version of those words or other comparable words. Any forward-looking statements contained
in this discussion are based upon the historical performance of us and our subsidiaries and on our
current plans, estimates and expectations. The inclusion of this forward-looking information should
not be regarded as a representation by us, or any other person that the future plans, estimates or
expectations contemplated by us will be achieved. Such forward-looking statements are subject to
various risks and uncertainties and assumptions relating to our operations, financial results,
financial condition, business prospects, growth strategy and liquidity. If one or more of these or
other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect,
our actual results may vary materially from those indicated in these statements. These factors
should not be construed as exhaustive and should be read in conjunction with the other cautionary
statements that are included in this Form 10-Q. Unless required by law, RHI Inc. does not undertake
any obligation to publicly update or review any forward-looking statement, whether as a result of
new information, future developments or otherwise.
The historical consolidated financial data discussed below reflect the historical results
of operations of RHI Entertainment, LLC (RHI LLC) and its subsidiaries as RHI Inc. did not have any
historical operations prior to June 23, 2008. See Notes to RHI Inc.s Condensed Consolidated
Financial Statements included elsewhere in this Form 10-Q.
In this discussion, unless the context otherwise requires, the terms RHI Inc., the
Company, we, us and our refer to RHI Entertainment, Inc. and its subsidiaries including RHI
Entertainment Holdings II, LLC and RHI Entertainment, LLC.
Overview
We develop, produce and distribute new made-for-television (MFT) movies, mini-series and
other television programming worldwide. We also selectively produce new episodic series programming
for television. In addition to our development, production and distribution of new content, we own
an extensive library of existing long-form television content, which we license primarily to
broadcast and cable networks worldwide.
Our revenue and operating results are seasonal in nature. A significant portion of the
films that we develop, produce and distribute are delivered to the broadcast and cable networks in
the second half of each year. Typically, programming for a particular year is developed either late
in the preceding year or in the early portion of the current year. Generally, planning and
production take place during the spring and summer and completed film projects are delivered in the
third and fourth quarters of each year. As a result, our first, second and third quarters of our
fiscal year typically have less revenue than the fourth quarter of such fiscal year. Additionally,
the timing of the film deliveries from year-to-year may vary significantly. Importantly, the
results of one quarter are not necessarily indicative of results for the next or any future
quarter.
Each year, we develop and distribute a new list, or slate, of film content, consisting
primarily of MFT movies and mini-series. The investment required to develop and distribute each new
slate of films is our largest operating cash expenditure. A portion of this investment in film each
year is financed through the collection of license fees during the production process. Each new
slate of films is added to our library in the year subsequent to its initial year of delivery. Cash
expenditures associated with the distribution of the library film content are not significant.
We refer to the revenue generated from the licensing of rights in the fiscal year in
which a film is first delivered to a customer as production revenue. Any revenue generated from
the licensing of rights to films in years subsequent to the films initial year of delivery is
referred to as library revenue. The growth and interaction of these two revenue streams is an
important metric we monitor as it indicates the current market demand for both our new content
(production revenue) and the content in our film library (library revenue). We also monitor our
gross profit, which allows us to determine the overall profitability of our film content. We focus
on the profitability of our new film slates rather than volume. As such, we strive to manage the
scale of our individual production budgets to meet market demand and enhance profitability.
14
Discussion of consolidated financial information
Revenue
We derive our revenue from the distribution of our film content. Historically, most of
our revenue has been generated from the licensing of rights to our film content to broadcast and
cable networks for specified terms, in specified media and territories.
The timing of film deliveries during the year can have a significant impact on revenue.
Each year, we develop and distribute a new slate of film content, consisting primarily of MFT
movies and mini-series. We refer to the revenue generated from the licensing of rights in the
fiscal year in which a film is first delivered to a customer as production revenue. Any revenue
generated from the licensing of rights to films in years subsequent to the films initial year of
delivery is referred to as library revenue.
Cost of sales
We capitalize costs incurred for the acquisition and development of story rights, film
production costs, film production-related interest and overhead, residuals and participations.
Residuals and participations represent contingent compensation payable to parties associated with
the film including producers, writers, directors or actors. Residuals represent amounts payable to
members of unions or guilds such as the Screen Actors Guild, Directors Guild of America and
Writers Guild of America based on the performance of the film in certain media and/or the guild
members salary level.
Cost of sales includes the amortization of capitalized film costs, as well as
exploitation costs associated with bringing a film to market.
Selling, general and administrative expense
Selling, general and administrative expense includes salaries, rent and other expenses
net of amounts included in capitalized overhead. We expect increases in general and administrative
expense as we incur additional expenses in connection with operating as a publicly traded company.
Interest expense, net
Interest expense, net represents interest incurred on the Companys credit facilities
(inclusive of amortization of: i) deferred debt issuance costs, ii) fair market value of interest
rate swaps de-designated as hedges and iii) original issue discount). Interest expense is reflected
net of interest capitalized to film production costs.
Income taxes
Our operations are conducted through our indirect subsidiary, RHI LLC. Holdings II and RHI LLC are
organized as limited liability companies. For U.S. federal income tax purposes, Holdings II is
treated as a partnership and RHI LLC is disregarded as a separate entity from Holdings II.
Partnerships are generally not subject to income tax, as the income or loss is included in the tax
returns of the individual partners.
The consolidated financial statements of RHI Inc. include a provision for corporate
income taxes associated with RHI Inc.s membership interest in Holdings II as well as an income tax
provision related to RHI International Distribution, Inc., a wholly-owned subsidiary of RHI LLC,
which is a taxable U.S. corporation.
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates that we expect to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. We record a valuation allowance to reduce
our deferred tax assets to the amount that is more likely than not to be realized. In evaluating
our ability to recover our deferred tax assets, we consider all available positive and negative
facts and circumstances and allowances, if any, are adjusted during each reporting period.
KRH is entitled to exchange its common membership units in Holdings II for, at our
option, cash or shares of RHI Inc. common stock on a one-for-one basis (as adjusted to account for
stock splits, recapitalizations or similar events) or a combination of both stock and cash. These
exchanges may result in increases in the tax basis of the assets of Holdings II that otherwise
would not have been available. These increases in our proportionate share of tax basis may increase
depreciation and amortization deductions for tax
15
purposes and therefore reduce the amount of tax
that RHI Inc. would otherwise be required to pay in the future, although the IRS may challenge all
or part of that tax basis increase, and a court could sustain such a challenge.
Results of operations
Three months ended September 30, 2009 compared to the three months ended September 30, 2008
The results of operations for the three months ended September 30, 2009 and 2008 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Decrease)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue
|
|
$
|
2,576
|
|
|
$
|
21,833
|
|
|
|
$
|
(19,257
|
)
|
Library revenue
|
|
|
6,932
|
|
|
|
31,693
|
|
|
|
|
(24,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
9,508
|
|
|
|
53,526
|
|
|
|
|
(44,018
|
)
|
Cost of sales (including film production cost impairment charges of $6,957
for three months ended September 30, 2009)
|
|
|
17,680
|
|
|
|
38,247
|
|
|
|
|
(20,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(8,172
|
)
|
|
|
15,279
|
|
|
|
|
(23,451
|
)
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
8,565
|
|
|
|
9,814
|
|
|
|
|
(1,249
|
)
|
Amortization of intangible assets
|
|
|
270
|
|
|
|
314
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(17,007
|
)
|
|
|
5,151
|
|
|
|
|
(22,158
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(12,446
|
)
|
|
|
(9,855
|
)
|
|
|
|
(2,591
|
)
|
Interest income
|
|
|
1
|
|
|
|
17
|
|
|
|
|
(16
|
)
|
Other income (expense), net
|
|
|
934
|
|
|
|
(1,001
|
)
|
|
|
|
1,935
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and non-controlling interest in loss of
consolidated entity
|
|
|
(28,518
|
)
|
|
|
(5,688
|
)
|
|
|
|
(22,830
|
)
|
Income tax provision
|
|
|
(503
|
)
|
|
|
(389
|
)
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before non-controlling interest in loss of consolidated entity
|
|
|
(29,021
|
)
|
|
|
(6,077
|
)
|
|
|
|
(22,944
|
)
|
Non-controlling interest in loss of consolidated entity
|
|
|
12,275
|
|
|
|
2,570
|
|
|
|
|
9,705
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,746
|
)
|
|
$
|
(3,507
|
)
|
|
|
$
|
(13,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share.
|
|
$
|
(1.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
$
|
(0.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
16
Revenue, cost of sales and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
Production revenue
|
|
$
|
2,576
|
|
|
|
27
|
%
|
|
$
|
21,833
|
|
|
|
41
|
%
|
|
$
|
(19,257
|
)
|
|
|
(88
|
)%
|
Library revenue
|
|
|
6,932
|
|
|
|
73
|
%
|
|
|
31,693
|
|
|
|
59
|
%
|
|
|
(24,761
|
)
|
|
|
(78
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
9,508
|
|
|
|
100
|
%
|
|
|
53,526
|
|
|
|
100
|
%
|
|
|
(44,018
|
)
|
|
|
(82
|
)%
|
Cost of sales
(including film
production cost
impairment charges
of $6,957 for the
three months ended
September 30, 2009)
|
|
|
17,680
|
|
|
|
186
|
%
|
|
|
38,247
|
|
|
|
71
|
%
|
|
|
(20,567
|
)
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
$
|
(8,172
|
)
|
|
|
(86
|
)%
|
|
$
|
15,279
|
|
|
|
29
|
%
|
|
$
|
(23,451
|
)
|
|
|
(153
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased $44.0 million, or 82%, to $9.5 million during the three months ended
September 30, 2009 from $53.5 million during the same period in 2008.
Production revenue decreased $19.3 million to $2.6 million in the three months ended September
30, 2009, compared to $21.8 million during the same period in 2008. The decrease in production
revenue was due to the delivery of fewer films during the three months ended September 30, 2009
compared to the same period in 2009. In the three months ended September 30, 2009, one original
MFT movie was delivered, while five MFT movies and two mini-series were delivered during the three
months ended September 30, 2008. The reduction in the total
number of films delivered in the three months ended September 30, 2009, compared to the same period
in 2008, reflects overall weak market conditions and the on-going softness in the worldwide
advertising market. We currently expect to deliver approximately 27 films in 2009, meaning that
we expect to deliver approximately 20 films
in the fourth quarter of 2009. We delivered 35 films in
2008.
Library revenue decreased $24.8 million, or 78%, to $6.9 million in the three months ended
September 30, 2009 from $31.7 million during the comparable period in 2008. Library revenue
continues to be negatively impacted by the slow-down in sales activity resulting from weak market
conditions that began in the fourth quarter of 2008. While market conditions have improved, there
is continued pressure on pricing and volume, which was further confirmed at the MIPCOM sales
conference in October. In addition, we have experienced unanticipated delays in completing some
transactions for library product. As a result, when compared to the prior year, a higher
percentage of 2009s library sales activity is expected to fall into the fourth quarter. Library
revenue is recognized based upon when the window for a particular film becomes open and available
for a licensee to air. As a result, sales agreements completed in one quarter often are not
recognized as revenue until subsequent quarters.
Approximately $20.4 million of the decrease in library revenue is attributable to one
customer, to whom we continue to license product, who had significant licenses with windows opening
during the three months ended September 30, 2008 as compared to the same period in 2009. Also
contributing to the decrease was a $3.1 million reduction in revenue related to the distribution of
programming on ION during the three months ended September 30,
2009, compared to the same period in
the prior year as a result of the termination of our agreement with ION as discussed in footnote 10
of our unaudited condensed consolidated financial statements.
Cost of sales decreased $20.6 million to $17.7 million during the three months ended September
30, 2009 from $38.2 million during the same period in 2008. Cost of sales as a percentage of
revenue increased to 186% during the three months ended September 30, 2009 from 71% during the same
period in 2008. Cost of sales is comprised of film cost amortization, film production cost
impairment charges, certain distribution expenses and, through June 30, 2009, amortization of
minimum guarantee payments made to ION. The decrease in gross profit during the three months ended
September 30, 2009 compared to the same period in the prior year is primarily due to the lower
revenue recognized in the three months ended September 30, 2009 and the fact that the distribution
expenses do not directly correlate to the recognized revenue. Additionally, film production cost
impairment charges of $7.0 million were recorded during the three months ended September 30, 2009
(see discussion below). No film production cost impairment charges were recorded during the same
period in 2008. Film cost amortization (excluding film production
cost impairment charges and a one-time charge related to the
termination of the ION agreement) as a
percentage of revenue increased slightly to 63% during the three months ended September 30, 2009
compared 62% during the same period in 2008.
As the result of our quarterly ultimate revenue analysis and in light of continued weakness in
market prices and sales volume, we reduced the ultimate revenues for certain films in our library.
The reduction in ultimate revenues resulted in an increase to our film cost amortization for the
three months ended September 30, 2009 of $0.4 million. The reduction in ultimate revenues resulted
in a decrease in the fair value of certain films to an amount below their net book value.
Impairment charges were recorded totaling $7.0
17
million during the three months ended September 30, 2009 to reduce the net book value of those
films to an amount approximating their fair value. As a result of
current market conditions and the reduction in ultimate revenues, we
also anticipate that film cost amortization as a percentage of revenue
for both library films and new production will be higher in future
periods than those experienced in recent years.
Other costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
$ Increase/
|
|
%Increase/
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
(Decrease)
|
|
|
(Dollars in thousands)
|
Selling, general and administrative
|
|
$
|
8,565
|
|
|
$
|
9,814
|
|
|
$
|
(1,249
|
)
|
|
|
(13
|
)%
|
Amortization of intangible assets
|
|
|
270
|
|
|
|
314
|
|
|
|
(44
|
)
|
|
|
(14
|
)%
|
Selling, general and administrative expenses decreased $1.2 million to $8.6 million in the
three months ended September 30, 2009, from $9.8 million in the same period in 2008. The decrease
of 13% is primarily due to less expense associated with the marketing and promotion of our
programming on ION. During the three months ended September 30, 2008, we incurred approximately
$0.8 million of costs associated with the marketing and promotion of our programming on ION
compared to credits of $0.6 million during the three months ended September 30, 2009 due to the
reversal of certain accrued liabilities resulting from the Settlement Agreement discussed in
footnote 10 to our unaudited condensed consolidated financial statements. Also contributing to the
decrease in selling, general and administrative costs are the benefits from our fourth quarter 2008
decision to reduce our overhead costs. These decreases were partially offset by severance costs
incurred during the three months ended September 30, 2009.
Interest expense, net
Interest expense, net increased $2.6 million to $12.4 million for the three months ended
September 30, 2009 from $9.9 million during the comparable period in 2008. The increase in interest
expense is primarily due to amortization of the fair market value of the interest rate swaps
de-designated as hedges. As discussed in footnote 7 of our unaudited condensed consolidated
financial statements, on April 21, 2009, the Company amended its existing interest rate swap
agreements and de-designated them as cash flow hedges. As a result of the de-designation, the fair
market value of the swaps immediately preceding the amendments is being amortized as interest
expense for the period of April 21, 2009 through April 27, 2010, which is the maturity date of the
original swaps. For the three months ended September 30, 2009, the amortization of the fair value
of the amended interest rate swaps was $4.0 million. Also contributing to the increase in interest
expense was additional interest expense of $1.5 million associated with the net settlement of our
current interest rate swaps and an increase in weighted average debt outstanding for the three
months ended September 30, 2009, compared to the same period in the prior year. During the three
months ended September 30, 2009, we had an average debt balance of $586.6 million compared to
$560.6 million during the comparable period of 2008. Partially offsetting these increases was a
reduction in weighted average interest rates during the three months ended September 30, 2009 as
compared to the same period of 2008 resulting from the reductions in the benchmark interest rates
(i.e. LIBOR). The average interest rate during the three months ended September 30, 2009 was 3.1%,
compared to 5.4% during the comparable period of 2008.
Other income (expense), net
For the three months ended September 30, 2009, Other income (expense), net represents the
change in fair value of our interest rate swaps subsequent to the amendment and de-designation of
our interest rate swaps as cash flow hedges and realized foreign currency gains resulting from the
settlement of customer accounts denominated in foreign currencies. The change in the fair market
value of our interest rate swaps resulted in a gain of $0.5 million for the three months ended
September 30, 2009. Foreign currency gains for the same period amounted to $0.4 million. Other
income (expense), net for the three months ended September 30, 2008 primarily represents foreign
exchange losses of $1.0 million.
Income tax provision
The income tax provision for the three months ended September 30, 2009 and 2008 is primarily
related to foreign taxes related to license fees from customers located outside the United States.
No tax benefit has been provided for RHI Inc.s interest in the net loss because insufficient
evidence is available that would support that it is more likely than not that we will generate
sufficient income to utilize the net operating loss generated by RHI Inc.
Net loss
The net loss for the three months ended September 30, 2009 was $(16.7) million, compared to
$(3.5) million for the three months ended September 30, 2008.
18
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
The results of operations for the nine months ended September 30, 2009 and 2008 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
|
(a) + (b)
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Combined (1)
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
June 23, 2008 to
|
|
|
January 1, 2008
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Increase/
|
|
|
|
September 30, 2008
|
|
|
to June 22, 2008
|
|
|
|
2008
|
|
|
2009
|
|
|
(Decrease)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue
|
|
$
|
22,765
|
|
|
$
|
6,602
|
|
|
|
$
|
29,367
|
|
|
$
|
14,408
|
|
|
$
|
(14,959
|
)
|
Library revenue
|
|
|
33,182
|
|
|
|
66,643
|
|
|
|
|
99,825
|
|
|
|
30,786
|
|
|
|
(69,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
55,947
|
|
|
|
73,245
|
|
|
|
|
129,192
|
|
|
|
45,194
|
|
|
|
(83,998
|
)
|
Cost of sales (including film production cost
impairment charges of $6,957 during the
nine months ended September 30, 2009)
|
|
|
39,550
|
|
|
|
49,396
|
|
|
|
|
88,946
|
|
|
|
49,605
|
|
|
|
(39,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
16,397
|
|
|
|
23,849
|
|
|
|
|
40,246
|
|
|
|
(4,411
|
)
|
|
|
(44,657
|
)
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,546
|
|
|
|
25,802
|
|
|
|
|
36,348
|
|
|
|
26,453
|
|
|
|
(9,895
|
)
|
Amortization of intangible assets
|
|
|
350
|
|
|
|
671
|
|
|
|
|
1,021
|
|
|
|
869
|
|
|
|
(152
|
)
|
Fees paid to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
|
|
|
|
287
|
|
|
|
|
287
|
|
|
|
|
|
|
|
(287
|
)
|
Termination fee
|
|
|
6,000
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(499
|
)
|
|
|
(2,911
|
)
|
|
|
|
(3,410
|
)
|
|
|
(31,733
|
)
|
|
|
(28,323
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(10,674
|
)
|
|
|
(21,559
|
)
|
|
|
|
(32,233
|
)
|
|
|
(32,513
|
)
|
|
|
(280
|
)
|
Interest income
|
|
|
20
|
|
|
|
34
|
|
|
|
|
54
|
|
|
|
5
|
|
|
|
(49
|
)
|
Other income (expense), net
|
|
|
(934
|
)
|
|
|
706
|
|
|
|
|
(228
|
)
|
|
|
(713
|
)
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and
non-controlling interest in loss of
consolidated entity
|
|
|
(12,087
|
)
|
|
|
(23,730
|
)
|
|
|
|
(35,817
|
)
|
|
|
(64,954
|
)
|
|
|
(29,137
|
)
|
Income tax (provision) benefit
|
|
|
(472
|
)
|
|
|
1,518
|
|
|
|
|
1,046
|
|
|
|
(1,021
|
)
|
|
|
(2,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before non-controlling interest
in loss of consolidated entity
|
|
|
(12,559
|
)
|
|
|
(22,212
|
)
|
|
|
|
(34,771
|
)
|
|
|
(65,975
|
)
|
|
|
(31,204
|
)
|
Non-controlling interest in loss of
consolidated entity
|
|
|
5,312
|
|
|
|
|
|
|
|
|
5,312
|
|
|
|
27,907
|
|
|
|
22,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,247
|
)
|
|
$
|
(22,212
|
)
|
|
|
$
|
(29,459
|
)
|
|
$
|
(38,068
|
)
|
|
$
|
(8,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share.
|
|
$
|
(0.54
|
)
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
$
|
(2.82
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the combined results for the Predecessor and Successor period presented. The
combined results are non-GAAP financial measures and should not be used in isolation or
substitution of Predecessor and Successor results. We believe the combined results help to
provide a presentation of our results for comparability purposes to prior periods. These
combined results form the basis for the ensuing discussion of the results of our operations.
|
19
Revenue, cost of sales and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
Production revenue
|
|
$
|
14,408
|
|
|
|
32
|
%
|
|
$
|
29,367
|
|
|
|
23
|
%
|
|
$
|
(14,959
|
)
|
|
|
(51
|
)%
|
Library revenue
|
|
|
30,786
|
|
|
|
68
|
%
|
|
|
99,825
|
|
|
|
77
|
%
|
|
|
(69,039
|
)
|
|
|
(69
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
45,194
|
|
|
|
100
|
%
|
|
|
129,192
|
|
|
|
100
|
%
|
|
|
(83,998
|
)
|
|
|
(65
|
)%
|
Cost of sales
(including film
production cost
impairment charges
of $6,957 during
the nine months
ended September 30,
2009)
|
|
|
49,605
|
|
|
|
110
|
%
|
|
|
88,946
|
|
|
|
69
|
%
|
|
|
(39,341
|
)
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
$
|
(4,411
|
)
|
|
|
(10
|
)%
|
|
$
|
40,246
|
|
|
|
31
|
%
|
|
$
|
(44,657
|
)
|
|
|
(111
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased $84.0 million, or 65%, to $45.2 million during the nine months ended
September 30, 2009 from $129.2 million during the same period in 2008.
Production revenue decreased $15.0 million to $14.4 million in the nine months ended September
30, 2009, compared to $29.4 million during the same period in 2008. In the nine months ended
September 30, 2009, five original MFT movies and two original mini-series were delivered, while 14
original MFT movies and two original mini-series were delivered during the nine months ended
September 30, 2008. While the decrease in production revenue was partly due to the delivery of
fewer films, the primary reason for the decrease was lower license fees recognized on the two
mini-series delivered during the nine months ended September 30,
2009, compared to the two
mini-series delivered during the same period in 2008. Initial license fees were recognized on all
five of the MFT movies delivered in the nine months ended September 30, 2009, compared to six of
the 14 MFT movies delivered in the nine months ended September 30, 2008. The other eight films
delivered during the nine months ended September 30, 2008 premiered on video-on-demand prior to the
initial broadcast term. While the short video-on-demand windows earn royalty-based revenue, they
delay the opening of the domestic initial license window and, therefore, the recognition of revenue
associated with domestic initial license fees occurs later. The reduction in the total number of films delivered in the nine months ended September 30, 2009,
compared to the same period in 2008, reflects overall weak market conditions and the on-going
softness in the worldwide advertising market. We currently expect to
deliver approximately 27
films in 2009, meaning that we expect
to deliver approximately 20
films in the fourth quarter of 2009. We delivered 35 films in 2008.
Library revenue decreased $69.0 million, or 69%, to $30.8 million in the nine months ended
September 30, 2009 from $99.8 million during the comparable period in 2008. Library revenue
continues to be negatively impacted by the slow-down in sales activity resulting from weak market
conditions that began in the fourth quarter of 2008. While market conditions have improved, there
is continued pressure on pricing and volume. In addition, we have experienced unanticipated delays
in completing some transactions for library product. As a result, when compared to the prior year,
a higher percentage of 2009s library sales activity is expected to fall into the fourth quarter.
Approximately $54.0 million of the decrease is attributable to one customer who had significant
licenses with windows opening during the nine months ended September 30, 2008 as compared to the
same period in 2009. Also contributing to the decrease was a $6.2 million reduction in revenue
related to the distribution of programming on ION during the nine months ended September 30, 2009
compared to the same period in the prior year. This decrease is the result of the termination of
our agreement with ION effective as of June 30, 2009 as well as a weaker advertising market.
Cost of sales decreased $39.3 million to $49.6 million during the nine months ended September
30, 2009 from $88.9 million during the same period in 2008. Cost of sales as a percentage of
revenue increased to 110% during the nine months ended September 30, 2009 from 69% during the same
period in 2008. Cost of sales is comprised of film cost amortization, film cost impairment charges,
certain distribution expenses and, through June 30, 2009, amortization of minimum guarantee
payments made to ION. The decrease in gross profit during the nine months ended September 30, 2009
compared to the same period in the prior year is due to the lower revenue recognized in the nine
months ended September 30, 2009 and the fact that the distribution expenses and ION minimum
guarantee expense do not directly correlate to the recognized revenue. Additionally, film
production cost impairment charges of $7.0 million were recorded during the nine months ended
September 30, 2009 (see discussion below). No film production cost impairment charges were recorded
during the same period of 2008. Film cost amortization (excluding film production cost impairment
charges and a one-time charge related to the termination of the ION
agreement) as a percentage of revenue increased slightly to 62% during the nine months ended
September 30, 2009 compared to 60% during the same period in 2008.
20
As the result of our quarterly ultimate revenue analysis and in light of continued weakness in
market prices and sales volume, we reduced the ultimate revenues for certain films in our library.
The reduction in ultimate revenues resulted in an increase to our film cost amortization for the
nine months ended September 30, 2009 of $0.4 million. The reduction in ultimate revenues resulted
in a decrease in the fair value of certain films to an amount below their net book value.
Impairment charges were recorded totaling $7.0 million during the nine months ended September 30,
2009 to reduce the net book value of those films to an amount approximating their fair value. As a result of
current market conditions and the reduction in ultimate revenues, we
also anticipate that film cost amortization as a percentage of revenue
for both library films and new production will be higher in future
periods than those experienced in recent years.
Other cost of sales were higher during the nine months ended September 30, 2009 as compared to
the same period of 2008 due to approximately $3.4 million credit recorded in the nine months ended
September 30, 2008 as a result of the reduction of certain participation accruals. No similar
credit was recorded in the nine months ended September 30, 2009.
Other costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
$ Increase/
|
|
% Increase/
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
(Decrease)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Selling, general and administrative
|
|
$
|
26,453
|
|
|
$
|
36,348
|
|
|
$
|
(9,895
|
)
|
|
|
(27
|
)%
|
Amortization of intangible assets
|
|
|
869
|
|
|
|
1,021
|
|
|
|
(152
|
)
|
|
|
(15
|
)%
|
Fees to related parties
|
|
|
|
|
|
|
6,287
|
|
|
|
(6,287
|
)
|
|
|
(100
|
)%
|
Selling, general and administrative expenses decreased $9.9 million to $26.5 million in the
nine months ended September 30, 2009, from $36.3 million in the same period in 2008. The decrease
of 27% is primarily due to the collection of approximately $2.8 million of accounts receivable from
Tele-Munchen in 2009, which was previously reserved for during the nine months ended September 30,
2008. Additionally, during the nine months ended September 30,
2008, we incurred approximately $2.8
million more in costs related to the marketing and promotion of our programming on ION and $1.0
million more in costs associated with severance agreements compared to the same period of 2009.
These decreases were offset by additional costs incurred in connection with operating as a publicly
traded company as well as professional fees which were not incurred during the nine months ended
September 30, 2008. While the company has begun to experience cash savings from our 2008 decision
to reduce overhead costs, the savings are not reflected in our selling, general and administrative
expenses because a significant portion of the savings related to overhead costs that were
capitalized and allocated to our films in the prior year.
In 2006, we agreed to pay Kelso an annual management fee of $600,000 in connection with a
financial advisory agreement for the planning, strategy, oversight and support to management. A
total of $287,000 of this management fee was recorded as fees paid to related parties during the
nine months ended September 30, 2008. Concurrent with the closing of the IPO, we paid Kelso $6.0
million in exchange for the termination of its fee obligations under the existing financial
advisory agreement. The $6.0 million was recorded as fees paid to related parties during the nine
months ended September 30, 2008.
Interest expense, net
Interest expense, net increased $0.3 million to $32.5 million for the nine months ended
September 30, 2009 from $32.2 million during the comparable period in 2008. The increase in
interest expense is primarily due to amortization of the fair market value of the interest rate
swaps de-designated as hedges. As discussed in footnote 7 of our unaudited condensed consolidated
financial statements, on April 21, 2009, the Company amended its existing interest rate swap
agreements and de-designated them as cash flow hedges. As a result of the de-designation, the fair
market value of the swaps immediately preceding the amendments is being amortized as interest
expense for the period of April 21, 2009 through April 27, 2010, which is the maturity date of the
original swaps. For the nine months ended September 30, 2009, the amortization of the fair value
of the amended interest rate swaps was $7.0 million. In addition, interest expense associated with
the net settlement of our interest rate swaps increased $4.1 million and amortization of deferred
debt costs increased $1.1 million during the nine months ended September 30, 2009 compared to the
same period in the prior year. Partially offsetting the effects of the accounting for our interest
rate swaps and deferred debts costs was a reduction in weighted average interest rates during the
nine months ended September 30, 2009 as compared to the same period of 2008 resulting from the
reductions in the benchmark interest rates (i.e. LIBOR). The average interest rate during the nine
months ended September 30, 2009 was 3.7%, compared to 5.8% during the comparable period of 2008. In
addition, weighted average debt balances outstanding during the nine months ended September 30,
2009 decreased compared to 2008. During the nine months ended September 30, 2009, we had an average
debt balance of $580.9 million compared to $633.1 million during the comparable period of 2008.
21
Other income (expense), net
For the nine months ended September 30, 2009, Other income (expense), net represents the
change in fair value of our interest rate swaps subsequent to the amendment and de-designation of
our interest rate swaps as cash flow hedges and realized foreign currency gains resulting from the
settlement of customer accounts denominated in foreign currencies. The change in the fair market
value of our interest rate swaps resulted in a loss of $0.8 million for the nine months ended
September 30, 2009. Other income (expense), net for the nine months ended September 30, 2008
primarily represents foreign exchange losses of $0.2 million.
Income tax (provision) benefit
The income tax provision for the nine month period ended September 30, 2009 is primarily
related to foreign taxes related to license fees from customers located outside the United States.
The benefit in the prior year resulted from taxable losses associated with our corporate subsidiary
offset by foreign taxes related to license fees from customers located outside the United States.
No tax benefit has been provided for RHI Inc.s interest in the net loss because insufficient
evidence is available that would support that it is more likely than not that we will generate
sufficient income to utilize the net operating loss generated by RHI Inc.
Net loss
The net loss for the nine months ended September 30, 2009 was $(38.1) million, compared to
$(29.5) million for the nine months ended September 30, 2008. The net loss for the nine months
ended September 30, 2009 is not comparable to the net loss for the nine months ended September 30,
2008, as the pre-IPO period from January 1, 2008 to June 22, 2008 does not include any adjustment
for non-controlling interest in loss of consolidated entity.
Liquidity and capital resources
Our credit facilities currently include: (i) two first lien facilities, a $175.0 million
term loan and a $350.0 million revolving credit facility; and (ii) a $75.0 million senior second
lien term loan. As of September 30, 2009, all of our debt was variable rate and totaled
$589.6 million outstanding. To manage the related interest rate risk, we have entered into interest
rate swap agreements. As of September 30, 2009, we had floating to fixed interest rate swaps
outstanding in the notional amount of $435.0 million, effectively converting that amount of debt
from variable rate to fixed rate. The interest rate swaps were amended in April 2009 (refer to
footnote 7 of our unaudited condensed consolidated financial statements) which will result in cash
interest savings through April 2010. As of September 30, 2009, we had $3.2 million of cash compared
to $22.4 million of cash at December 31, 2008. As of September 30, 2009, we had $7.0 million
available under our revolving credit facility, net of an outstanding letter of credit, subject to
the terms and conditions of that facility. The decrease in cash reflects our production spending
during the nine months ended September 30, 2009. Historically, we have financed our operations with
funds from operations, capital contributions from our owners and the use of credit facilities.
Additionally, from time-to-time, we may seek additional capital through the incurrence of debt, the
issuance of equity or other financing alternatives.
Our ability to meet our debt and other obligations and to reduce our total debt depends
on our future operating performance and on economic, financial, competitive and other factors. High
levels of interest expense could have negative effects on our future operations. Interest expense,
which is net of capitalized interest and includes amortization of debt issuance costs and
amortization of the fair market value of the interest rate swaps de-designated as hedges, totaled
$32.5 million for the nine months ended September 30, 2009. A substantial portion of our cash flow
from operations must be used to pay our interest expense and will not be available for other
business purposes.
Management is continually reviewing its operations for opportunities to adjust the timing of
expenditures to ensure that sufficient resources are maintained. The timing surrounding the
commencement of production of movies and mini-series is the most significant item we can alter in
terms of managing our resources. In addition to the seven films we delivered during the nine
months ended September 30, 2009, we have films in various stages of production and currently expect
to deliver approximately 27 films in 2009. Our production partners have financed a substantial
portion of the cost for each 2009 film through the use of new or existing credit facilities of
their own. In connection with these financings, we have consented to our production partners
pledging as collateral the associated distribution contracts they have with RHI. Although a
majority of our films are in production in the summer months so that
22
they can be delivered late in the third quarter and during the fourth quarter, a portion of the
funding for these films has been paid and, consistent with prior periods, a portion has been
deferred to future periods to better match the cash inflows related to sales of this product. As
such, our net production funding requirements for the balance of 2009 are not significant relative
to the remaining film deliveries. To the extent funding for a
production has not been paid, an accrual for the remaining funding is recorded as Accrued film production costs in our balance sheet. If our production partners cannot finance a substantial portion
of a films cost through the use of new or existing credit facilities of their own, we may decide
not to develop or produce that film. As a result, the number of films we produce may be further
reduced, which could have an adverse impact on our production revenue. Reflecting this as well as
continued soft market conditions, we currently expect to deliver
approximately 27 films in 2009,
down from earlier expectations of 30-35 films. In addition, given overall market conditions and
recent sales activity, discussions are underway with certain of these project lenders about the
timing of certain of these deferred production payments due in 2010. Depending on sales activity
during the fourth quarter of 2009, certain of these payments may need to be extended beyond 2010.
See Risk Factors Risks related to our business Our focus on managing our resources in the most
efficient manner may result in a reduction in our production slate in our Annual Report on Form
10-K for the year ended December 31, 2008, which was filed with the SEC on March 5, 2009.
In general, we expect that the revenue for a film over its ultimate period (generally 10
years) will significantly exceed the cost of that film. Quarterly, we assess market conditions,
sales data, pricing and other factors to determine if any changes have occurred that could cause a
reduction in that expected ultimate revenue for its films. If management determines that the
above-noted factors indicate a potential reduction in ultimate revenues and/or a film impairment,
further analysis is performed. In light of continued weakness in market prices and sales volume,
which was further confirmed at the MIPCOM sales conference in
October, the ultimate analysis completed as of September 30, 2009 resulted in a reduction of the ultimate
revenues for certain films in our library. A reduction in the ultimate revenue associated with a
particular film results in a higher rate of amortization over the films remaining accounting life
and causes a reduction in the films prospective profit margin For the three and nine months ended
September 30, 2009, the reduction in ultimate revenues from our review resulted in an increase to
our film cost amortization of $0.4 million. Additionally, the reduction in ultimate revenues
resulted in a decrease in the fair value of certain films to an amount below their net book value.
As a result,
impairment charges were recorded for 30 films totaling $7.0 million during the three and nine
months ended September 30, 2009 to reduce the net book value for those films to an amount
approximating their fair value.
Given the seasonal nature of our business, management continues to review the ultimate revenue
associated with our films in the fourth quarter. This analysis benefits from additional data
points, including current market conditions, library sales activity during the fourth quarter, the
delivery of the remainder of our annual film slate and the results of the annual independent
valuation of our film library (see below). The Company expects to complete this work during the fourth quarter of
2009. Any further reduction in the ultimate revenue of our films and/or an impairment of certain
films in the library could result in additional net losses for the year ended December 31, 2009.
Such losses and associated write-down of assets, if substantial,
and/or an inability to meet our fourth quarter income projections
could cause the Company to be in
default of the Minimum Consolidated Tangible Net Worth covenant (Net Worth Covenant) contained in
its First Lien Credit Agreement. While the Company is unable at this time to determine
whether any such default will occur, the Company has begun discussions with its administrative
agent and other lenders in its bank syndicate to address this possibility. In the event of an
imminent or actual default of the Net Worth Covenant, we cannot assure you that the Company and its
lenders will reach an agreement on an appropriate accommodation, including a possible waiver and/or
amendment of the Net Worth Covenant. If there is a default under the Net Worth Covenant and an
amendment or waiver cannot be obtained, the Company would be in
default under its First Lien Credit
Agreement which would also cause a default under its Second Lien Credit Agreement if the loans
under its First Lien Credit Agreement were accelerated. We cannot give assurances that an
accommodation can be obtained on satisfactory terms or at all. Any such accommodation, if reached,
would likely result in alterations to the terms of our First Lien Credit Facility, including
additional fees and a higher interest rate.
Each
year, the Company commissions an independent valuation of its film library in accordance
with the covenants in its credit agreements. This valuation, which is typically conducted in the
first quarter of each year, includes a determination of the value of the non-contracted portion of
the film library i.e., the value of the rights that are not encumbered by any existing licenses
and therefore are available for license to third parties. Our First Lien Credit Agreement provides
that the amount of money that the Company may borrow is a formula based on certain asset values,
including the value of the non-contracted portion of the film library. This formula is called a
borrowing base. In its borrowing base formula, the Company receives a library advance rate of
55%, meaning that 55% of the value of the non-contracted portion of the film library is included in
the calculation of its borrowing base. It is possible that when this independent valuation is
completed, the non-contracted portion of the film library may be valued at a lower valuation than
the valuation currently used in the Companys borrowing base, which could potentially result in a
reduction in the borrowing base, thereby restricting the Companys ability to draw on its full
First Lien Credit Facilities. In addition, the Company needs to address an issue with the lenders
concerning the borrowing base and the allowable level of certain receivables in the borrowing base
calculation related to a major customer. Failure to favorably resolve this issue could result in
an approximate $32 million reduction of the borrowing base as of December 31, 2009. The resolution
of the issue regarding the borrowing base is important to maintain the full
23
availability of the First Lien Credit Facilities.
If our drawings under the
revolving portion of our First Lien Credit Facility exceed the amount of the borrowing base, the
Company would be required to make an immediate prepayment in the amount our drawings exceed the
borrowing base and, if the Company failed to do so, it would be in
default under its First Lien Credit Agreement.
While the Company at this time does not know the
result of the independent valuation or its potential impact on the borrowing base, and the Company
is likewise unable to determine at this time whether it can resolve the borrowing base issue noted
above, the Company has begun discussions with its administrative agent and other lenders in its
bank syndicate to address these matters. If an agreement cannot be reached,
the Company would be unable to draw on its full borrowing capacity. There can be no assurance that an accommodation, if necessary, can be obtained on
satisfactory terms or at all. Any such accommodation is likely to result in alterations to the
terms of our First Lien and Second Lien Credit Facilities, including additional fees and a higher
interest rate.
As noted above, discussions are underway with certain of these project lenders concerning
deferred production payments and the Company has had and will continue to have discussions with the
lenders in its bank syndicate regarding at least two financial covenants. Although there can be no
assurance as to the outcome, pending the favorable resolution of these matters, management believes
that the cash on hand, available borrowings under our credit facility and projected cash flows from
operations will be sufficient to satisfy the Companys financial obligations through at least the
next twelve months. See Risk Factors Risks related to our business Our substantial
indebtedness could adversely affect our financial health and prevent us from fulfilling our
obligations under our existing senior secured credit facilities in our Annual Report on Form 10-K
for the year ended December 31, 2008, which was filed with the SEC on March 5, 2009.
The chart below shows our cash flows for the nine months ended September 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
(a) + (b)
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Combined
|
|
Successor
|
|
|
Period from
|
|
Period from
|
|
Nine Months
|
|
Nine Months
|
|
|
June 23, 2008
|
|
January 1,
|
|
Ended
|
|
Ended
|
|
|
to September 30,
|
|
2008 to June 22,
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2009
|
|
|
(Dollars in thousands)
|
Net cash used in operating activities
|
|
$
|
(30,574
|
)
|
|
$
|
(32,331
|
)
|
|
$
|
(62,905
|
)
|
|
$
|
(31,713
|
)
|
Net cash used in investing activities
|
|
|
(77
|
)
|
|
|
(81
|
)
|
|
|
(158
|
)
|
|
|
(212
|
)
|
Net cash provided by financing activities
|
|
|
3,837
|
|
|
|
64,520
|
|
|
|
68,357
|
|
|
|
12,800
|
|
Cash (end of period)
|
|
|
6,701
|
|
|
|
33,515
|
|
|
|
6,701
|
|
|
|
3,248
|
|
Operating activities
Cash used in operating activities in the nine months ended September 30, 2009 was
$31.7 million, as compared to $62.9 million for the comparable period in 2008. Operating cash
flows reflect spending related to production, distribution, selling, general and administrative
expenses and interest, offset by the collection of cash associated with the distribution of our MFT
movies, mini-series and other television programming. The $31.2 million improvement in operating
cash flows was primarily the result of a $23.4 million increase in receipts from the film library,
a $3.7 million reduction in interest paid and a $4.1 million decrease in payments related to
selling, general and administrative expense.
Investing activities
During the nine months ended September 30, 2009 and 2008, we used $212,000 and $158,000,
respectively, in investing activities, reflecting the purchase of property and equipment.
Financing activities
During the nine months ended September 30, 2009, there was $12.8 million of cash provided
by financing activities due to borrowings under our credit facilities (net of repayments of $1.0
million), principally to fund our operations.
During the nine months ended September 30, 2008, $68.4 million of cash was provided by
financing activities. We used the $174.0 million of net proceeds from our IPO in combination with
$55.0 million of proceeds from our new second lien term loan and $81.2 million of proceeds from our
revolving credit facility to fund the $260.0 million repayment of our prior second lien term loan,
a $35.7 million distribution to KRH, a $2.6 million second lien term loan pre-payment penalty and
$4.2 million of costs associated with our new and amended credit facilities. RHI LLC received a
$29.1 million equity contribution from KRH prior to the IPO. An additional $32.0 million of cash
was provided by financing activities from borrowings under our credit facilities (net of repayments
of $69.6 million), inclusive of $19.6 million in proceeds from additional loans under our second lien
credit facility.
24
Contractual obligations
The following table sets forth our contractual obligations as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
Off balance sheet arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments (1)
|
|
$
|
35,155
|
|
|
$
|
3,762
|
|
|
$
|
7,261
|
|
|
$
|
6,981
|
|
|
$
|
17,151
|
|
Purchase obligations (2)
|
|
|
41,931
|
|
|
|
39,046
|
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,086
|
|
|
|
42,808
|
|
|
|
10,146
|
|
|
|
6,981
|
|
|
|
17,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations reflected on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations (3)
|
|
|
589,589
|
|
|
|
|
|
|
|
52,500
|
|
|
|
462,089
|
|
|
|
75,000
|
|
Accrued film production costs (4)
|
|
|
49,883
|
|
|
|
49,596
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
Other contractual obligations (5)
|
|
|
10,597
|
|
|
|
6,597
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650,069
|
|
|
|
56,193
|
|
|
|
54,787
|
|
|
|
464,089
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
(6)
|
|
$
|
727,155
|
|
|
$
|
99,001
|
|
|
$
|
64,933
|
|
|
$
|
471,070
|
|
|
$
|
92,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating lease commitments represent future minimum payment obligations on various long-term
noncancellable leases for office (primarily New York City headquarters) and storage space.
|
|
(2)
|
|
Purchase obligation amounts represent a contractual commitment to exclusively license the
rights in and to a film that is not complete.
|
|
(3)
|
|
Debt obligations exclude interest payments and include future principal payments due on our
bank debt (see Note 7).
|
|
(4)
|
|
Accrued film production costs represent contractual amounts payable for the completed films
as well as costs incurred for the buy out of certain participations.
|
|
(5)
|
|
Other contractual obligations primarily represent commitments to settle various accrued
liabilities.
|
|
(6)
|
|
Excluded from the table are $1.6 million of unrecognized tax obligations associated with FIN
48 for which the timing of payment is not estimable.
|
Off-balance sheet arrangements
We do not have any relationships with unconsolidated entities or financial partnerships,
such as variable interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical accounting policies and estimates
For a complete discussion of our accounting policies, see the information under the
heading Managements discussion and analysis of financial condition and results of operations
Critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended
December 31, 2008, which was filed with the SEC on March 5, 2009. We believe there have been no
material changes to the critical accounting policies and estimates disclosed in the Companys Form
10-K.
Recent accounting pronouncements
In June 2009, the FASB issued SFAS No. 166, Amendments to FASB Interpretation No. 46(R).
This statement requires an enterprise to perform an analysis to determine whether the enterprises
variable interest or interests give it a controlling financial interest in a variable interest
entity. The statement requires ongoing reassessments of whether an enterprise is a primary
beneficiary of a variable interest entity and eliminates the quantitative approach previously
required for determining the primary beneficiary. SFAS No. 166 is effective as of January 1, 2010
and the Company does not anticipate SFAS No. 166 to have a material impact to the companys
consolidated financial statements.
25
In June 2009, the FASB issued SFAS No. 167, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140, which removes the concept of a qualifying special-purpose entity from Statement 140 and
removes the exception from applying FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities,
to qualifying special-purpose entities. This
Statement clarifies that the objective of paragraph 9 of Statement 140 is to determine whether a
transferor and all of the entities included in the transferors financial statements being
presented have surrendered control over transferred financial assets. That determination must
consider the transferors continuing involvements in the transferred financial asset, including all
arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even
if they were not entered into at the time of the transfer. This Statement modifies the
financial-components approach used in Statement 140 and limits the circumstances in which a
financial asset, or portion of a financial asset, should be derecognized when the transferor has
not transferred the entire original financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented and/or when the transferor has continuing
involvement with the transferred financial asset. SFAS No. 167 is effective as of January 1, 2010
and the Company does not anticipate SFAS No. 167 to have a material impact to the companys
consolidated financial statements.
In August, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value or ASU 2009-05. ASU 2009-05 allows
companies determining the fair value of a liability to use the perspective of an investor that
holds the related obligation as an asset. The update addresses practice difficulties caused by the
tension between fair-value measurements based on the price that would be paid to transfer a
liability to a new obligor and contractual or legal requirements that prevent such transfers from
taking place. The update is effective for interim and annual periods beginning after August 27,
2009. The Company does not anticipate the adoption of the update to have a material impact on the
financial statements.
For a description of recent accounting pronouncements adopted, see Note 3 Summary of
Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial
Statements.
26
Item 3.
Quantitative and Qualitative Disclosures about Risk
Interest rate risk
We are subject to market risks resulting from fluctuations in interest rates as our
credit facilities are variable rate credit facilities. To manage the related risk, we enter into
interest rate swap agreements. As of September 30, 2009, we have swaps outstanding that total
$435.0 million, effectively converting that portion of debt from variable rate to fixed rate.
Foreign currency risk
Our reporting currency is the U.S. Dollar. We are subject to market risks resulting from
fluctuations in foreign currency exchange rates through some of our international licensees and we
incur certain production and distribution costs in foreign currencies. The primary foreign currency
exposures relate to adverse changes in the relationships of the U.S. Dollar to the British Pound,
the Euro, the Canadian Dollar and the Australian Dollar. However, there is a natural hedge against
foreign currency changes due to the fact that, while certain receipts for international sales may
be denominated in a foreign currency certain production and distribution expenses are also
denominated in foreign currencies, mitigating fluctuations to some extent depending on their
relative magnitude.
Historically, foreign exchange gains (losses) have not been significant. Foreign exchange
gains (losses) for the three months ended September 30, 2009 and 2008 (Successor), the nine months
ended September 30, 2009 (Successor), the period from June 23, 2008 to September 30, 2008
(Successor) and the period from January 1, 2008 to June 22, 2008 (Predecessor) were $0.4 million,
$(1.0) million, nil, $(0.9) million and $0.7 million, respectively.
Credit risk
We are exposed to credit risk from our licensees. These parties may default on their
obligations to us, due to bankruptcy, lack of liquidity, operational failure or other reasons.
Item 4.
Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) are effective, in all material respects, to ensure that
information we are required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
In addition, no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has
materially affected, or is likely to materially affect, our internal control over financial
reporting.
27
Part 2. Other Information
Item 1.
Legal Proceedings
Putative Shareholder Class Action Lawsuit
On October 9, 2009, RHI Entertainment, Inc. and two of its officers were named as defendants
in a putative shareholder class action filed in the United States District Court for the Southern
District of New York (the Lawsuit), alleging violations of federal securities laws by issuing a
registration statement in connection with the Companys June 2008 initial public offering that
contained untrue statements of material facts and omitted other facts necessary to make certain
statements not misleading. The central allegation of the Lawsuit is that the registration statement
overstated the number of made-for-television (MFT) movies and mini-series the Company expected to
develop, produce and distribute in 2008, while it failed to disclose that the Company would not be
able to complete the expected number of MFT movies and miniseries in 2008 due to the declining
state of the credit markets and other negative factors then impacting the Companys business. The
Lawsuit seeks unspecified damages and interest. The Company believes that the Lawsuit has no merit
and intends to defend itself and its officers vigorously.
ION Settlement
On July 15, 2009, RHI Entertainment Distribution, LLC entered into a settlement agreement and
release (the Settlement Agreement) to resolve a dispute with one of the Companys distribution
partners, ION Media Networks, Inc. (ION), in connection with a lawsuit filed against the Company on
June 8, 2009. The lawsuit was filed in the United States Bankruptcy Court for the Southern District
of New York (the Court) and alleged that the Company breached the license agreement dated June 29,
2007, as amended on December 1, 2007 (the License Agreement), pursuant to which the Company
licensed to ION certain programming for broadcast on IONs television network, and ION provided to
RHI Entertainment Distribution the exclusive right to air such programming during certain time
periods and to receive the revenue from the sale of all but two minutes of advertising inventory
per broadcast hour during which the Companys programming aired.
The Settlement Agreement became effective on August 10, 2009 (the Effective Date), which was
two business days after it was approved by the Court. In connection with the Settlement Agreement,
the Company made a one-time payment of $2.5 million to ION on August 10, 2009 (the Settlement
Payment). Under the Settlement Agreement, once the Settlement Payment was made to ION, the License
Agreement terminated and neither party has any further obligations to the other under such License
Agreement. The Settlement Agreement also provides that the parties will release each other from any
claims under the License Agreement and ION will dismiss its lawsuit against the Company within five
days of the Effective Date.
The Settlement Payment represents the net amounts owed to ION by the Company associated with
the Companys final $3.5 million minimum guarantee payment and $3.3 million of minimum advertising
spending commitments net of $4.3 million owed by ION to the Company related to the Companys June
30, 2009 accounts receivable balance associated with advertising sales of the Companys programming
on ION. A net gain of approximately $1.0 million was recorded for the three and nine months ended
September 30, 2009, resulting from the settlement of any assets and liabilities related to the
License.
Item 1a.
Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the
heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008,
which was filed with the SEC on March 5, 2009 There have been no material changes to the risk
factors as disclosed in the Companys Form 10-K.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
There have not been any unregistered sales of equity securities or repurchases of the
Companys common stock during the three months ended September 30, 2009.
Item 3.
Defaults upon Senior Securities
None.
28
Item 4.
Submissions of Matters to a Vote on Security Holders
None.
Item 5.
Other Information
None.
29
Item 6.
Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
10.1
|
|
Settlement Agreement and Release, dated July 15, 2009, by and between RHI Entertainment
Distribution, LLC and ION Media Networks, Inc. (incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed with the SEC on August 12, 2009).
|
|
|
|
31.1*
|
|
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1*
|
|
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2*
|
|
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Date: November 10, 2009
|
|
By:
|
|
Robert A. Halmi, Jr
|
|
|
|
|
Robert A. Halmi, Jr.
|
|
|
|
|
President & Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Date: November 10, 2009
|
|
By:
|
|
William J. Aliber
|
|
|
|
|
William J. Aliber
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Accounting Officer)
|
|
|
31
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
10.1
|
|
Settlement Agreement and Release, dated July 15, 2009, by and between RHI Entertainment
Distribution, LLC and ION Media Networks, Inc. (incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed with the SEC on August 12, 2009).
|
|
|
|
31.1*
|
|
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1*
|
|
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2*
|
|
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32
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