RHIE Rhi Entertainment (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

OR

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

For the transition period from              to

001-34102
(Commission File Number)

RHI ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		36-4614616 (I.R.S. Employer Identification No.)

1325 Avenue of Americas, 21st Floor
New York, NY 10019
(Address of principal executive offices)

Registrant’s 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):

     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 registrant’s common stock, par value $0.01 per share, outstanding as of May 11, 2010 was 23,420,898.

 

 

RHI ENTERTAINMENT, INC.
INDEX

		Page
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures about Risk			20
Item 4. Controls and Procedures			20
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings			21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3. Defaults upon Senior Securities			22
Item 4. (Removed and Reserved)			22
Item 5. Other Information			22
Item 6. Exhibits			23
Signatures			24

Part 1. Financial Information

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Balance Sheets

		March 31,				December 31,
		2010				2009
		(In thousands, except per share data)
ASSETS
Cash		$	25,096			$	25,120
Accounts receivable, net of allowance for doubtful accounts and discount to present value of $4,828 and $5,350, respectively			67,873				85,217
Film production costs, net			464,991				461,232
Property and equipment, net			357				390
Prepaid and other assets, net			14,747				14,768
Intangible assets, net			855				1,125
Total assets		$	573,919			$	587,852
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable and accrued liabilities		$	30,933			$	21,610
Accrued film production costs			160,974				166,895
Debt			609,171				609,171
Deferred revenue			27,903				22,861
Total liabilities			828,981				820,537
Stockholders’ deficit
Common stock, par value $0.01 per share;125,000 shares authorized and 23,416 shares issued and outstanding		$	234			$	234
Additional paid-in capital			54,818				54,390
Accumulated deficit			(310,114	)			(287,309	)
Total RHI Entertainment, Inc. stockholders’ deficit			(255,062	)			(232,685	)
Total liabilities and stockholders’ deficit		$	573,919			$	587,852

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Operations

		Three Months				Three Months
		Ended				Ended
		March 31, 2010				March 31, 2009
		(In thousands, except per share data)
Revenue
Production revenue		$	969			$	—
Library revenue			7,430				13,003
Total revenue			8,399				13,003
Cost of sales			7,153				13,438
Gross profit (loss)			1,246				(435	)
Other costs and expenses:
Selling, general and administrative			12,541				10,966
Amortization of intangible assets			270				314
Loss from operations			(11,565	)			(11,715	)
Other (expense) income:
Interest expense, net			(10,400	)			(9,632	)
Interest income			7				3
Other expense, net			(487	)			(694	)
Loss before income taxes and non-controlling interest in loss of consolidated entity			(22,445	)			(22,038	)
Income tax (provision) benefit			(360	)			25
Loss before non-controlling interest in loss of consolidated entity			(22,805	)			(22,013	)
Non-controlling interest in loss of consolidated entity			—				9,311
Net loss		$	(22,805	)		$	(12,702	)
Loss per Share:
Basic		$	(0.97	)		$	(0.94	)
Diluted		$	(0.97	)		$	(0.94	)
Weighted Average Shares Outstanding:
Basic			23,422				13,505
Diluted			23,422				13,505

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Cash Flows

		Three Months				Three Months
		Ended				Ended
		March 31, 2010				March 31, 2009
		(In thousands)
Cash flows from operating activities
Net loss		$	(22,805	)		$	(12,702	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of film production costs			5,679				8,222
Amortization of deferred debt financing cost			845				845
Decrease of accounts receivable reserves			(522	)			(532	)
Share-based compensation			428				478
Amortization of intangible assets			270				314
Depreciation and amortization of fixed assets			33				53
Non-controlling interest in loss of consolidated entity			—				(9,311	)
Deferred income taxes			—				89
Change in operating assets and liabilities:
Decrease in accounts receivable			17,866				30,469
(Increase) decrease in prepaid and other assets			(824	)			3,594
Additions to film production costs			(9,438	)			(9,627	)
Increase (decrease) in accounts payable and accrued liabilities			9,323				(2,582	)
Decrease in accrued film production costs			(5,921	)			(21,863	)
Increase (decrease) in deferred revenue			5,042				(701	)
Net cash used in operating activities			(24	)			(13,254	)
Cash flows from investing activities
Purchase of property and equipment			—				(26	)
Net cash used in investing activities			—				(26	)
Cash flows from financing activities
Borrowings from credit facilities			—				1,000
Repayments of credit facilities			—				(1,000	)
Net cash provided by financing activities			—				—
Net decrease in cash			(24	)			(13,280	)
Cash, beginning of period			25,120				22,373
Cash, end of period		$	25,096			$	9,093
Supplemental disclosure of cash flow information:
Cash paid for interest		$	—			$	10,730
Cash paid for income taxes			708				356

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements

(1) Business and Organization

      In these Notes to Unaudited Condensed Consolidated Financial Statements, unless the context otherwise requires, the terms “the Company,” “we,” “us” and “our” refer to RHI Entertainment, Inc. and its subsidiaries including RHI Entertainment Holdings II, LLC and RHI Entertainment, LLC.

     On January 12, 2006, Hallmark Entertainment Holdings, LLC (Hallmark) sold its 100% interest in Hallmark Entertainment, LLC (Hallmark Entertainment) 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). Subsequent to the transaction, RHI LLC’s 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 (collectively, Films).

     On June 23, 2008, RHI Entertainment, Inc. (RHI Inc.) 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 II’s assumption of all of KRH’s 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 held a majority of the economic interests. KRH was the non-managing member of Holdings II and held a minority of the economic interests. RHI Inc. held a number of common membership units in Holdings II equal to the number of outstanding shares of RHI Inc. common stock.

     Pursuant to the IPO, a total of 13,500,000 shares of Class A Common Stock were sold for aggregate offering proceeds of $189.0 million. The underwriting discounts were $13.2 million and the net proceeds from the IPO (before fees and expenses) totaled $175.8 million. RHI LLC used the net proceeds of the IPO that were contributed by RHI Inc., together with the net proceeds from RHI LLC’s new $55.0 million senior second lien credit facility, approximately $52.2 million of borrowings under RHI LLC’s revolving credit facility (see Note 6) and $29.0 million of cash on hand as follows: (i) approximately $260.0 million was used to repay RHI LLC’s existing senior second lien credit facility in full; (ii) approximately $35.7 million was used to fund a distribution to KRH intended to return capital contributions by KRH; (iii) approximately $0.5 million, net of reimbursements was used to pay fees and expenses in connection with the IPO; (iv) approximately $9.8 million was used to pay fees and expenses in connection with the amendments to RHI LLC’s credit facilities, including accrued interest and a 1% prepayment premium on the existing senior second lien credit facility; and (v) $6.0 million was paid to Kelso in exchange for the termination of RHI LLC’s fee obligations under the existing financial advisory agreement. An additional $1.4 million of fees and expenses related to the IPO were paid subsequent to the IPO.

     The Amended and Restated Limited Liability Company Operating Agreement of Holdings II, dated as of June 23, 2008, by and between RHI Inc. and KRH, as amended (the “LLC Agreement”) provided KRH with the right to exchange its membership units in Holdings II for, at RHI Inc.’s option, either (i) shares of RHI Inc. common stock, (ii) cash or (iii) a combination of both shares of common stock and cash (the “Exchange Right”). On December 14, 2009, KRH provided notice to RHI Inc. of its intent to exercise its Exchange Right for 100% of its 9,900,000 membership units in Holdings II. On December 15, 2009, the Board of Directors of RHI Inc. determined that it was in the best interest of the Company to issue KRH shares of RHI Inc. common stock, and authorized and approved the issuance of such shares in exchange for the surrender and transfer of the 9,900,000 membership units by KRH. On December 22, 2009, RHI Inc. issued 9,900,000 shares of its common stock to KRH. As a result of the foregoing, RHI Inc. owns, as its sole material asset, 100% of the outstanding membership units in Holdings II.

Liquidity and Restructuring

     Market conditions confronting the media and entertainment industry have continued to be a challenge for the Company. The business environment deteriorated substantially beginning in the fourth quarter of 2008 and remained challenging throughout all of 2009. Specifically, total revenue in 2009 declined significantly as compared to prior years. This was primarily due to 2009 fourth quarter sales activity falling dramatically short of our expectations, resulting in significantly lower fourth quarter revenue compared to the prior year. While current market conditions have begun to strengthen in the first quarter of 2010, they remain weaker than market

conditions prior to the fourth quarter of 2008. As a result of the significant weakening of the Company’s financial position, results of operations and liquidity, the Company is currently in default of certain covenants of its senior secured credit facilities and is in discussions with its lenders regarding a restructuring of those facilities. However, management can provide no assurance that it will be able to successfully restructure the Company’s debt obligations. If the Company is not successful in restructuring its debt obligations or unable to come to a consensual agreement with its creditors, the Company will likely be required to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

     For films produced within the last fiscal year, the Company’s production partners have financed a substantial portion of the cost through the use of their own new or existing credit facilities. In connection with these financings, the Company has consented to its production partners pledging as collateral the associated distribution contracts they have with the Company. To address liquidity constraints, the Company is currently renegotiating several of its distribution contracts with its production partners and/or their financing sources in an effort to defer or restructure certain payments under those contracts which have already come due or will come due in the near term. In some cases, such restructuring involves giving up the Company’s distribution rights for these films in certain territories. The Company is currently involved in negotiations that would result in it giving up distribution rights to sixteen completed titles having a combined book value of $44.0 million in Film Production Costs, $4.7 million of Accounts Receivable, $48.4 million of Accrued Film Production Costs and $6.4 million of Deferred Revenue recorded as of March 31, 2010. If the Company is unsuccessful in renegotiating the amounts owed by it under these contracts, the Company will be expected to pay amounts that will exacerbate its liquidity concerns. In addition, non payment of amounts due under these agreements could result in the termination of the Company’s licensing rights to these films, affect the future working relationship with certain production partners, which could in turn affect future revenues, profits, collection of certain accounts receivable and/or require the Company to seek protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in RHI Inc.’s current equityholders receiving little or no continuing interest in the assets and operations of the Company.

     As a result of the foregoing, the Company’s board of directors engaged Rothschild, Inc. as a financial advisor in the fourth quarter of 2009 to assist in negotiating and implementing a restructuring transaction, and the Company is in the midst of in-depth discussions with its lenders with respect to restructuring its indebtedness and capital structure. Management expects these discussions to likely result in a significant or complete dilution of the Company’s existing equityholders’ interest through an issuance of preferred stock or common stock of RHI Entertainment, LLC (or its successor) to some or all of its lenders and/or creditors. As a result of these discussions, we may enter into various agreements and settlements with certain of these creditors in the near future, in which we may agree to transfer, assign or surrender certain rights or assets. No assurance can be given as to whether these discussions will be successful in restructuring the Company’s debt obligations. Even if the Company is successful in coming to a consensual agreement with some or all of its creditors, any such restructuring would likely involve a filing under Chapter 11 of the U.S. Bankruptcy Code and any such filing would result in RHI Inc.’s current equityholders receiving little or no continuing interest in the assets and operations of the Company.

     These unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business, and do not reflect adjustments that could result if the Company were unable to continue as a going concern. The Company has incurred net losses from operations and net operating cash outflows in each of the past four fiscal years and at March 31, 2010 has an accumulated deficit of $310.1 million. The Company’s inability to borrow under its revolving credit facility, in addition to other factors described above, has resulted in an inability to pay some of its obligations as they come due. The liquidity constraints have also prevented the Company from making certain expenditures to continue producing or acquiring as many films as we could have otherwise. As a result, the Company decreased its production slate for 2009 and 2010, reduced its selling, general and administrative expenses through cost-cutting measures that included, among others, job reductions and the Company expects to take additional steps, including discussions with our landlords and various vendors, to preserve liquidity in the short term. However, despite any additional cost-saving steps it may implement, unless the Company successfully restructures its debt, obtains other sources of liquidity and significantly improves its operating results, the Company will not have the resources to continue as a going concern. There can be no assurance that the Company will be successful in such endeavors. The Company’s independent auditors included an explanatory paragraph in their Report of Independent Registered Public Accounting Firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 26, 2010, that noted factors which raised substantial doubt about the Company’s ability to continue as a going concern.

     Refer to Note 6 “Debt” for a further discussion of defaults under the Company’s senior secured credit facilities.

(2) Basis of Presentation

     The unaudited financial statements as of March 31, 2010 and for the three months ended March 31, 2010 and 2009, have been prepared according to U.S. generally accepted accounting principles and 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. The consolidated financial statements include the accounts of RHI Inc. and its consolidated subsidiary, Holdings II (which consolidates RHI LLC). All intercompany accounts and transactions have been eliminated. 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 Company’s accounting policies, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 26, 2010.

(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 Company’s previously held interest rate swaps) affecting stockholders’ deficit that, under U.S. generally accepted accounting principles, are excluded from net loss. Comprehensive loss for the three months ended March 31, 2010 and 2009 were $22.8 million and $11.3 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 8% and 33% of total revenue for the three months ended March 31, 2010 and 2009, respectively. These revenues, generally denominated in U.S. dollars, were primarily from sales to customers in Europe.

(d) New Accounting Pronouncements Adopted

     No new accounting pronouncements were adopted during the three months ended March 31, 2010.

(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 March 31, 2010, the Company has no potentially dilutive securities outstanding. The weighted average number of basic and diluted shares outstanding for the three months ended March 31, 2010 and 2009 was 23,421,595 and 13,505,100, respectively.

(5) Film Production Costs, Net

     Film production costs are comprised of the following (in thousands):

		March 31,				December 31,
		2010				2009
Completed films		$	786,206			$	783,246
Crown Film Library			89,702				89,683
Films in process and development			14,349				7,966
			890,257				880,895
Accumulated amortization			(425,266	)			(419,663	)
		$	464,991			$	461,232

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):

		Three Months				Three Months
		Ended				Ended
		March 31, 2010				March 31, 2009
		(In thousands)
Overhead costs capitalized		$	2,000			$	2,353
Interest capitalized			—				95
Amortization of completed films			5,456				7,660
Amortization of Crown Film Library			147				330

     Approximately 65% of completed film production costs have been amortized and/or impaired through March 31, 2010. The Company further anticipates that approximately 5% of completed film production costs will be amortized through March 31, 2011. The Company anticipates that approximately 39% of unamortized film production costs as of March 31, 2010 will be amortized over the next three years and that approximately 80% of unamortized film production costs will be amortized within five years. The Crown Film Library has a remaining amortization period of 16 years and 9 months as of March 31, 2010.

(6) Debt

     Debt consists of the following (in thousands):

		March 31,				December 31,
		2010				2009
First Lien Term Loan		$	175,000			$	175,000
Revolver			339,589				339,589
Second Lien Term Loan			75,000				75,000
Interest rate swap termination obligation			19,582				19,582
		$	609,171			$	609,171

     The Company has two credit agreements. The Company’s 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 credit facility, including a letter of credit sub-facility (Revolver). The Company’s 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 is scheduled to amortize 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 scheduled 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 is scheduled to mature 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 were previously due, at the Company’s 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 March 31, 2010, the interest rates associated with the First Lien Term Loan, Revolver and Second Lien Term Loan were 6.25%, 6.25%, and 11.75%, respectively. Pursuant to the Company’s default under its First Lien Credit Agreement and Second Lien Credit Agreement (see discussion below), all of its outstanding debt balances were converted to three month ABR as of December 23, 2009 for the First

Lien Credit Agreement, February 12, 2010 for $20 million of the Second Lien Credit Agreement and March 1, 2010 for the remaining $55 million of the Second Lien Credit Agreement and are subject to 2.00% annual default interest in addition to the applicable margins noted above. The interest rates noted are inclusive of this default interest. Due to the over-advance position of the Company’s borrowing base and the Company’s default under its First and Second Lien Credit Agreements (see discussions below), it is precluded from accessing its revolving credit facility.

     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 certain subsidiaries that guarantee the credit agreement). The First Lien and Second Lien Credit Agreements are collateralized by a perfected security interest in substantially all of the Company’s and its subsidiaries’ assets.

Defaults and Forbearance

     The Company is currently in default under both its First Lien and Second Lien Credit Agreements. On December 23, 2009, the Company acknowledged defaults on the First Lien Lien Credit Agreement resulting from (x) an over-advance on its Revolver due to a reduction in its borrowing base and consequent failure to make mandatory prepayment to cure, and (y) a failure to pay settlement amounts payable and due upon the termination of its interest rate swaps on December 22, 2009 (see further discussion below). On February 12, 2010, the Company acknowledged a default on the Second Lien Credit Agreement resulting from its failure to make a scheduled interest payment.

     On December 23, 2009, the Company entered into a forbearance agreement with the first lien agent and lenders holding a majority in principal amount of the loans under its first lien credit facilities and swap counterparties. That forbearance agreement was subsequently amended on January 22, 2010 and again on March 5, 2010. On February 12, 2010, the Company entered into a separate forbearance agreement with the second lien agent and lenders holding a majority in principal amount of the loans under the second lien credit facility, which was subsequently amended on March 5, 2010. Under each of these forbearance agreements, the agents and lenders (and in the case of the first lien forbearance, the swap counterparties) had agreed to forbear from exercising certain of their rights and agreed to waive some of the existing or prospective defaults until March 31, 2010.

     On December 23, 2009, the Company terminated its interest rate swap agreements. As of the date of termination, the interest rate swaps had a value of $19.6 million in favor of the swap counterparties, including approximately $1.1 million related to the net interest settlement of the interest rate swaps. Although this $19.6 million was contractually due immediately upon termination of the interest rate swap agreements, such obligation was deferred in connection with the forbearance agreement entered into between the Company and its First Lien Credit Facility lenders.

     The Company and its lenders did not extend the forbearance agreements upon their expiration on March 31, 2010. Therefore, the agents and lenders under the respective credit facilities and swap counterparties may exercise all of their rights and remedies, including the acceleration of the loans and foreclosure on collateral. Although the Company continues to engage in productive discussions with its lenders regarding a restructuring, if the agents and lenders under the respective credit facilities and swap counterparties make such elections, the Company would likely avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, and any such filing would result in RHI Inc.’s current equityholders receiving little or no continuing interest in the assets or operations of the Company.

(7) Share-based Compensation

     In February 2010, the Company’s Chairman and Chief Executive Officer entered into surrender agreements whereby each individual irrevocably surrendered, cancelled and forfeited any and all of their respective RSUs that were due to vest on February 9, 2010. A total of 166,667 RSU’s were forfeited. Subject to the individuals’ continued employment with the Company, the remaining RSUs of each individual will vest on February 9, 2011 and February 9, 2012. The RSUs that vest on these future dates have not been surrendered, cancelled nor forfeited and are not subject to the surrender agreements.

(8) Commitments and Contingencies

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 Company’s 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, changing media technologies and other negative factors then impacting the Company’s business. The Lawsuit seeks unspecified damages and interest. On May 3, 2010, the Company filed a motion to dismiss the complaint, to which the plaintiffs have not yet responded. The Company believes that the Lawsuit has no merit and intends to defend itself and its officers vigorously in this litigation.

Flextech Litigation

     On April 7, 2009, RHI Entertainment Distribution, LLC and RHI Entertainment, LLC were served with a Complaint filed in the United States District Court for the Southern District of New York alleging that they had breached an agreement with Flextech Rights Limited (“Flextech”), a British distributor, by failing to make the second of two installment payments. A judgment in the amount of approximately $0.9 million was entered against the defendants on February 17, 2010, for which the Company has accrued as of March 31, 2010. The Company has agreed to a settlement with Flextech and as of the date of this filing has paid $0.6 million.

MAT IV Litigation

     On February 22, 2010, RHI Entertainment Distribution, LLC was served with a Complaint filed in the United States District Court for the Southern District of New York alleging that the Company had breached a contract with MAT Movies and Television Productions GmnH & Co. Project IV KG (“MAT IV”), a German investment fund, by failing to pay amounts due under an agreement dated September 25, 2009. The Complaint seeks approximately $7.0 million in damages, plus interest and attorneys’ fees, for which the Company believes it has accrued an appropriate amount as of March 31, 2010. On April 15, 2010, the Company moved to dismiss the complaint. MAT IV filed an opposition to the Company’s motion on April 29, 2010. The Company intends to defend itself vigorously in this litigation.

Restructuring

     The Company has been actively engaged in discussions with its lenders and other creditors regarding an anticipated restructuring. As part of this restructuring effort, the Company has sought to defer certain payment deadlines and failed to make certain payments when due. As a result of these discussions, we may enter into various agreements and settlements with certain of these creditors in the near future, in which we may agree to transfer, assign or surrender certain rights or assets. If these discussions are not successful, we could face litigation from creditors, including but not limited to production partners, lenders, former employees, landlords and labor unions.

     The Company is involved in various other 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, except as disclosed above.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. We generally identify 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, we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

      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 typically 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 generate 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 film’s 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.

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 film’s 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 member’s 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 Company’s 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.

     Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes and interest and penalties will be due. These reserves are established when, despite our belief that our tax return positions are supportable, we believe certain positions are likely to be challenged and such positions may more likely than not be sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate, as well as the associated net interest and penalties.

     In addition, we are subject to the examination of our tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. While

we believe that we have adequately provided for our tax liabilities, including the likely outcome of these examinations, it is possible that the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by us are recorded in the period they become known.

     The ultimate outcome of these tax contingencies could have a material effect on our financial position, results of operations and cash flows.

Results of operations

Three months ended March 31, 2010 compared to the three months ended March 31, 2009

     The results of operations for the three months ended March 31, 2010 and 2009 are summarized as follows:

		Three months ended March 31,								Increase/
		2010				2009				(Decrease)
Revenue
Production revenue		$	969			$	—			$	969
Library revenue			7,430				13,003				(5,573	)
Total revenue			8,399				13,003				(4,604	)
Cost of sales			7,153				13,438				(6,285	)
Gross (loss) profit			1,246				(435	)			1,681
Other costs and expenses:
Selling, general and administrative			12,541				10,966				1,575
Amortization of intangible assets			270				314				(44	)
(Loss) income from operations			(11,565	)			(11,715	)			150
Other (expense) income:
Interest expense, net			(10,400	)			(9,632	)			(768	)
Interest income			7				3				4
Other (expense), net			(487	)			(694	)			207
Loss before income taxes and non-controlling interest in loss of consolidated entity			(22,445	)			(22,038	)			(407	)
Income tax (provision) benefit			(360	)			25				(385	)
Loss before non-controlling interest in loss of consolidated entity			(22,805	)			(22,013	)			(792	)
Non-controlling interest in loss of consolidated entity			—				9,311				(9,311	)
Net loss		$	(22,805	)		$	(12,702	)		$	(10,103	)
Basic and diluted loss per share.		$	(0.97	)		$	(0.94	)		$	(0.03	)

Revenue, cost of sales and gross profit

		Three Months Ended March 31,
		2010								2009
						As a								As a
						Percentage								Percentage				$ Increase/				% Increase/
		Amount				of Revenue				Amount				of Revenue				(Decrease)				(Decrease)
										(Dollars in thousands)
Production revenue		$	969				12	%		$	—				0	%		$	969				100	%
Library revenue			7,430				88	%			13,003				100	%			(5,573	)			(43	)%
Total revenue			8,399				100	%			13,003				100	%			(4,604	)			(35	)%
Cost of sales			7,153				85	%			13,438				103	%			(6,285	)			47	%
Gross profit (loss)		$	1,246				15	%		$	(435	)			(3	)%		$	1,681			NM

     Total revenue decreased $4.6 million, or 35%, to $8.4 million during the three months ended March 31, 2010 from $13.0 million during the same period in 2009.

     Production revenue increased $1.0 million in the three months ended March 31, 2010 compared to nil during the same period in 2009. The increase in production revenue was due to the delivery of two MFT films during the three months ended March 31, 2010 compared to no film deliveries in the same period in 2009.

     Library revenue decreased $5.6 million, or 43%, to $7.4 million in the three months ended March 31, 2010 from $13.0 million during the comparable period in 2009. The decrease in Library revenue during the three months ended March 31, 2010 is primarily due to the termination of our agreement with ION effective as of June 30, 2009 and the reversal of certain revenue recorded in prior periods. During the three months ended March 31, 2009, we recognized $3.0 million of revenue related to our programming on ION compared to nil during the three months ended March 31, 2010. The revenue reversals were related to the cancellation of license agreements primarily resulting from the ongoing restructuring and related renegotiation of certain distribution contracts with our production partners. In addition, 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 and have continued through the first quarter of 2010.

     Cost of sales decreased $6.3 million to $7.2 million during the three months ended March 31, 2010 from $13.4 million during the same period in 2009. Cost of sales as a percentage of revenue decreased to 85% during the three months ended March 31, 2010 from 103% during the same period in 2009. Cost of sales is comprised of film cost amortization, certain distribution expenses and, through June 30, 2009, amortization of minimum guarantee payments made to ION. The increase in gross profit during the three months ended March 31, 2010 compared to the same period in the prior year is primarily due to the termination of our agreement with ION effective as of June 30, 2009 and the fact that we were no longer required to make minimum guarantee payments as of that date. During the three months ended March 31, 2009, we incurred $3.5 million expense associated with the amortization of minimum guarantee payments compared to nil during the three months ended March 31, 2010. The decrease associated with the amortization of minimum guarantee payments made to ION was offset by an increase in film cost amortization as a percentage of revenue due to an increase in amortization rates as a result of the review of our ultimate revenues and impairment of film production costs which occurred in the second half of 2009. Film cost amortization as a percentage of revenue increased from 63% during the three months ended March 31, 2009 compared to 68% during the same period of 2010.

Other costs and expenses

		Three Months Ended
		March 31,								$ Increase/				%Increase/
		2010				2009				(Decrease)				(Decrease)
						(Dollars in thousands)
Selling, general and administrative		$	12,541			$	10,966			$	1,575				14	%
Amortization of intangible assets			270				314				(44	)			(14	)%

     Selling, general and administrative expenses increased $1.6 million to $12.5 million in the three months ended March 31, 2010, from $11.0 million in the same period in 2009. The increase of 14% is primarily due to an additional $4.0 million of costs associated with professional fees related to the ongoing restructuring of our capital structure, which were not incurred during the three months ended March 31, 2009 and an additional $1.0 million in costs associated with headcount reductions and associated severance agreements compared to the same period of 2009. Notwithstanding the above, recurring selling, general and administrative expenses such as salaries, rent and other operating expenses decreased for the three months ended March 31, 2010 compared to the same period in the prior year due to the Company’s decision to reduce overhead costs during 2009 and the first quarter of 2010. Additionally, the Company experienced a decrease in selling expenses resulting from the timing of an industry tradeshow. During the three months

ended March 31, 2009 we incurred an additional $0.7 million in expenses related to a tradeshow that occurred in the first quarter of 2009, but that in 2010 did not occur until the second quarter.

Interest expense, net

     Interest expense, net increased $0.8 million to $10.4 million for the three months ended March 31, 2010 from $9.6 million during the comparable period in 2009. The increase in interest expense is primarily a result of the increase in the weighted average interest rate due to an additional 2% default penalty as a result of our default under the First and Second Lien Credit Agreements. For the three months ended March 31, 2010, the average interest rate was 6.6% compared to 4.5% for the three months ended March 31, 2009. Additionally, the weighted average debt outstanding increased to $609.2 million for the three months ended March 31, 2010, compared to $576.8 million for the three months ended March 31, 2009. Offsetting these increases was a decrease in interest expense of $3.4 million during the three months ended March 31, 2010, compared to the same period of 2009, as a result of the termination of our interest rate swaps in December 2009.

Other expense, net

     For the three months ended March 31, 2010 and 2009, Other expense, net primarily represents realized foreign currency losses resulting from the settlement of customer accounts denominated in foreign currencies.

Income tax provision

     The income tax provision for the three months ended March 31, 2010 is primarily attributable to foreign taxes related to license fees from customers located outside the United States. During the three months ended March 31, 2009, the income tax benefit is related to the pre-tax loss of 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 three months ended March 31, 2010 was $22.8 million, compared to $12.7 million for the three months ended March 31, 2009. The increase in net loss is primarily the result of the non-controlling interest in loss of consolidated entity recorded for the three months ended March 31, 2009.

Liquidity and capital resources

     Our credit facilities include: (i) first lien senior secured facilities consisting of a $175.0 million term loan facility and a $350.0 million revolving credit facility; and (ii) a $75.0 million second lien senior secured term loan facility. On December 23, 2009, in conjunction with the termination of our interest rate swaps, the value owed to counterparties under the interest rate swaps was immediately converted into $19.6 million of secured debt under our first lien facilities. As of December 31, 2009, all of our debt was variable rate and totaled $609.2 million outstanding. As of March 31 2010 and December 31, 2009, we had $25.1 million of cash. As of March 31, 2010, we had no additional borrowings available.

     Market conditions confronting the media and entertainment industry have continued to be a challenge for us. The business environment deteriorated substantially beginning in the fourth quarter of 2008 and remained challenging throughout all of 2009. Specifically, total revenue in 2009 declined significantly as compared to prior years. This was primarily due to 2009 fourth quarter sales activity falling dramatically short of our expectations, resulting in significantly lower fourth quarter revenue compared to the prior year. While current market conditions have begun to strengthen in the first quarter of 2010, they still remain weaker than market conditions prior to the fourth quarter of 2008. As a result of the significant weakening of our financial position, results of operations and liquidity, we are currently in default of certain covenants of our senior secured credit facilities and in discussions with our lenders regarding a restructuring of those credit facilities. However, we can provide no assurance that we will be able to successfully restructure our debt obligations. If we are unsuccessful in restructuring our debt obligations or unable to come to a consensual agreement with our creditors, we will likely be required to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

     As a result of the foregoing, we engaged Rothschild, Inc. as a financial advisor in the fourth quarter of 2009 to assist us in negotiating and implementing a restructuring transaction, and we are in the midst of in-depth discussions with our lenders with respect

to restructuring our indebtedness and capital structure. We expect these discussions to likely result in a significant or complete dilution of our existing equityholders’ interest through an issuance of preferred stock or common stock of RHI Entertainment, LLC (or its successor) to some or all of our lenders and/or creditors. As a result of these discussions, we may enter into various agreements and settlements with certain of these creditors in the near future, in which we may agree to transfer, assign or surrender certain rights or assets. No assurance can be given as to whether these discussions will be successful in restructuring our debt obligations. Even if we are successful in coming to a consensual agreement with some or all of our creditors, any such restructuring would likely involve a filing under Chapter 11 of the U.S. Bankruptcy Code and any such filing would result in RHI Inc.’s current equityholders receiving little or no continuing interest in the assets and operations of the Company.

     The financial statements included in this report have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business, and do not reflect adjustments that might result if the Company were unable to continue as a going concern. In addition, any filing under Chapter 11 of the U.S. Bankruptcy Code will likely result in substantial changes to amounts recorded in our financial statements for a period after the date of such filing. The Company’s independent auditors included an explanatory paragraph in their Report of Independent Registered Public Accounting Firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 26, 2010, that noted factors which raised substantial doubt about the Company’s ability to continue as a going concern.

     We are currently in default under both our first lien and second lien senior secured credit facilities. On December 23, 2009, we acknowledged defaults on the first lien facilities resulting from (x) an over-advance on our revolver due to a reduction in our borrowing base and consequent failure to make mandatory prepayment to cure, and (y) a failure to pay settlement amounts payable and due upon the termination of our interest rate swaps on December 22, 2009. On February 12, 2010, we acknowledged a default on the second lien facility resulting from our failure to make a scheduled interest payment.

     On December 23, 2009, we entered into a forbearance agreement with the first lien agent and lenders holding a majority in principal amount of the loans under our first lien credit facilities and swap counterparties. That forbearance agreement was subsequently amended and extended on January 22, 2010 and again on March 5, 2010. On February 12, 2010, we entered into a separate forbearance agreement with the second lien agent and lenders holding a majority in principal amount of the loans under the second lien credit facility, which was subsequently amended and extended on March 5, 2010. Under each of these forbearance agreements, the agents and lenders (and in the case of the first lien forbearance, the swap counterparties) had agreed to forbear from exercising certain of their rights and agreed to waive some of the existing or prospective defaults until March 31, 2010.

     The Company and its lenders did not extend the forbearance agreement upon their expiration on March 31, 2010, therefore, the agents and lenders under the respective credit facilities and swap counterparties may exercise all of their rights and remedies, including the acceleration of the loans and foreclosure on collateral. Although the Company continues to engage in productive discussions with its lenders regarding a restructuring, if the agents and lenders under the respective credit facilities and swap counterparties make such elections, the Company would likely avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, and any such filing would result in its current equityholders receiving little or no continuing interest in the Company.

     For films produced within the fiscal last year, our production partners have financed a substantial portion of the cost through the use of their own new or existing credit facilities. In connection with these financings, we have consented to our production partners pledging as collateral the associated distribution contracts they have with us. To address liquidity constraints, we are currently renegotiating several of our distribution contracts with our production partners and/or their financing sources in an effort to defer or restructure certain payments under those contracts which have already come due or will come due in the near term. In some cases, such restructuring involves giving up our distribution rights for these films in certain territories. We are currently involved in negotiations that would result in us giving up distribution rights to sixteen completed titles having a combined book value of $44.0 million in Film Production Costs, $4.7 million of Accounts Receivable, $48.4 million of Accrued Film Production Costs and $6.4 million of Deferred Revenue recorded as of March 31, 2010. If we are unsuccessful in renegotiating the amounts owed by us under these contracts, we will be expected to pay amounts that will exacerbate our liquidity concerns. In addition, non payment of amounts due under these agreements could result in the termination of our licensing rights to these films, affect the future working relationship with certain production partners, which could in turn affect future revenues, profits, collectability of certain accounts receivable and/or require us to seek protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in RHI Inc.’s current equityholders receiving little or no continuing interest in the assets and operations of the Company.

The chart below shows our cash flows for the three months ended March 31, 2010 and 2009.

		Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands)
Net cash used in operating activities		$	(24	)		$	(13,254	)
Net cash used in investing activities			—				(26	)
Net cash provided by financing activities			—				—
Cash (end of period)			25,096				9,093

Operating activities

     Cash used in operating activities in the three months ended March 31, 2010 was $24,000, as compared to $13.3 million for the comparable period in 2009. 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 $13.2 million improvement in operating cash flows was primarily the result of a decrease in payments of accrued film production costs of approximately $17.2 million due to not making certain payments to our production partners and a decrease in interest payments of $10.7 million due to not paying interest on our first and second lien credit facilities during the first quarter of 2010. These decreases in payments were offset by a decrease in cash receipts of approximately $11.5 million and a $4.0 million increase in payments for professional fees related to the ongoing restructuring of our capital structure during the three months ended March 31, 2010.

Investing activities

     During the three months ended March 31, 2010 and 2009, we used nil and $26,000, respectively, in investing activities, reflecting the purchase of property and equipment.

Financing activities

     No cash was provided or used by financing activities during the three months ended March 31, 2010 and 2009.

Contractual obligations

     The following table sets forth our contractual obligations as of March 31, 2010:

						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)		$	33,249			$	3,724			$	7,147			$	7,032			$	15,346
Purchase obligations (2)			—				—				—				—				—
			33,249				3,724				7,147				7,032				15,346
Contractual obligations reflected on the balance sheet:
Debt obligations (3)			609,171				19,582				52,500				462,089				75,000
Accrued film production costs (4)			63,208				63,059				149				—				—
Other contractual obligations (5)			8,174				5,174				2,000				1,000				—
Uncertain tax positions (6)			382				382				—				—				—
			680,935				88,197				54,649				463,089				75,000
Total contractual obligations		$	714,184			$	91,921			$	61,796			$	470,121			$	90,346

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 “Management’s 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, 2009, which was filed with the SEC on March 26, 2010. We believe there have been no material changes to the critical accounting policies and estimates disclosed in the Company’s Form 10-K.

Recent accounting pronouncements

     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”.

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.

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 losses for the three months ended March 31, 2010 and 2009 were $0.5 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.

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 Company’s June 2008 initial public offering (IPO) that purportedly 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 and prospectus overstated the projected 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, changing media technologies and other negative factors then impacting the Company’s business. The Lawsuit seeks unspecified damages and interest. On May 3, 2010, the defendants filed a motion to dismiss the complaint, to which the plaintiffs have not responded. The Company believes that the Lawsuit has no merit and intends to defend itself and its officers vigorously.

Flextech Litigation

     On April 7, 2009, RHI Entertainment Distribution, LLC and RHI Entertainment, LLC were served with a Complaint filed in the United States District Court for the Southern District of New York alleging that they had breached an agreement with Flextech Rights Limited (“Flextech”), a British distributor, by failing to make the second of two installment payments. A judgment in the amount of approximately $0.9 million was entered against the defendants on February 17, 2010, for which we have accrued as of March 31, 2010. The Company has agreed to a settlement with Flextech and as of the date of this filing has paid $0.6 million.

MAT IV Litigation

     On February 22, 2010, RHI Entertainment Distribution, LLC was served with a Complaint filed in the United States District Court for the Southern District of New York alleging that the Company had breached a contract with MAT Movies and Television Productions GmnH & Co. Project IV KG (“MAT IV”), a German investment fund, by failing to pay amounts due under an agreement dated September 25, 2009. The Complaint seeks approximately $7.0 million in damages, plus interest and attorneys’ fees, for which we believe we have accrued the appropriate amount as of March 31, 2010. On April 15, 2010, the Company moved to dismiss the complaint. MAT IV filed an opposition to the Company’s motion on April 29, 2010. The Company intends to defend itself and vigorously in this litigation.

     The Company is involved in various other 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, except as disclosed above.

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, 2009, which was filed with the SEC on March 26, 2010. There have been no material changes to the risk factors as disclosed in the Company’s 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 Company’s common stock during the three months ended March 31, 2010.

Item 3. Defaults upon Senior Securities

Item 4. (Removed and Reserved)

Item 5. Other Information

Item 6. Exhibits

Exhibit
Number		Exhibit
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.

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.

EXHIBIT INDEX

Exhibit
Number		Exhibit
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.

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