UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File No. 001-34102

RHI ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(212) 977-9001

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     NO þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     NO þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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):

 

(Do not check if a smaller reporting company)

 

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o NO þ

 

Based on the closing sales price of $3.19 per share on June 30, 2009, the aggregate market value of the common stock held by non-affiliates of the registrant was $43,081,269 million. The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 23,416,000 as of March 24, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Proxy Statement for its 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

 

RHI ENTERTAINMENT, INC.

 

FORM 10-K

 

TABLE OF CONTENTS

 

 

 

Our website address is www.rhitv.com. We make available free of charge on the Investor Relations section of our website (http://ir.rhitv.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed or furnished with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our Proxy Statements and reports filed by officers and directors under Section 16(a) of that Act, as well as our Code of Business Conduct. We do not intend for information contained in our website to be part of this Form 10-K.

 

Any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

In this report, except where the context requires otherwise, references to: (1) “RHI LLC” refers to RHI Entertainment, LLC, a Delaware limited liability company that is the current operating company for our business, and is the sole asset of RHI Entertainment Holdings II, LLC; (2) “Holdings II” refers to RHI Entertainment Holdings II, LLC, a Delaware limited liability company which holds RHI LLC as its sole asset; (3) “RHI,” “RHI Inc.,” the “Company,” “we,” “us,” and “our” refer to RHI Entertainment, Inc., a Delaware corporation, and its consolidated subsidiaries, including Holdings II and RHI LLC and their subsidiaries and predecessor companies; (4) “KRH” refers to KRH Investments LLC, a Delaware limited liability company, which was a member of Holdings II until December 22, 2009, when it received shares of RHI Inc. in consideration for its membership interests in Holdings II; (5) “Kelso” refers to Kelso & Company L.P. a Delaware limited partnership, an affiliate of the principal investor in KRH; (6) “Initial Predecessor Company” refers to Hallmark Entertainment, LLC, our operating company prior to January 12, 2006 (for purposes of our financial data); (7) “Predecessor Company” refers to RHI LLC, our operating company from January 12, 2006 (inception) to June 22, 2008 (for purposes of our financial data); (8) “Successor Company” refers to RHI Inc. from June 23, 2008 (the date of the its initial public offering) (9) “Hallmark Cards” refers to Hallmark Cards Inc., a Delaware corporation; (10) “Crown Media” refers to Crown Media Holdings, Inc., a Delaware corporation and a subsidiary of Hallmark Cards; and (11) “Hallmark Entertainment” refers to Hallmark Entertainment LLC, a Delaware limited liability company, its consolidated subsidiaries and the predecessor company of RHI LLC before it was acquired and renamed in January 2006.

 

This report includes forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “seek,” “estimate,” “plan,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, ability to meet our working capital needs, capital expenditures and other liquidity needs, our ability to maintain compliance with the covenants contained in the agreements governing our indebtedness and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

Moreover, we operate in a competitive and rapidly changing market environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common shares,

investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled “Risk factors” and elsewhere in this report could have a material adverse effect on our business, financial condition and results of operations.

 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward- looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations.

 

 

Overview

 

We develop, produce and distribute new made-for-television movies, mini-series and other television programming worldwide. We are the leading provider of new long-form television content, including domestic made-for-television, or MFT, movies and mini-series. 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 business is comprised of the licensing of new film production and the licensing of existing content from our film library in territories around the world. Licensing rights to our film library generate contractual accounts receivable. The contractual accounts receivable reflect license agreements we have entered into with third parties for rights to our film content in future periods.

 

Development and production

 

Made-for-television movies

 

Our MFT movie franchise focuses on the production of films with dramatic, suspenseful, or more recently, action/thriller storylines which are generally two broadcast hours in length. With production costs of $1.0 to $2.0 million per broadcast hour, our MFT movies limit our financial risk with their short production cycles and pre-sales which typically recoup the majority of our cost of production. In 2007, 2008 and 2009 our pre-sales equaled 84%, 70% and 78% of our MFT movie production costs, respectively. Historically, our pre-sale percentage has been higher. The lower pre-sale percentage over the past two years reflects the difficult economic conditions that were confronted and specifically the significant drop in worldwide advertising revenue. This decline put pressure on broadcast and cable networks’ financial performance and resulted in reduced spending on television programming, including our MFT movies and mini-series.

 

MFT movies are ordered by broadcast and cable networks and have become an integral part of the broadcast strategies of these programmers. Networks license the rights to air films that meet the characteristics of the network’s genre and therefore will appeal to their viewers. In 2009, we delivered multiple MFT movies to the Hallmark Channel, Lifetime, Syfy and Spike TV.

 

Mini-series

 

Over more than 20 years, we have shaped the mini-series industry with award winning and highly-rated releases like Lonesome Dove, Gulliver’s Travels, Human Trafficking, Mitch Albom’s The Five People You Meet in Heaven, Tin Man and Alice. A mini-series is typically four broadcast hours in length and production costs are approximately $2 to $5 million per broadcast hour of content. Typically, mini-series are ordered by broadcast and cable networks on a picture-by-picture basis. In 2008 and 2009, the pre-sale percentage for our mini-series were 80% and 72%, respectively, of our production costs for mini-series, reflecting the lower sales activity resulting from the general economic slowdown which began in the fourth quarter of 2008 and the worldwide decline in advertising revenue as noted above.

 

Episodic series

 

In addition to MFT movies and mini-series, we have selectively produced episodic series programming in the past for broadcast and cable television if pre-ordered by our customers. The initial order for a television series is typically 13 episodes and a customer will generally increase its initial order to 22 episodes if the series is generating high ratings for such customer. We do not undertake production of a series unless a portion of the production costs are covered by the initial network’s license fee. We may selectively engage in series development in the future.

Long-form television library

 

With more than 1,000 titles, comprising over 3,500 broadcast hours of long-form television programming, our library is an important source of contractual cash flow, revenue and growth for our business. Our film library is enhanced each year with the addition of new MFT movies, mini-series and other television programming as their initial licenses expire. These new productions add value to the film library and ensure that it remains current. We believe that the talent and recognizability of the actors and actresses starring in our productions, along with the subject matter, result in our library having a long shelf life. Classic MFT movies and mini-series such as Cleopatra, Alice In Wonderland, Call of the Wild, Dinotopia, Arabian Nights, Merlin, The Odyssey and The Lion in Winter are examples of our library content which have been repeatedly licensed to our customers over the last several years.

 

The production, marketing and distribution of our films

 

Project development

 

Our production process begins in project development, which requires relatively low expenditures to acquire the rights and commission new scripts for potential films. Projects are developed in-house or are commissioned by broadcast and cable networks. A portion of development we undertake each year (typically MFT movies) is commissioned and paid for by broadcast and cable networks. As part of this process, we work with both our internal staff and outside parties to develop a script and formulate a budget for the film.

 

For the development of some mini-series, and those projects not commissioned by networks, we have a small internal staff that reviews scripts and sources project ideas. Once the management team has targeted projects to further develop, produce and distribute, a pre-sale process is initiated to determine the interest of the potential licensee and the feasibility of bringing the project to fruition. Broadcast and cable networks are approached based on the subject matter and genre of a film, with the intention of maximizing audience appeal.

 

Prior to beginning full production, senior management reviews and approves all projects to determine economic viability (in a process called greenlighting). During greenlighting sessions, we review all key aspects of a film project including total production budget as compared to the aggregate fees expected from initial license contracts or expected foreign license distribution, production incentives and subsidies, and ancillary distribution opportunities such as home video sales.

 

Licensing

 

The first step in the sale process is negotiating an initial license with broadcast or cable networks. A network pays to acquire the right to air our content for a defined period of time. This period generally ends after a specific number of telecasts, but generally not later than seven years (depending on the type of content) after delivery. Our general practice is to not begin production of a MFT movie or mini-series without securing an initial license agreement. Most of our existing license agreements are not tied to ratings performance when aired, nor is there a penalty if ratings for a particular project do not meet expectations. See “Risk Factors — Risks related to our business — Our success depends on our ability to develop, produce and distribute quality MFT movies and mini-series that achieve acceptance from our target audiences.”

 

The exhibition rights licensed to a domestic licensee are generally limited to the United States and its territories. We usually are able to simultaneously license the same programming to international broadcast and cable networks. We have long-term relationships with broadcast and cable networks and distributors in many countries including the United Kingdom, Germany, Spain, France, Italy and Australia. Due to our long history of delivering content that satisfies international market demand, many of our international customers commit to licensing all or part of our annual production slate of MFT movies and mini-series prior to production. Fees from these foreign licensing arrangements, together with domestic license fees, generally equal or exceed the costs associated with these productions. Foreign licensees acquire the exclusive right to air our content for typically two to six years within their specific country of operation. Generally, we will not begin production of a MFT movie, mini-series or other television programming unless a significant number of these foreign license agreements are secured or are in negotiation.

 

The licensing process does not end when we secure the initial domestic and foreign licenses. If the initial domestic licensee is a broadcast network, we will also negotiate an exclusive subsequent license with a cable

network. Broadcast and cable networks also license from us the second and third cycles of our film content. Internationally, we will often license successive second and third cycles of our film product. Similarly, we license our content to distribution platforms such as home video.

 

Production

 

When the initial license agreement is secured, the production process begins. Although we have key employees who evaluate certain aspects of a project, we rely on third party production companies to produce our MFT movies, mini-series and other television programming. In consultation with RHI management, these third parties are responsible for hiring key talent, including actors, directors, writers and film production crews. In consultation with our senior management team, these third party production companies also determine the location of filming, finalize the production budget and schedule.

 

MFT movies are generally filmed in 25 to 30 days, while mini-series have a production timeline of approximately 40 to 60 days. All programming is filmed using either 35 millimeter or high definition cameras, enabling easy adoption to various distribution platforms.

 

Upon completion of filming, the core visuals and dialogue are in place and post-production commences. Post-production can include scene editing, addition of special effects and sound effects, and addition of a musical score. A final version of the project is then delivered to the initial licensee. The initial licensee may then air the film at will, in accordance with its licensing agreement. Further, the film is simultaneously delivered to our foreign licensees.

 

Production incentives and subsidies

 

Production incentives and subsidies for film productions are widely used throughout the television industry and are important in helping to offset production costs. Many foreign countries, the United States and individual states have programs designed to attract production. Production incentives and subsidies are used to reduce production costs and such incentives take different forms, including direct government rebates, sale and leaseback transactions or transferable tax credits. We have benefited from these incentives and subsidies in Canada as well as in Germany, the United Kingdom, Ireland, Hungary, South Africa, Australia, New Zealand and the United States. In many cases, co-production treaties between countries allow us to receive production incentives and subsidies from more than one country with respect to a single production. See “Risk factors — We have accessed a variety of film production incentives and subsidies offered by foreign countries and the United States which reduce our production costs. If these incentives and subsidies become less accessible to us or our production partners, or if they are eliminated, modified, denied or revoked for any reason, our production costs could substantially increase.”

 

Talent

 

Over the years, we have been able to attract a highly talented and diverse group of actors and actresses to star in our MFT movies, mini-series and other television programming. Our programming has included such actors as Jon Voight, Robert Duvall, Sigourney Weaver, Glenn Close and Patrick Stewart. Recently, as we have produced more diversified content, we have been able to attract actors such as Katherine Heigl, Sean Astin, Mira Sorvino and Zooey Deschanel. We expect to continue engaging well-known talented actors and actresses to star in our productions without compromising our production costs and operating budget.

 

Sales and distribution

 

Our sales force continuously makes presentations to broadcast and cable networks worldwide in order to generate orders for both our new productions and existing content from our film library. Our content is licensed on either an individual or multi-picture basis, depending on the needs of the distribution platform. Recent sales have included several multi-film agreements for licensing of new content. The majority of our new productions automatically qualify for inclusion in several of our existing international distribution agreements with European broadcast and cable networks, providing secured foreign market distribution.

 

Twice a year, we attend large sales conferences in Cannes, France. These conferences bring together buyers and sellers from around the world. We produce various marketing and sales materials for these events and host numerous meetings with prospective clients.

Customers

 

Our customers include a variety of domestic broadcast and cable networks, such as ABC, NBC, CBS, the Hallmark Channel, Lifetime, Syfy and Spike TV, as well as large international broadcasters, including Antena-3, M6, PROSIEBEN-SAT1, Seven Network, Sky and TF1. In addition, our on-going new production and extensive library provide us with the ability to exploit new business opportunities beyond our traditional distribution channels.

 

Seasonality

 

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 ordered either late in the preceding year or in the early portion of the current year. Planning and production generally takes place during the spring and summer and completed film projects are generally 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. Importantly, the results of one quarter are not necessarily indicative of results for the next or any future quarter. See “Risk Factors — Risks related to our business — Delays and changed delivery dates have had a material impact on the timing of our revenue recognition and receipt of cash, which has affected our financial results and ultimately has decreased the value of our stock price.”

 

2008 through 2009 — Quarterly Revenues as a Percentage of Total Revenue

 

 

Intellectual property

 

Our most valuable assets are our intellectual property and other legal rights to our film library, including our copyright ownership and interests therein. We currently conduct an active program to maintain and protect our intellectual property and other legal rights in the United States and abroad including the timely registration and recordation of our copyright interests with the United States Copyright Office and our trademarks with the United States Patent and Trademark Office. Copyright laws of the United States and most other countries provide substantial civil and criminal penalties for unauthorized duplication and exhibition of our films. As necessary, we will take appropriate and reasonable measures to secure, protect and maintain copyright protection for all of our pictures under the laws of the applicable jurisdictions.

Many foreign countries are signatories to the Berne Convention, and we, therefore, expect that our intellectual property rights are protectable in those countries. However, certain other foreign countries do not have laws which protect United States holders of intellectual property rights equivalent to the laws of the United States, and, therefore, our rights may be difficult to enforce, or may be unenforceable in those countries.

 

Competition

 

The developing, producing and distributing of MFT movies, mini-series and other television programming is a highly competitive business. The most important competitive factors include quality, subject matter and timeliness of delivery. Our primary competitors in MFT movie content include Disney/ABC International Television, CBS Paramount International Television, Sony Pictures Television International and Warner Brothers International Television Distribution. Similarly, there are numerous companies that develop, produce and distribute mini-series content. They are, among others, A&E International, CBS Paramount International Television, Disney/ABC International Television, HBO, NBC Universal International Television Distribution and Warner Brothers International Distribution.

 

Employees

 

As of December 31, 2009, we had 80 full-time employees with 72 employed in the United States, six in the United Kingdom and two in Australia. In addition, we have numerous independent contractors and consultants in creative, marketing and production areas.

 

Recent Developments

 

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 as well as fourth quarter revenue from the prior year. As a result of the significant weakening of our financial position, results of operations and liquidity in 2009, we are currently in default of certain covenants of our senior secured facilities and in discussions with our lenders regarding a restructuring of our senior secured 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. We have retained the services of outside advisors to assist us in instituting and implementing a restructuring transaction. See “Risk Factors — Risks related to our business — We expect to pursue a strategic restructuring, refinancing or other transaction in order to preserve our long-term financial condition, and current market conditions could limit our ability to consummate such a transaction, which would likely have a material adverse effect on our financial condition.”

 

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 our current equityholders receiving little or no continuing interest in the Company. See “Risk Factors — Risks related to investments in our common stock — If we seek protection under Chapter 11 of the U.S. Bankruptcy Code, all of our outstanding shares of capital stock would likely be cancelled and holders of our capital stock would not be entitled to any payment in respect of their shares.” The accompanying 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 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 periods after the date of such filing.

In connection with the discussion above, certain recent events, which are summarized below, have occurred over the last several months.

 

 

As a result of the foregoing, we engaged Rothschild, Inc. as a financial advisor in the fourth quarter of 2009, and are in the midst of in-depth discussions with our first and second lien 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 to some or all of our lenders and/or creditors. It is also possible that these discussions could result in a sale of some or all of the Company’s assets for less than their book value. No assurance can be given as to whether these discussions will be successful. If we are not successful 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. 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 under Chapter 11 of the U.S. Bankruptcy Code would result in our current equityholders receiving little or no continuing interest in the Company.

 

 

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) have agreed to forbear from exercising certain of their rights and agreed to waive some of the existing or prospective defaults until March 31, 2010 unless such forbearance agreement is earlier terminated due to further unanticipated defaults or other factors. The forbearance agreements are short term arrangements that allow us to work with the agents and lenders under our senior secured credit facilities to develop a longer-term strategy for restructuring our liabilities. Under the forbearance agreements, we agreed, among other things, that:

 

 

 

If we are not able to cure all defaults or enter into a new forbearance agreement for each of our credit facilities by March 31, 2010 (or any earlier date that the forbearance agreements may be terminated), then 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. Upon the occurrence of such events, the Company would likely avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in our current equityholders receiving little or no continuing interest in the Company.

 

 

As referenced above, the annual third party valuation report of our film library required by our lenders under our first lien credit facility (the Valuation Report) was completed in March of 2010. The Valuation Report indicates a material and substantial reduction of approximately 50% of the non-contracted value of the films in our film library at December 31, 2009 as compared to the third party valuation at December 31, 2008 using similar methodologies. The decrease in the value of our film library directly and materially reduces the borrowing base governing the revolving credit facility under the First Lien Credit Agreement. This result of the Valuation Report is also a contributing factor our annual assessment of ultimate revenues.

 

Risks related to our business

 

You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company. However, the risks and uncertainties our company faces are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

 

We are currently in default of our First Lien and Second Lien Credit Agreements and are in negotiations with our lenders to restructure our debt, which will likely result in significant dilution of our equity holders or extinguishment of our equityholders’ interest in our company. We expect to pursue a strategic restructuring, refinancing or other transaction in order to preserve our long-term financial condition, and current market conditions could limit our ability to consummate such a transaction, which would likely have a material adverse effect on our financial condition.

 

Our inability to borrow under our revolving credit facility, coupled with other factors described above, is causing liquidity constraints resulting in an inability to pay some of our obligations as they come due. The liquidity constraints are preventing us from making certain expenditures relating to new productions and acquisition of other content that would otherwise enhance our business. We decreased our production slate for 2009, reduced our selling, general and administrative expenses through cost-cutting measures that included among others, job reductions and we expect to take additional steps to preserve liquidity. However, despite any additional cost-saving steps we may implement, unless we successfully restructure our debt and/or obtain other sources of liquidity, we do not have the resources to continue as a going concern.

 

As a result of the foregoing, we engaged Rothschild, Inc. as a financial advisor in the fourth quarter of 2009, and are in the midst of in depth discussions with our first and second lien 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 through an issuance of preferred stock or common stock to some or all of our lenders and/or creditors. It is also possible that these discussions could result in a sale of some or all of the Company’s assets for less than their book value. No assurance can be given as to whether these discussions will be successful. 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. 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 our current equityholders receiving little or no continuing interest in the Company.

 

The report of our independent registered public accounting firm contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern, which could adversely affect our relationships with our customers and production partners.

 

Because of our limited capital resources and current restructuring process described above, coupled with a history of losses and negative cash flows, our independent registered public accounting firm has included an explanatory paragraph in its report on our consolidated financial statements found elsewhere in this Annual Report that expresses substantial doubt regarding our ability to continue as a going concern (the “Going Concern Opinion”). The accompanying 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 might result if the Company were unable to continue as a going concern. The Going Concern Opinion could adversely affect our relationships with our customers and production partners. If any of these customers or production partners lose confidence in our ability to perform as a going concern subsequent to a restructuring of our capital structure, our future results of operations could be adversely impacted.

Our substantial indebtedness and failure to comply with the financial covenants contained in the credit agreements governing our senior secured credit facilities will likely have a continued material adverse affect on our operating results and financial condition.

 

High levels of interest expense continue to have negative effects on our operations. As of December 31, 2009, all of our debt was variable rate and totaled $609.2 million outstanding. To manage the related interest rate risk, we entered into interest rate swap agreements. Until December 23, 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 and terminated on December 23, 2009 (refer to Note 11 of our consolidated financial statements included herein). As of December 31, 2009, we had $25.1 million cash on hand. See “Management Discussion & Analysis — Liquidity and Capital Resources.”

 

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. The forbearance agreements are short term arrangements that allow us to work with the agents and lenders under our senior secured credit facilities to develop a longer-term strategy for restructuring our liabilities. The forbearance agreement executed on December 23, 2009, has subsequently been 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) have agreed to forbear from exercising certain of their rights and agree to waive some of the existing or prospective defaults until March 31, 2010 unless the forbearance agreement is earlier terminated due to further unanticipated defaults or other factors.

 

If we are not able to cure all defaults or enter into a new forbearance agreement for each of our credit facilities by March 31, 2010 (or any earlier date that the forbearance agreements may be terminated), then the agents and lenders under the respective credit facilities and swap counterparties may exercise all of their rights and remedies, including acceleration of the loans and foreclosure on collateral. Upon the occurrence of such events, the Company would likely avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in our current equityholders receiving little or no continuing interest in the Company.

 

We have incurred net losses in the past and currently expect to experience continued net losses in the future.

 

We have incurred net losses in the past largely due to amortization of film production costs, inclusive of impairment charges, and interest expense on our outstanding indebtedness. During the year ended December 31, 2009, impairment charges were recorded for the majority of our films totaling $338.9 million to reduce the net book value for those films to an amount approximating their fair value and film cost amortization was increased $1.1 million related to films for which revenue has been recognized during the period as a result of the reduction in (and elimination of) ultimate revenues from our annual review of ultimate revenues. During the year ended December 31, 2008, a non-cash impairment charge of $59.8 million with respect to goodwill was recorded as the result of our stock price declining significantly to a level implying a market capitalization below our book value. During the year ended December 31, 2007, a loss on extinguishment of debt was recorded with respect to the refinancing of our credit facilities.

 

We have incurred accelerated film amortization and significant write-offs due to changes in our estimates of total revenue for each film.

 

We use the individual film-forecast-computation method to amortize our capitalized film production costs. We are required to amortize capitalized film production costs over the expected revenue streams as we recognize

revenue from each of the associated films. The amount of film production costs that will be amortized depends on the amount of ultimate revenue we expect to receive from each film. If estimated ultimate revenue declines, amortization of capitalized film costs will be accelerated and future margins may be lower than expected. If estimated ultimate revenue is not sufficient to recover the unamortized film production costs, the unamortized film production costs will be written down to fair value. Furthermore, we base our estimates of revenue on a variety of information, including recent sales data from domestic and major international licenses and other sources. If the estimates are not correct or are subsequently revisited, and our internal controls over such information do not detect such an error or the revisions are not applied in a timely manner, the amount of film production cost amortization that we record could be incorrect, which could result in fluctuations in our earnings.

 

We review the ultimate revenues associated with our films. This analysis considers various data points, including current market conditions, library sales activity, pricing, the delivery of our annual film slate and the results of the annual independent valuation of the unsold rights to our film library. This assessment reflecting ultimate revenues as of December 31, 2009, was completed in February of 2010. As a result of the continued weak market conditions, sales data, pricing and other factors present during the fourth quarter of 2009 and into 2010 as well as the significant decline in the annual independent valuation of the unsold rights to our film library, this analyses resulted in a significant reduction of the ultimate revenues for the majority of films in our library. In addition, based upon a qualitative analysis and assessment of recent sales activity, we now assume that there will be no future revenues for certain films. A reduction in the ultimate revenue associated with a film results in a higher rate of amortization over that film’s remaining accounting life and causes a reduction in that film’s prospective profit margin. The reduction in ultimate revenues resulted in a decrease in the fair value of films to an amount below their net book value. As a result, impairment charges were recorded totaling $338.9 million during the year ended December 31, 2009 to reduce the net book value of those films to an amount approximating their fair value. Refer to Note 6 of our consolidated financial statements included herein. In addition, the reduction in ultimate revenues resulted in a $1.1 million increase to film cost amortization for the year ended December 31, 2009 related to films for which revenue has been recognized during the period.

 

We principally operate in one business: the development, production and distribution of long-form television content; our lack of a diversified business could adversely affect us.

 

We derive substantially all of our revenue from the development, production and distribution of MFT movies, mini-series and other television programming. Since we depend on demand for long-form television content, our financial condition would suffer significantly if audience demand for our product declines in the future. This demand is driven by the interests of the viewers and the financial strength of the various networks. Unlike our major competitors, which are divisions of major media companies that generate revenue from a variety of other operations, we depend primarily on the success of our MFT movies and mini-series. In recent years, the major U.S. broadcast networks migrated away from airing long-form television programs in favor of reality and other programming. If a new type of content becomes popular in the television entertainment industry, or the networks or other buyers of our content perceive changes in audience demand for our content, the ability to license our MFT movies, mini-series and other television programming either domestically or internationally may be negatively impacted and we may suffer significant financial losses.

 

We must continue to augment our film library with new titles from our annual production slate in order to maintain contracted cash flows generated by our film library, but managing our limited resources in the most efficient manner of late has resulted in a reduction in our production slate.

 

We must continue to add to the existing titles in our film library. As audience tastes and demands change over time, some of our older content loses a portion of its licensing value. To meet market demand, we must continue to deliver new content that will achieve high ratings and increased viewership. If we do not augment our film library with new content that will meet market and audience demand, our film library cash flow will decrease and negatively impact our profits. Given our current financial position and liquidity concerns, we will likely produce fewer new films and we have asked our production partners to finance a significant portion of the cost of each new production without short-term financial support from us. If our production partners cannot finance a substantial portion of a film’s cost through the use of new or existing credit facilities of their own, we will not develop or

produce that film. As a result, the number of films in our new production slate may be further reduced, which would likely have an adverse impact on our production revenue and the contracted cash flows generated by our film library.

 

In addition, the size of our film library is expected to decrease over time due to the expiration of our distribution rights to certain titles in our film library. Although we own the distribution rights in perpetuity for the majority of titles in our library, our rights to approximately 34% of the titles in our film library will ultimately expire. By December 31, 2012, our intellectual property rights to 52 of our films, or approximately 5% of our existing titles, will terminate. Therefore, we must continue to develop, produce and distribute new content in an effort to replenish the titles available for distribution and to sustain our business model.

 

Our success depends on our ability to develop, produce and distribute quality MFT movies and mini-series that achieve acceptance from our target audiences.

 

An uncertainty always exists with the production of television content whose success is subject to viewer tastes and preferences that can change in unpredictable ways. Generally, the popularity of our programs depends on many factors, including the critical acclaim they receive, the genre, the specific subject matter, the actors and other key talent and the format of their initial release. To respond to market demand, we have developed and produced film content outside of our traditional genres, including a number of action/thriller MFT movies targeted at a younger 18-34 year old demographic. We cannot assure you that there will continue to be a demand for these action/thriller movies in broadcast television, PPV and/or home video platforms. In addition, to respond to future market demand, we may need to produce genres that we lack experience in delivering. We cannot assure you that this programming will achieve high ratings.

 

The delivery of a MFT movie or mini-series that does not achieve high ratings can adversely affect our financial condition and results of operations in at least three ways. First, we rely heavily on our ability to license our original productions several times, but the receipt of low ratings for a particular MFT movie or mini-series will hinder our ability to re-license that program to another customer in the future. Second, the initial customer may decide against licensing the rights to any of our future MFT movies or mini-series due to the lack of profitability from the prior production. Third, one or more MFT movies or mini-series that do not achieve high ratings may cause a negative impact to our reputation and could also cause our significant customers to look to one of our competitors to fulfill their long-form television programming needs.

 

We are seeking to renegotiate payment terms and certain rights under several distribution license agreements.

 

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 us. To address liquidity constraints, we are currently renegotiating several of our 2009 slate 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. 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 and/or require us to seek protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in our current equityholders receiving little or no continuing interest in the Company.

 

We have a significant concentration of our revenue from a limited number of licensees.

 

In 2009, approximately 73% of our revenue was earned from our top ten customers, with approximately 20% from Lifetime, 16% from broadcast and cable channels affiliated with Universal Television (NBC, Syfy and Universal Television’s international channels) and 5% from the Hallmark Channel. As a percentage of our total original MFT movies and mini-series productions licensed to broadcast and cable networks, the Hallmark Channel comprised approximately 28% in 2007, 11% in 2008 and 27% in 2009. A disruption to, or termination of, our relationship with any of our significant licensees could cause our company to suffer significant financial losses.

Additionally, as of December 31, 2009, approximately $78.3 million, or 87%, of the Company’s accounts receivable was due from our top ten customers. Because the licensing of our content for network and cable television is highly concentrated, an adverse change in our relationship with any of our significant customers or an adverse change in the financial condition of our customers could have a material adverse impact on our financial condition.

 

In March 2010, Crown Media, the parent company of the Hallmark Channel, filed its Annual Report on Form 10K with the SEC. The report of Crown Media’s independent registered public accounting firm on their 2009 financial statements contains an explanatory paragraph noting the significant short-term debt obligations of Crown Media which raise substantial doubt regarding Crown Media’s ability to continue as a going concern and referring to Crown Media’s plans in regard to those matters. Crown Media’s financial statements note, “... the Company believes the ability of the Company to continue its operations depends upon completion of the Recapitalization.” This proposed Recapitalization (described in detail in Crown Media’s Annual Report) has been approved by Crown Media and by Hallmark Cards, the substantial shareholder of Crown Media and the lender or guarantor on Crown Media’s short-term debt that would be refinanced under the proposed recapitalization. Based upon our discussions with Crown Media’s management and review of Crown Media’s Annual Report and other publicly available documents concerning the financial condition of Crown Media and the details of the proposed recapitalization transaction, we have concluded that a reserve against the accounts receivable due from Crown Media ($42.4 million at December 31, 2009) is not necessary.

 

In 2009, we replaced Genius Products (Genius) as our domestic video distributor and entered into an agreement with Vivendi Entertainment (Vivendi) for video and digital distribution of our content requiring Vivendi to provide us with monthly royalty reports reflecting the financial performance of the titles included under the agreement along with monthly royalty payments. If Vivendi does not report or remit to us in a timely manner, if Vivendi experiences financial difficulties, or if Vivendi is not successful in distributing our content, it could have a material effect on our business and results of operations.

 

We rely on third party licensees to promote, market and advertise our programming to their customer base in order to sustain high television ratings.

 

We have licensed to broadcast and cable networks the right to air our long-form television content. We also license our content to other parties in order to take advantage of emerging distribution platforms. Licensed distributors’ decisions regarding the timing of release and promotional support of our television content are important in determining the success of our MFT movies, mini-series and other television programming. We do not control the timing and manner in which our customers distribute our productions. Because we rely on those with initial rights to our content to create a high-level of interest in our programming, any decision by them not to distribute or promote one of our productions or, instead, to promote our competitors’ television programs or related products more than they promote ours could have a material adverse effect on our business and financial condition. In addition, upon the completion of a license term, we have the ability to re-license the same programming to another party. If during the initial license term, our programming does not enjoy high ratings, our ability to re-license these programs in the future will become difficult and our reputation and opportunity to license new programming may be adversely affected.

 

We place significant reliance on third party production companies to produce our MFT movies and mini-series.

 

Although we have a team of creative personnel who read scripts and evaluate talent, the filming, editing and final production of our films is primarily performed by third party producers and independent contractors. The success of our programming will depend to a degree on our ability and the ability of these third parties to avoid production problems and delays and to hire, retain and motivate top creative talent. Making films is an activity that requires the services of individuals, such as actors, directors and producers, each of whom have unique creative talents. If our production partners experience difficulty in hiring, retaining or motivating creative talent, the production of our films could be delayed or the success of our films could be adversely affected. If any of these partners were unable or unwilling to produce or assist in the production of our MFT movies and mini-series, we would have to expend significant time, money and resources to find another company to produce our content and we may not be able to meet our creative needs and timely completion of our content with a new production company. In

addition, our production partners finance a substantial portion of our films through the use of new or existing credit facilities of their own. 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 deferred to future periods to better match the cash inflows related to sales of this product. If our production partners cannot finance a substantial portion of a film’s cost through the use of new or existing credit facilities of their own, management will not develop or produce that film. As a result, the number of films produced may be further reduced, which could have an adverse impact on our production revenue and contracted cash flows generated from our film library. These risks are further exacerbated by our recent deferral of payments to production partners and other creditors, which may impair our relationship with such parties and would likely result in a more challenging environment to consummate new deals.

 

Our business involves risks of liability claims for entertainment content, which could adversely affect our business, results of operations and financial condition.

 

As an owner and distributor of entertainment content, we may face potential liability for:

 

 

These types of claims have been brought, sometimes successfully, against broadcasters, producers and distributors of entertainment content. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition.

 

Our success depends on certain key employees.

 

Our success greatly depends on our employees. In particular, we are dependent upon the services of our President and Chief Executive Officer, Robert Halmi, Jr., select members of our senior management and certain creative employees such as directors and producers. We have entered into employment agreements with Mr. Halmi, Jr. and with all of our top executive officers and production executives. However, although it is standard in the television industry to rely on employment agreements as a method of retaining the services of key employees, these agreements cannot assure us of the continued services of such employees. Although we carry key employee insurance for Mr. Halmi, Jr., the proceeds from an insurance payout would not compensate for the loss of our President and Chief Executive Officer’s creativity and knowledge of the long-form television business. The loss of Mr. Halmi, Jr.’s services or a substantial group of key employees could have a material adverse effect on our business and results of operations.

 

Recent market conditions have negatively impacted our ability to sustain our production model of generating contractual sales and collecting a significant portion of our production costs in advance of the delivery of our content to an initial licensee.

 

Historically, our production model has enabled us to contract for and collect license fees recouping the majority of our production costs for our MFT movies and mini-series before delivery of our content to an initial licensee. Although we intend to adhere to our general practice of commencing production when we have contracted license fees for a significant portion of our production costs, we cannot assure you that this will always be the case. Recent market conditions have resulted in a lower pre-sale percentage for our films, which has caused a substantial

negative impact to our revenues over the past two years than we have historically experienced. We may rely on an alternative means of revenue to recoup our production costs. We may determine that there are other ways of licensing our content, or our customers may change the way they license productions and such alternative methods may not include an upfront license fee that recoups a majority of our production costs before we deliver the content. However, we cannot assure you that these alternative means or methods will be available to us in the future which would continue to negatively impact our financial condition and results of operations.

 

We face risks relating to the international distribution of our films and related products.

 

Because we have historically derived a significant portion of our revenue (44%, 37% and 59% in 2009, 2008 and 2007, respectively) from the exploitation of our films in territories outside of the United States, our business is subject to risks inherent in international trade, many of which are beyond our control. These risks include:

 

 

The advancement of video technologies may cause advertisers to shift their expenditures to media in which their commercial messages are not circumvented by technology, leading to a reduction in television advertising and a reduction in demand for our programming.

 

The entertainment industry in general and the television industry in particular continue to undergo significant technological developments. Advances in technologies or alternative methods of product delivery or storage or certain changes in consumer behavior driven by these or other technologies and methods of delivery and storage could have a negative effect on our business. In particular, broadcast and cable networks place significant reliance on the revenue stream generated from commercial advertising. Since the introduction of video technology such as Digital Video Recording, or DVR, television audiences now have the ability to circumvent commercials while they view television programming, which could negatively impact advertising demand for the advertisers for our content, and could therefore adversely affect our revenue. Similarly, further increases in the use of portable devices that allow users to view content of their own choosing while avoiding traditional commercial advertisements could adversely affect our revenue. If we cannot successfully exploit these and other emerging technologies, it could have a material adverse effect on our business, results of operations and financial condition.

 

This technology has impacted the Nielsen ratings, which advertisers utilize to determine the rates for advertising time which they purchase from the television networks. Lower Nielsen ratings may result in a decrease in the amount of advertising revenue received by the networks and the networks may not have sufficient cash flow to license our programming at favorable rates for us, or choose not to license our programming at all.

 

We could be adversely affected by strikes and other union activity.

 

We do not have any union-represented employees within our company, but we do rely on members of the Screen Actors Guild, the Writers Guild of America, the Directors Guild of America and other guilds in connection with most of our productions. We are currently subject to collective bargaining agreements with these unions and, therefore, must comply with all provisions of those agreements in order to hire actors, directors or writers who are members of these guilds. Provisions in each labor contract with each of the Guilds obligate us to pay residuals to their members based on various criteria including the airing of films or cash collections. If we fail to pay such residuals to those entitled to receive them, any of the unions that represent our actors, writers and directors may have

the right to foreclose on the film giving rise to such residual in order to compensate its union members accordingly. Additionally, we may be adversely impacted by work stoppages or strikes. A halt or delay in negotiating a new industry-wide union contract, depending on the length of time involved, could lead to a strike by union members and cause delays in the development, production and completion of our films. Any new collective bargaining agreements may increase our expenses in the future.

 

Business interruptions and disasters could adversely affect our operations.

 

Our operations are vulnerable to outages and interruptions due to fire, flood, power loss, telecommunications failures and similar events beyond our control. In addition, we have a film vault located in California and a backup storage facility located in New Jersey. Our California film vault has, in the past, and may, in the future, be subject to earthquakes as well as electrical blackouts as a consequence of a shortage of available electrical power. Although we have developed certain plans to respond in the event of a disaster, there can be no assurance that such plans will be effective in the event of a specific disaster. In addition, we have business interruption insurance as well as property damage insurance to cover losses that stem from an event that could disrupt our business. However, films are unique in nature and cannot be easily reproduced. If our storage facilities were to suffer damage or destruction such that our films were no longer able to be licensed to third parties, our opportunity to generate revenue by re-licensing our content would be limited and would potentially impact our earnings and financial condition.

 

We may incur significant expenses in order to protect and defend against intellectual property claims, including claims where others may assert intellectual property infringement claims against us.

 

We currently own the rights to distribute more than 1,000 titles in our film library. As such, our success depends, in part, upon sufficient protection of our intellectual property. We cannot be certain that we have good title to each of the films in our library. Many of these films were produced by production companies that we hired, but others were acquired. Most notably, we acquired the domestic rights to approximately 550 titles from Crown Media in December 2006. Although the seller made representations that it had legal title to these films at the time of sale, we cannot be certain that legal title to these films was acquired when we consummated the acquisition. There can be no assurance that infringement or misappropriation claims (or claims for indemnification resulting from such claims) will not be asserted or prosecuted against us, or that any assertions or prosecutions will not materially adversely affect our business, financial condition or results of operations. Notwithstanding the validity or the successful assertion of such claims, we would incur significant costs and diversion of resources with respect to the defense thereof, which could have a material adverse effect on our business, financial condition or results of operations. If any claims or actions are asserted against us, we may seek to obtain a license of a third party’s intellectual property rights. We cannot provide any assurances, however, that under such circumstances a license would be available on reasonable terms or at all.

 

We face a potential loss in the copyrighted works in our library if it is determined that authors or artists have a right to recapture rights to those works under the U.S. Copyright Act.

 

Under the U.S. Copyright Act, authors and their heirs have a non-waiveable statutory right to terminate their earlier assignments and licenses in many copyrighted works by sending notice within a statutorily-defined window of time. The right of termination does not apply to copyrights in “works made for hire” which encompasses most of the copyrights we own. However, with respect to copyrights we license or to the extent that any of the works we have rights to are determined not to be “works made for hire,” a termination right may exist under the U.S. Copyright Act. These rights can provide authors and their heirs an opportunity to renegotiate new and more commercially advantageous arrangements. If that were to come to pass, our net revenue associated with those works could decrease.

 

Our intellectual property rights may not be enforceable in certain foreign jurisdictions.

 

We attempt to protect our proprietary and intellectual property rights to our productions through available copyright and trademark laws as well as through licensing and distribution arrangements with reputable international companies in specific territories and for limited durations. We rely on copyright laws to protect the works of authorship created by us or transferred to us via assignment or by operation of law as “works made for hire.” We

have generally recorded or registered our copyright and trademark interests in the United States. Despite these precautions, existing copyright and trademark laws vary from country to country and the laws of some countries in which our productions are marketed may not protect our intellectual property to the same extent as do U.S. laws, or at all. Furthermore, although copyrights and trademarks that arise under United States and United Kingdom law will be recognized in most other countries (as most countries are signatories to the Berne Convention, the Universal Copyright Convention and the Madrid Protocol), we cannot guarantee that courts in other jurisdictions will afford our copyrights and trademarks the same treatment as do courts in the United States or the United Kingdom. Although we believe that our intellectual property is enforceable in most jurisdictions, we cannot guarantee such validity or enforceability.

 

Competition within our industry could reduce our licensing revenue and our ability to achieve profitability.

 

We operate in the highly competitive business of developing, producing and distributing long-form television programming. If we are unable to compete effectively with large diversified entertainment companies that have substantially greater resources than us, our operating margins and market share could be reduced, and the growth of our business inhibited. In particular, we compete with other television production and distribution companies, such as Buena Vista International Television, Paramount Television and Sony Pictures Television. A continuing trend towards business combinations and alliances in the communications industries may create significant new competitors for us or intensify existing competition. Many of these combined entities have resources far greater than ours. These combined entities may provide programming and other services that compete directly with our offered programming. We may need to reduce our prices or license additional programming to remain competitive, and we may be unable to sustain future pricing levels as competition increases. Our failure to achieve or sustain market acceptance of our programming at desired pricing levels could impair our ability to achieve profitability or positive cash flow, which would negatively impact our results of operations.

 

Furthermore, third party producers, whom we heavily rely on to produce our productions, are capable of developing, producing and distributing their own content to cable and broadcast networks. If this were to occur, these third party producers could subject us to further competition in the industry.

 

We have accessed a variety of film production incentives and subsidies offered by foreign countries and the United States which reduce our production costs. If these incentives and subsidies become less accessible to us or to our production partners, or if they are eliminated, modified, denied or revoked, our production costs could substantially increase.

 

Production incentives and subsidies for film production are widely used throughout the industry and are important in helping to offset production costs. Many foreign countries, the United States and individual states have programs designed to attract production. Canada is a notable example. Incentives and subsidies are used to reduce production costs and such incentives and subsidies take different forms, including direct government rebates, sale and leaseback transactions or transferable tax credits. We have benefited from these financial incentives and subsidies in Canada as well as in Germany, the United Kingdom, Ireland, Hungary, South Africa, Australia, New Zealand and the United States. The laws and procedures governing these production incentives are subject to change. If we or our production partners are unable to access any of these incentives and subsidies because they are modified or eliminated, we may be forced to restructure the financing of our film productions, increasing the likelihood that our inability to offset production costs will cause our profits to decrease. Further, the applications for these incentives and subsidies often are prepared and filed by our production partners, rather than by us, and they are subject to guidelines and criteria mandated by foreign, United States or state governments. We do not control the application or approval processes. If these applications are denied or revoked for any reason, impacting the operations of our production partners, we may be forced to restructure the financing of our film productions. Failure to achieve the cost savings that we have historically achieved could have a material adverse effect on our results of operations, financial condition and cash flows. For further discussion on these production incentives and subsidies, see “Business — The production, marketing and distribution of our films — Production incentives and subsidies.”

Delays and changed delivery dates have had a material impact on the timing of our revenue recognition and receipt of cash, which has affected our financial results and ultimately has decreased the value of our stock price.

 

A majority of our annual productions have been completed and made available to our licensees during the third and fourth quarter of our fiscal year. Typically, our MFT movies, mini-series and other television programming are ordered in the beginning of our fiscal year, and produced during the spring and summer, with distribution beginning in the fall. In accordance with GAAP, we do not recognize revenue from the distribution and licensing of our productions until several criteria are met, including such productions being made available for exhibition by a third party distributor or licensee. To the extent that we have any production delays due to weather, equipment malfunctions, creative differences or labor strikes, the timing can shift from one quarter to the next, which causes us to recognize that revenue in the next quarter or fiscal year and materially impacts our results of operations. If we decide to give guidance on our financial condition or results of operation, we may not achieve those projections due to a variety of factors including those discussed in this report. Furthermore, due to unpredictable factors that may occur during production, we believe that quarterly comparisons of our financial results should not be relied upon as an indication of our future performance.

 

While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

 

Section 404 of the Sarbanes-Oxley Act of 2002 and the accompanying rules and regulations promulgated by the SEC to implement it require us to include in our Form 10-K an annual report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting that cannot be remediated in a timely manner, we will be unable to assert such internal control is effective. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the applicable policies or procedures may deteriorate. If we are unable to conclude that our internal control over financial reporting is effective (or if our independent auditors disagree with our conclusion), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

 

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results.

 

We have incurred, and will continue to incur, significant legal, accounting and other expenses associated with corporate governance and public company reporting requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and NASDAQ. As long as the SEC requires the current level of compliance for public companies of our size, we expect these rules and regulations to require significant legal and financial compliance costs and to make some activities time-consuming and costly. These rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than was previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as our executive officers.

Risks related to our corporate structure

 

We are a holding company with no operations of our own, and we will depend on the distributions from Holdings II to meet our ongoing obligations and to pay cash dividends on our common stock.

 

We are a holding company with no operations of our own and we have no independent ability to generate revenue. Consequently, our ability to obtain operating funds depends upon distributions from Holdings II. The distribution of cash flows and other transfers of funds by Holdings II to us will be subject to statutory and contractual restrictions contained in RHI LLC’s existing senior secured credit facilities and the Holdings II LLC Agreement. RHI LLC’s existing senior secured credit facilities limit RHI LLC’s ability to distribute cash to its members, including Holdings II, based upon certain leverage tests. We will be unable to pay dividends to our stockholders or pay other expenses outside the ordinary course of business if Holdings II is unable to distribute cash to us.

 

Because Holdings II is treated as a partnership for U.S. federal and state income tax purposes, we, as the sole member and 100% owner of Holdings II, will incur U.S. federal and state income taxes on our proportionate share of any net taxable income of Holdings II. To the extent we need funds to pay such taxes or for any other purpose, and Holdings II is unable to provide such funds because of limitations in RHI LLC’s existing senior secured credit facilities or other restrictions, such inability to pay could have a material adverse effect on our business, financial condition, results of operations or prospects.

 

If we are determined to be an investment company, we would become subject to burdensome regulatory requirements and our business activities could be restricted.

 

We do not believe that we are an “investment company” under the Investment Company Act of 1940, as amended (the “ICA”). As sole manager of Holdings II, we control Holdings II, and our interest in Holdings II is not an “investment security” as that term is used in the ICA. If we were to stop participating in the management of Holdings II, our interest in Holdings II could be deemed an “investment security” for purposes of the ICA. Generally, a company is an “investment company” if it owns investment securities having a value exceeding 40% of the value of its total assets (excluding U.S. government securities and cash items). Our sole asset is our equity interest in Holdings II. A determination that such asset was an investment security could result in our being considered an investment company under the ICA. As a result, we would become subject to registration and other burdensome requirements of the ICA. In addition, the requirements of the ICA could restrict our business activities, including our ability to issue securities.

 

We intend to conduct our operations so that we are not deemed an investment company under the ICA. However, if anything were to occur that would cause us to be deemed to be an investment company, we would become subject to restrictions imposed by the ICA. These restrictions, including limitations on our capital structure and our ability to enter into transactions with our affiliates, could make it impractical for us to continue our business as currently conducted and could have a material adverse effect on our financial performance and operations.

 

Our certificate of incorporation, bylaws and other material agreements contain anti-takeover protections that may discourage or prevent strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders.

 

Our certificate of incorporation, bylaws, the Holdings II LLC Agreement, the director designation agreement, other reorganization agreements, our credit agreements and provisions of the Delaware General Corporation Law, or DGCL, could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws:

 

 

 

The foregoing provisions and restrictions, along with those in our formation and reorganization documents, could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of us or Holdings II.

 

Risks related to an investment in our common stock

 

If we seek protection under Chapter 11 of the U.S. Bankruptcy Code, all of our outstanding shares of capital stock would likely be cancelled and holders of our capital stock would not be entitled to any payment in respect of their shares.

 

If we seek protection under Chapter 11 of the U.S. Bankruptcy Code, all of our outstanding shares of capital stock would likely be cancelled and holders of our capital stock would not be entitled to any payment in respect of their shares. It is also likely that certain of our obligations to certain of our creditors would be satisfied by the issuance of shares of capital stock in satisfaction of their claims. The value of any capital stock so issued is likely to be less than the face value of our obligations to those creditors, and the price of any such capital stock will likely be volatile. In addition, in the event of a bankruptcy filing, our common stock will be suspended from trading on and delisted from NASDAQ. Accordingly, we would expect trading in our common stock to be limited, and our stockholders will likely not be able to resell our common stock for their purchase price or at all. In addition, if we commence a filing under Chapter 11 of the U.S. Bankruptcy Code, our current equityholders would receive little or no continuing interest in the Company.

 

We are currently not in compliance with the continued listing requirements of NASDAQ, which is likely to result in the delisting of our common stock if we cannot regain compliance.

 

On December 24, 2009, we were notified by NASDAQ that our common stock was subject to delisting from the NASDAQ Global Market because the market value of our publicly held shares was less than the $5 million minimum required for continued listing pursuant to Listing Rule 5450(b)(1)(C) and that we no longer met the $1.00 per share requirement for continued listing pursuant to Listing Rule 5450(a)(1). We were granted 180 calendar days to regain compliance with each of these requirements. As of the date of this report, we have not regained compliance with such requirements and can provide no assurance the we will achieve compliance.

 

Our future issuance of preferred stock could dilute the voting power of our common stockholders and adversely affect the market value of our common stock.

 

The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock, either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock. The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock.

 

The sale of a substantial number of our shares of common stock in the public market could adversely affect the market price of our shares, which in turn could negatively impact our share price.

 

Future sales of substantial amounts of our shares of common stock in the public market (or the perception that such sales may occur) could adversely affect the market price of our common stock and could impair our ability to

raise capital through future sales of our equity securities. As of December 31, 2009, 23,416,000 shares of our common stock were issued and outstanding. We may issue our shares of common stock from time to time as consideration for future acquisitions and investments, or to satisfy obligations to our creditors. If any such acquisition, investment or obligation is significant, the number of shares that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares in connection with any such acquisitions and investments.

 

Because we have not paid dividends and do not anticipate paying dividends on our common stock in the foreseeable future, you should not expect to receive dividends on shares of our common stock.

 

We have not paid dividends on our common stock in the past and do not currently intend to do so in the near future. However, our board of directors has discretion to determine if and when a dividend will be payable in the future. Our board will likely consider a variety of factors, including general economic conditions, future prospects for the business, the Company’s cash requirements and any other factors that the board deems relevant. In addition, our current senior secured credit facilities contain covenants prohibiting the payment of cash dividends without the consent of our lenders.

 

 

Not applicable.

 

We are headquartered in New York City, with offices in Kansas City, Los Angeles, London and Sydney.

 

 

 

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 and other negative factors then impacting the Company’s business. The Lawsuit seeks unspecified damages and interest. An Amended Complaint is due to be filed on March 18, 2010. 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 December 31, 2009.

 

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, for which we have accrued as of December 31, 2009, plus interest and attorneys’ fees.

 

 

No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2009.

 

 

Price Range of RHI Entertainment’s Common Stock, par value $.01

 

Our common stock is listed on NASDAQ and is traded under the symbol “RHIE.” The initial public offering price was $14.00 per share. At the close of business on March 24, 2010, there were 23,416,000 shares of our common stock outstanding and approximately 59 common stockholders of record. A number of our stockholders have their shares in street name; therefore, we believe that there are substantially more beneficial owners of common stock.

 

The following table sets forth for the periods indicated the high and low reported sale prices per share for the common stock since June 25, 2008, the date that our common stock began trading on NASDAQ, as reported on NASDAQ:

 

 

NASDAQ Delisting Notification

 

On December 24, 2009, we received a notice from NASDAQ stating that the we no longer met the $1.00 per share requirement for continued listing on NASDAQ in accordance with Listing Rule 5450(a)(1). This notice does not result in an immediate delisting of our common stock from NASDAQ, as a grace period of 180 calendar days (June 22, 2010) is provided under Listing Rule 5810(c)(3)(A). If at anytime during this grace period the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will provide the us written confirmation of compliance. If we do not regain compliance under Listing Rule 5450(b)(1)(C) within the grace period of 180 days, NASDAQ will provide written notification to us that our common stock may be delisted. At that time, we may apply for the transfer of our common stock to The NASDAQ Capital Market prior to the delisting date if we satisfy all of the requirements, other than minimum bid price, for initial listing on The NASDAQ Capital Market as set forth in Listing Rule 5505. If we elect to apply for such transfer, and the application is approved, we would be eligible for an additional 180 calendar day grace period.

 

In addition, on December 24, 2009, we also received a notice from NASDAQ stating that the Company’s common stock failed to maintain a minimum market value of publicly held shares (MVPHS) of $5,000,000 for the previous 30 consecutive trading days, as required for continued inclusion on NASDAQ in accordance with Listing Rule 5450(b)(1)(C). This notice does not result in an immediate delisting of our common stock from NASDAQ, as an original grace period of 90 calendar days was provided under Listing Rule 5810(c)(3)(D). However, on February 4, 2010, the Securities & Exchange Commission approved changes to the NASDAQ listing rules, which now provide us with an additional 90 days to regain compliance (June 22, 2010) with Listing Rule 5450(b)(1)(C). We were notified by NASDAQ on February 9, 2010 about the additional grace period. To regain compliance, the Company’s MVPHS needs to close at $5,000,000 or more for a minimum of 10 consecutive business days. Similar to the minimum bid price requirement, we may apply for transfer of our common stock to The NASDAQ Capital

Market prior to the expiration of the 180-day grace period if it satisfies all of the requirements for initial listing on The NASDAQ Capital Market as set forth in Listing Rule 5505. At this time, neither notification has any effect on the listing of the Company’s common stock on NASDAQ and our common stock will continue to trade on NASDAQ under the symbol RHIE.

 

Based upon the recent price levels of our common stock, stockholders’ equity and net income from continuing operations provided in the financial statements included in this report, we would not be in compliance with the listing requirements of The NASDAQ Capital Market and can provide no assurance the we will achieve compliance. If we cannot remedy our noncompliance during any applicable notice or grace periods, our common stock will be delisted from NASDAQ and any application to transfer our stock to The NASDAQ Capital Market may not be approved. The delisting of our common stock would likely have a material adverse effect on the trading price, liquidity, volume and marketability of our common stock. We are evaluating all of our options following receipt of these notifications and intend to work diligently to attempt to retain listing of our common stock on NASDAQ.

 

Exchange of Holdings II Membership Units for Shares of Our Common Stock

 

On December 22, 2009, we issued 9,900,000 shares of our common stock to KRH (KRH Shares) in connection with the exercise of KRH’s exchange right under the Holdings II LLC Agreement. We and KRH entered into the Holdings II LLC Agreement in connection with our IPO, which provided, among other things, KRH with the right to exchange its membership units in Holdings II for, at our option, either (i) shares of our common stock, (ii) cash or (iii) a combination of both shares of common stock and cash (Exchange Right). On December 14, 2009, KRH provided us notice of its intent to exercise its Exchange Right for 9,900,000 membership units in Holdings II (Exchanged Units). Prior to consummation of these transactions, we owned, as our sole material asset, all of the outstanding membership units in Holdings II other than 9,900,000 membership units in Holdings II that were owned by KRH (which represented 42.3% of Holdings II’s outstanding membership units). As a result of the foregoing, we currently own, as our sole material asset, 100% of the outstanding membership units in Holdings II. The sale of the KRH Shares was made pursuant to Section 4(2) of the Securities Act of 1933. In connection with the our IPO, we entered into a Registration Rights Agreement with KRH, dated June 23, 2008, which provides KRH with unlimited registration demand rights that can be exercised at any time in the future. There were no underwriters involved or cash proceeds received in connection with the issuance and sale of the KRH Shares. As result of the foregoing transaction, KRH no longer owns any membership units in Holdings II and, thus, it is no longer a member of Holdings II. Instead, KRH owns 9,900,000 shares of the Registrant’s common stock (42.3% of its outstanding stock).

 

RHI Inc. and KRH are parties to a tax receivable agreement that provides for the payment by us to KRH of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that RHI Inc. realizes as a result of any increase in tax basis it receives as a result of any exchange of KRH membership interest in Holdings II. Although the tax receivable agreement is still in effect, there should be no prospective implications with respect to this agreement for RHI Inc. as KRH’s exchange did not result in an increase in RHI Inc’s tax basis in its membership interest in Holdings II.

 

Dividend Policy

 

We have not paid dividends on our common stock in the past and do not currently intend to do so in the near future. However, our board of directors has discretion to determine if and when a dividend will be payable in the future. Our board will likely consider a variety of factors, including general economic conditions, future prospects for the business, the Company’s cash requirements and any other factors that the board deems relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table lists information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2009. All equity compensation plans have been approved by the shareholders.

 

 

 

 

 

 

 

 

 

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-K. 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.

 

The historical consolidated financial data discussed below reflect the historical results of operations of RHI Entertainment, LLC and its subsidiaries as RHI Inc. did not have any historical operations prior to June 23, 2008. See the Notes to our consolidated financial statements included herein.

 

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 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.

Recent Developments

 

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 as well as fourth quarter revenue from the prior year. As a result of the significant weakening of our financial position, results of operations and liquidity in 2009, we are currently in default of certain covenants of our senior secured facilities and in discussions with our lenders regarding a restructuring of our senior secured 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. We have retained the services of outside advisors to assist us in instituting and implementing a restructuring transaction. See “Risk Factors — Risks related to our business — We expect to pursue a strategic restructuring, refinancing or other transaction in order to preserve our long-term financial condition, and current market conditions could limit our ability to consummate such a transaction, which would likely have a material adverse effect on our financial condition.”

 

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 our current equityholders receiving little or no continuing interest in the Company. See “Risk Factors — Risks related to investments in our common stock — If we seek protection under Chapter 11 of the U.S. Bankruptcy Code, all of our outstanding shares of capital stock would likely be cancelled and holders of our capital stock would not be entitled to any payment in respect of their shares.” The accompanying 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 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 periods after the date of the filing.

 

In connection with the discussion above, certain recent events, which are summarized below, have occurred over the last several months.

 

 

As a result of the foregoing, we engaged Rothschild, Inc. as a financial advisor in the fourth quarter of 2009, and are in the midst of in-depth discussions with our first and second lien 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 to some or all of our lenders and/or creditors. It is also possible that these discussions could result in a sale of some or all of the Company’s assets for less than their book value. No assurance can be given as to whether these discussions will be successful. If we are not successful 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. 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 our current equityholders receiving little or no continuing interest in the Company.

 

 

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) have agreed to forbear from exercising certain of their rights and agreed to waive some of the existing or prospective defaults until March 31, 2010 unless such forbearance agreement is earlier terminated due to further unanticipated defaults or other factors. The forbearance agreements are short term arrangements that allow us to work with the agents and lenders under our senior secured credit facilities to develop a longer-term strategy for restructuring our liabilities. Under the forbearance agreements, we agreed, among other things, that:

 

 

If we are not able to cure all defaults or enter into a new forbearance agreement for each of our credit facilities by March 31, 2010 (or any earlier date that the forbearance agreements may be terminated), then 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. Upon the occurrence of such events, the Company would likely avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in our current equityholders receiving little or no continuing interest in the Company.

 

 

 

Critical accounting policies and estimates

 

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities including estimates of ultimate revenue and film production costs, the potential outcome of future tax consequences of events that have been recognized in our financial statements and estimates used in the determination of the fair value of equity awards for the determination of share-based compensation. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgment and estimation on the part of management.

 

Revenue recognition

 

We recognize revenue from the distribution of our films in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (the Codification or ASC) 926-605-25. The following are the conditions that must be met in order to recognize revenue: (i) persuasive evidence of a sale or licensing arrangement with a customer exists; (ii) the film is complete and has been delivered or is available for immediate and unconditional delivery; (iii) the license period of the arrangement has begun and the customer can begin its

exploitation, exhibition or sale; (iv) the arrangement fee is fixed or determinable; and (v) collection of the arrangement fee is reasonably assured. Amounts received from customers prior to the availability date of the product are included in deferred revenue. Long-term receivables are reflected at their net present value.

 

Allowance for doubtful accounts

 

We regularly assess the collection of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an account receivable is not probable. We also analyze accounts receivable and historical bad debt experience, customer creditworthiness and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. If any of these factors change, our estimates may also change, which could affect the level of our future provision for doubtful accounts.

 

Film production costs and cost of sales

 

We capitalize film production costs, including costs incurred for the acquisition and development of story rights, interest related to film production costs and residuals and participations. We also capitalize production related overhead expenses into film production costs. Production related overhead includes allocable costs, including salaries and benefits (including share-based compensation) of individuals in departments with exclusive or significant responsibility for the production of our films. Our completed film library primarily consists of films that were made or acquired for initial exhibition on a broadcast or cable network in the United States. Film production costs are stated at the lower of cost less amortization or net realizable value.

 

Film production costs are amortized and included in cost of sales in the proportion that current revenue bears to the estimated remaining ultimate revenue as of the beginning of the current fiscal period under the individual-film-forecast-computation method in accordance with FASB ASC 926-20-35. The amount of film production costs that are amortized each period will therefore depend on the ratio of current revenue to remaining ultimate revenue for each film for such period. We make certain estimates and judgments of remaining ultimate revenue to be earned for each film based on our knowledge of the industry. Estimates of remaining ultimate revenue and residuals and participations are reviewed annually and are revised, if necessary. Any change in any given period to the remaining ultimate revenue for an individual film will result in an increase or decrease to the percentage of amortization of capitalized film production costs relative to a previous period. The film library acquired from Crown Media is treated as an acquired film library and amortized as a single asset. Film production costs are evaluated for impairment each reporting period on a film-by-film (or, in the case of the Crown Media library, on a single asset) basis. If estimated remaining ultimate revenue is not sufficient to recover the film production costs for that film, the film production costs will be written down to fair value determined using a discounted cash flow calculation. See Note 6 of our consolidated financial statements included herein for discussion of film production cost impairments recorded during the year ended December 31, 2009.

 

Impairment of long-lived assets

 

We review long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

In assessing the recoverability of the Company’s long-lived assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows. These valuations are based on estimates and assumptions including projected future cash flows, discount rate, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. If these estimates or related assumptions change materially in the future, we may be required to record impairment charges related to our long-lived assets.

Share-based compensation

 

The Company accounts for share-based compensation in accordance with the provisions of FASB ASC 718. Share-based compensation expense is based on fair value at the date of grant and the pre-vesting forfeiture rate and is recognized over the requisite service period using the straight-line method. The fair value of the awards is determined from periodic valuations using key assumptions for implied asset volatility, expected dividends, risk free rate and the expected term of the awards. If factors change and we employ different assumptions in future periods or if there is a material change in the fair value of the Company, the compensation expense that we record may differ significantly from what we have recorded in the current period.

 

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.

 

Recent accounting pronouncements

 

In June 2009, the FASB issued the FASB ASC as the source of authoritative 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 FASB’s 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 Company’s 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 company’s 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 11 of our consolidated financial statements included herein 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.

 

In June 2009, the FASB amended guidance on variable interest entities (VIE’s) in ASC Topic 810. The amendments require entities to evaluate former qualifies special purpose entities for consolidation, changes the approach of determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. The amendments are effective as of January 1, 2010 and the Company does not anticipate them to have a material impact to the Company’s consolidated financial statements.

 

Also, in June 2009, the FASB issued new standards which remove the concept of a qualifying special-purpose entity. This standards clarify rules in order to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s 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 standards modify the financial-components approach in FASB ASC 860-10 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. The new standards are effective as of January 1, 2010 and the Company does not anticipate they will have a material impact to the Company’s consolidated financial statements.

 

In August 2009, 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 in our consolidated financial statements included herein.

Results of Operations

 

The results of operations for the years ended December 31, 2009, 2008 and 2007 are summarized below. The year ended December 31, 2008 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.

The year ended December 31, 2009 compared to the year ended December 31, 2008

 

The year ended December 31, 2008 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.

 

Revenue, cost of sales and gross profit

 

 

Total revenue decreased $148.7 million, or 66%, to $77.8 million during the year ended December 31, 2009 from $226.4 million during the same period in 2008.

 

Production revenue decreased $43.7 million to $35.8 million during the year ended December 31, 2009, compared to $79.5 million during 2008. The reduction in production revenue is attributed to the decrease in the size of the 2009 film slate versus 2008. During the year ended December 31, 2009, 10 original MFT movies and five original mini-series were delivered, while 27 original MFT movies and eight original mini-series were delivered during the year ended December 31, 2008. The delivery of fewer films during the year ended December 31, 2009 compared to the prior year was the result of continuingly weak market conditions and constraints on the Company’s capital resources (See “Management’s Discussion and Analysis — Liquidity and capital resources”).

 

Library revenue decreased $105.0 million, or 71%, to $42.0 million during the year ended December 31, 2009 from $146.9 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 and continued throughout 2009. Approximately $74.5 million of the decrease is attributable to one customer who had significant licenses with windows opening during the year ended December 31, 2008 as compared to the same period in 2009. Also contributing to the decrease was a $9.4 million reduction in revenue related to the distribution of programming on ION during the year ended December 31, 2009 compared to 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 increased $259.5 million to $413.1 million during the year ended December 31, 2009 from $153.7 million during 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 year ended December 31, 2009 compared to the prior year is primarily due to film production cost impairment charges of $338.9 million recorded during the year ended December 31, 2009 (see discussion below). No film production cost impairment charges were recorded during 2008. Additionally, 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 to 73% during the year ended December 31, 2009 compared to 61% during in 2008 as a result of our annual ultimate revenue assessment (see discussion below) and its impact on the amortization rates associated with our films. This is a trend that has continued from the prior year and is due to the challenging market conditions confronting the media and entertainment industry previously discussed. Additionally, the lower revenue recognized during the year ended December 31, 2009 and the fact that the distribution expenses and ION minimum guarantee expense do not directly correlate to the recognized revenue contributed to the decrease in gross profit.

We review the ultimate revenues associated with our films. This analysis considers various data points, including current market conditions, library sales activity, pricing, the delivery of our annual film slate and the results of the annual independent valuation of the unsold rights to our film library. This assessment as of December 31, 2009 was completed in February of 2010. As a result of the continued weak market conditions, sales data, pricing and other factors present during the fourth quarter of 2009 and into 2010 as well as the significant decline in the annual independent valuation of the unsold rights to our film library, this analyses resulted in a significant reduction of the ultimate revenues for the majority of films in our library. In addition, based upon a qualitative analysis and assessment of recent sales activity, we now assume that there will be no future revenues for certain films. A reduction in the ultimate revenue associated with a film results in a higher rate of amortization over that film’s remaining accounting life and causes a reduction in that film’s prospective profit margin. The reduction in ultimate revenues resulted in a decrease in the fair value of films to an amount below their net book value. As a result, impairment charges were recorded totaling $338.9 million during the year ended December 31, 2009 to reduce the net book value of those films to an amount approximating their fair value. Refer to Note 6 of our consolidated financial statements included herein. In addition, the reduction in ultimate revenues resulted in a $1.1 million increase to film cost amortization for the year ended December 31, 2009 related to films for which revenue has been recognized during the period.

 

Contributing to the increase in Other cost of sales as a percentage of revenue was an approximately $3.4 million credit recorded during the year ended December 31, 2008 as a result of the reduction of certain participation accruals. No similar credit was recorded in the year ended December 31, 2009.

 

Other costs and expenses

 

 

Selling, general and administrative expenses decreased $13.6 million to $35.5 million during the year ended December 31, 2009, from $49.1 million in 2008. The decrease of 28% is primarily due to the reversal of approximately $2.8 million of accounts receivable reserves in 2009, which were established during the year ended December 31, 2008. Additionally, during the year ended December 31, 2008, we incurred approximately $4.7 million more in costs associated with severance agreements compared to the year ended December 31, 2009 and $3.4 million more in costs related to the marketing and promotion of our programming on ION. These decreases were offset by additional costs incurred in connection with operating as a publicly traded company and professional fees (associated with the ongoing restructuring of our capital structure) which were not incurred during the year ended December 31, 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 $0.6 million in connection with a financial advisory agreement for the planning, strategy, oversight and support to management. A total of $0.3 million of this management fee was recorded as fees paid to related parties during the year ended December 31, 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 year ended December 31, 2008.

 

Interest expense, net

 

Interest expense, net increased $9.1 million to $49.4 million for the year ended December 31, 2009 from $40.3 million during 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 Note 11 of our audited consolidated financial statements included herein, 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 was to be amortized as interest expense for the period of April 21, 2009 through April 27, 2010, which was the maturity date of the original swaps. On December 23, 2009, when the Company terminated the interest rate swaps, the remaining $5.5 million portion of the unamortized value was immediately recognized as interest expense. For the year ended December 31, 2009, the amortization of the fair value of the amended interest rate swaps was $16.1 million. In addition, interest expense associated with the net settlement of our interest rate swaps increased $5.8 million and amortization of deferred debt costs increased $1.1 million during the year ended December 31, 2009 compared to 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 year ended December 31, 2009 as compared to 2008 resulting from the reductions in the benchmark interest rates (i.e. LIBOR). The average interest rate during the year ended December 31, 2009 was 3.6%, compared to 5.9% during 2008. In addition, weighted average debt balances outstanding during the year ended December 31, 2009 decreased compared to 2008. During the year ended December 31, 2009, we had an average debt balance of $583.6 million compared to $618.4 million during 2008.

 

Other income (expense), net

 

For the year ended December 31, 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 losses 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 $2.4 million and foreign exchange losses amounted to $0.3 million for the year ended December 31, 2009. Other income (expense), net for the year ended December 31, 2008 primarily represents foreign exchange losses of $0.2 million.

 

Income tax (provision) benefit

 

The income tax provision for the year ended December 31, 2009 is primarily related to the establishment of deferred tax asset valuation allowances and tax contingency reserves associated with our corporate subsidiary as well as foreign taxes related to license fees from customers located outside the United States. The provision in 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 year ended December 31, 2009 was $251.1 million, compared to $(58.4) million for the year ended December 31, 2008. The net loss for the year ended December 31, 2009 includes the $338.9 million film production cost impairment charge discussed above. Additionally, the net loss for the year ended December 31, 2009 is not comparable to the net loss for the year ended December 31, 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.

 

The year ended December 31, 2008 compared to the year ended December 31, 2007

 

The year ended December 31, 2008 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.

Revenue, cost of sales and gross profit

 

 

Total revenue decreased $5.6 million, or 2%, to $226.4 million during the year ended December 31, 2008 from $232.0 million during the same period in 2007.

 

Production revenue was $79.5 million in 2008 compared to $133.1 million in 2007. The number of films delivered in 2008 decreased to 35 (eight mini-series and 27 MFT movies) from 43 (five mini-series, 37 MFT movies and one episodic series) in 2007. The decrease of approximately 40% in production revenue resulted primarily from the decrease in the average revenue per MFT movie and mini-series as well as a decrease in the number of MFT movies delivered in 2008. The decrease in average revenue per film reflects lower sales activity resulting from the economic slowdown in the fourth quarter of 2008. Additionally, there were short-term delays in license fee revenue recognition stemming from our operating decision to provide exploitation windows for programming on ION and/or PPV prior to exploitation windows on broadcast or cable networks. As previously discussed, our agreement with ION was terminated effective as of August 10, 2009. Fewer productions were intentionally delivered during 2008 in an effort to more efficiently manage the Company’s capital resources.

 

Library revenue totaled $146.9 million in 2008 compared to $98.9 million in 2007. The increase of approximately 49% is due primarily to the addition of the 2007 slate to the library, increased average revenue per library title and additional revenue related to the distribution of programming on ION. Revenue related to the distribution of programming on ION increased $9.0 million in 2008 compared to 2007. Our arrangement with ION did not commence until late June 2007 and, consequently, there was less revenue during 2007.

 

Cost of sales increased $16.6 million to $153.7 million in 2008 from $137.1 million during 2007. Cost of sales as a percentage of revenue increased to 68% in 2008 from 59% in 2007. Cost of sales is primarily comprised of film cost amortization, which as a percentage of revenue was 61% in 2008 compared to 53% in 2007. Consequently, our gross profit percentage declined to 32% in 2008 from 41% in 2007.

 

The average amortization rate on library revenue was higher than in 2007 due to the mix of films for which revenue was recognized in each period. Amortization is on a film-by-film basis and, on average, the films for which revenue was recognized during 2008 had higher rates of amortization than those in the same period of 2007. Amortization rates on production revenue were higher in 2008 than in 2007 reflecting the lower average revenue per film in 2008 and its impact on the sales projections for these films over their accounting life cycles.

 

Also contributing to the decrease in gross profit as a percentage of revenue was an additional $6.7 million of cost arising from the amortization of minimum guarantee payments made to ION during 2008 resulting from our arrangement with ION, which commenced in late June 2007.

Other costs and expenses

 

 

Selling, general and administrative expenses increased $3.4 million to $49.1 million during the year ended December 31, 2008 from $45.7 million during the year ended December 31, 2007. During 2008, we incurred $6.5 million of severance related costs and a $3.0 million provision for bad debt that was established during the year primarily related to one customer whose payments owed to us are past due. We also incurred additional costs in connection with operating as a publicly traded company during 2008 as compared to 2007. The aforementioned increases were partially offset by $3.7 million of professional fees incurred in 2007 for the consideration of financing structures and $3.9 million of legal and accounting fees incurred in 2007 in connection with a prior postponement of our IPO. There were no comparable costs incurred during 2008.

 

During the quarter ended December 31, 2008, our stock price declined significantly to a level indicating a market capitalization well below the Company’s book value. In analyzing the decline in stock price, we considered the decline to be primarily attributable to overall stock market volatility experienced in the fourth quarter. As a result of the significant reduction in our public market valuation, we performed a review of our Goodwill as of December 31, 2008 and determined that it was appropriate to write-off our Goodwill. As a result, a $59.8 million impairment charge was recorded in the fourth quarter of 2008.

 

In 2006, we agreed to pay Kelso an annual management fee of $0.6 million in connection with a financial advisory agreement for planning, strategy, oversight and support to management. A total of $0.3 million and $0.6 million of this management fee was recorded as fees paid to related parties during the years ended December 31, 2008 and 2007, respectively. 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 year ended December 31, 2008.

 

Interest expense, net

 

Interest expense, net decreased $11.2 million to $40.3 million for the year ended December 31, 2008 from $51.5 million during the comparable period in 2007. The decrease in interest expense is primarily due to a lower average interest rate during the year ending December 31, 2008 as compared to the comparable period of 2007 resulting from the favorable refinancing of our credit facilities in April 2007 as well as reductions in the benchmark interest rates (i.e. LIBOR). The average interest rate during the year ended December 31, 2008 was 5.9%, compared to 8.2% during the comparable period of 2007. Also contributing to the decrease in interest expense was a lower weighted average debt balance outstanding during 2008 compared to 2007. During the year ended December 31, 2008, we had an average debt balance of $618.4 million compared to $635.7 million during 2007. Offsetting the decreases in the average rate and weighted average debt balance was an increase in interest expense recorded in connection with our interest rate swap contracts resulting from the aforementioned reduction in LIBOR. Approximately $7.7 million in interest expense was recorded in connection with our interest rate swap contracts during the year ended December 31, 2008, compared to $1.0 million of income for the year ended December 31, 2007.

 

Loss on extinguishment of debt

 

On April 13, 2007 we amended and restated our credit agreements that govern our senior credit facilities. These facilities, as of December 31, 2007, consisted of a $275.0 million revolving credit facility, a $175.0 million term loan facility and a $260.0 million existing senior second lien term loan facility. These facilities replaced the senior credit facilities secured on January 12, 2006 (inception), as subsequently amended, in connection with the acquisition of the Company. As a result of entering into the amended and restated facilities, the Company incurred a

loss on extinguishment of debt of $17.3 million during the year ended December 31, 2007. There was no comparable expense incurred during 2008.

 

Other (expense) income, net

 

Other (expense) income, net primarily represents realized foreign currency (losses) gains resulting from the settlement of customer accounts denominated in foreign currencies. For the year ended December 31, 2008, we realized foreign currency losses totaling $0.2 million compared to foreign currency gains of $0.1 million during the year ended December 31, 2007.

 

Income tax provision

 

Income tax expense was $0.7 million for the year ending December 31, 2008, a decrease of $0.7 million from the same period of 2007. The decrease in tax expense in 2008 is primarily due to a decrease in pre-tax income associated with our corporate subsidiary, combined with lower 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 recorded by RHI Inc. in the period from June 23 through December 31, 2008.

 

Net loss

 

The net loss, including the Goodwill impairment charge of $59.8 million in 2008, for the years ended December 31, 2008 and 2007 was $(58.4) million and $(22.6) million, respectively.

 

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 December 31 2009, we had $25.1 million of cash compared to $22.4 million of cash at December 31, 2008. As of December 31, 2009, we had no additional borrowings available. See “Risk factors — Risks related to the business — Our substantial indebtedness and failure to comply with the financial covenants contained in the credit agreements governing our senior secured credit facilities will likely have a material adverse affect on our operating results and financial condition.”

 

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, as well as, fourth quarter revenue from the prior year. As a result of the significant weakening of our financial position, results of operations and liquidity in 2009, we are currently in default of certain covenants of our senior secured facilities and in discussions with our lenders regarding a restructuring of our senior secured 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. We have retained the services of outside advisors to assist us in instituting and implementing a restructuring transaction. See “Risk Factors — Risks related to our business — We expect to pursue a strategic restructuring, refinancing or other transaction in order to preserve our long-term financial condition, and current market conditions could limit our ability to consummate such a transaction, which would likely have a material adverse effect on our financial condition.”

 

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 our current equityholders receiving little or no continuing interest in the Company. See “Risk Factors —

Risks related to investments in our common stock — If we seek protection under Chapter 11 of the U.S. Bankruptcy Code, all of our outstanding shares of capital stock would likely be cancelled and holders of our capital stock would not be entitled to any payment in respect of their shares.” The accompanying 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 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 period after the date of such filing.

 

In connection with the discussion above, certain recent events, which are summarized below, have occurred over the last several months.

 

 

As a result of the foregoing, we engaged Rothschild, Inc. as a financial advisor in the fourth quarter of 2009, and are in the midst of in-depth discussions with our first and second lien 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 to some or all of our lenders and/or creditors. It is also possible that these discussions could result in a sale of some or all of the Company’s assets for less than their book value. No assurance can be given as to whether these discussions will be successful. If we are not successful 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. 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 our current equityholders receiving little or no continuing interest in the Company.

 

 

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) have agreed to forbear from exercising certain of their rights and agreed to waive some of the existing or prospective defaults until March 31, 2010 unless such forbearance agreement is earlier

terminated due to further unanticipated defaults or other factors. The forbearance agreements are short term arrangements that allow us to work with the agents and lenders under our senior secured credit facilities to develop a longer-term strategy for restructuring our liabilities. Under the forbearance agreements, we agreed, among other things, that:

 

 

If we are not able to cure all defaults or enter into a new forbearance agreement for each of our credit facilities by March 31, 2010 (or any earlier date that the forbearance agreements may be terminated), then 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. Upon the occurrence of such events, the Company would likely avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, which would result in our current equityholders receiving little or no continuing interest in the Company.

 

As referenced above, the annual third party valuation report of our film library as required by our lenders under our first lien credit facility (the Valuation Report) was completed in March of 2010. The Valuation Report indicates a material and substantial reduction of approximately 50% of the non-contracted value of the films in our film library at December 31, 2009 as compared to the third party valuation at December 31, 2008 using similar methodologies. The decrease in the value of our film library directly and materially reduces the borrowing base governing the revolving credit facility under the First Lien Credit Agreement. This result of the Valuation Report is also a contributing factor for our annual assessment of ultimate revenues.

 

The chart below shows our cash flows for the years ended December 31, 2009, 2008 and 2007:

 

 

Operating activities

 

Cash used in operating activities in the year ended December 31, 2009 was $9.8 million, as compared to $55.1 million for 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 $45.3 million improvement in operating cash flows was

primarily the result of a $34.4 million increase in receipts from the film library, a $14.2 million decrease in payments related to the distribution of our programming on ION, $5.7 million decrease in payments related to selling, general and administrative expense and $5.1 million reduction in interest paid.

 

Cash used in operating activities in the year ended December 31, 2008 was $55.1 million, as compared to $88.8 million for 2007. 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 $33.7 million improvement in operating cash flows was primarily the result of a $23.2 million increase in receipts from the film library and a $5.4 million reduction in interest paid.

 

Investing activities

 

During the years ended December 31, 2009, 2008 and 2007, we used $0.2 million, $0.2 million and $0.1 million, respectively, in investing activities, reflecting the purchase of property and equipment.

 

Financing activities

 

During the year ended December 31, 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 year ended December 31, 2008, $76.3 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 $40.0 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.

 

During 2007, $86.6 million of cash was provided by financing activities from borrowings under our credit facilities (net of deferred debt financing costs of $3.9 million and repayments of $653.9 million), principally to fund our operating activities.

 

Contractual obligations

 

The following table sets forth our contractual obligations as of December 31, 2009:

 

 

 

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.

 

 

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 gains (losses) for the year ended December 31, 2009, the period from June 23, 2008 through December 31, 2008, the period from January 1, 2008 through June 22, 2008 and the year ended December 31, 2007 were $(0.3) million, $(0.9) million, $0.7 million and $0.1 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.

 

 

See Index to Consolidated Financial Statements beginning on page F-1.

 

None.

 

 

(a) Evaluation of Disclosure 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 annual 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.

 

(b) Management’s Annual Report on Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm

 

This annual report includes a report of management’s assessment regarding internal controls over financial reporting, but does not include an attestation report of our registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.

 

(c) Change in Internal Control Over Financial Reporting

 

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.

 

 

None.

 

 

The information required by this Item is incorporated herein by reference to the Proxy Statement.

 

 

The information required by this Item is incorporated herein by reference to the Proxy Statement.

 

 

The information contained in this section is incorporated herein by reference to the Proxy Statement and this Annual Report on Form 10-K under the caption Part II — Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

 

The information required by this Item is incorporated herein by reference to the Proxy Statement.

 

 

The information required by this Item is incorporated herein by reference to the Proxy Statement.

 

 

(a) (1) and (a) (2) Financial statements and financial statement schedules

 

See Index to Consolidated Financial Statements beginning on page F-1.

 

(b) Exhibits

 

See Exhibit Index beginning on page IV-1.

 

(c) Financial Statement Schedules

 

Financial Statement Schedules not included herein have been omitted because they are neither required, nor applicable, or the information is otherwise included herein.

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, on March 26, 2010.

 

RHI ENTERTAINMENT, INC.

 

Robert A. Halmi, Jr.

President and Chief Executive Officer
(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and as of the date indicated.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

RHI ENTERTAINMENT, INC.

 

 

 

The Board of Directors and Stockholders

RHI Entertainment, Inc.:

 

We have audited the accompanying consolidated balance sheets of RHI Entertainment, Inc. and subsidiaries (Successor) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ (deficit) equity / member’s equity and comprehensive loss, and cash flows of RHI Entertainment, Inc. and subsidiaries for the year ended December 31, 2009 and the period from June 23, 2008 to December 31, 2008 (Successor periods), and the consolidated statement of operations, stockholders’ (deficit) equity / member’s equity and comprehensive loss, and cash flows of RHI Entertainment, LLC and subsidiaries (Predecessor) for the period from January 1, 2008 to June 22, 2008 and the year ended December 31, 2007 (Predecessor periods). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of RHI Entertainment, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the Successor periods, in conformity with U.S. generally accepted accounting principles. In our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of RHI Entertainment, LLC and subsidiaries for the Predecessor periods, in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has incurred losses from operations and net operating cash outflows in each of the past four years, has an accumulated deficit, is in default of covenants of its debt agreements and is unable to pay some of its obligations as they come due. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ KPMG LLP

 

New York, New York

March 26, 2010

RHI ENTERTAINMENT, INC.

Consolidated Balance Sheets

 

 

 

See accompanying notes to consolidated financial statements

RHI ENTERTAINMENT, INC.

Consolidated Statements of Operations