Attached files
file | filename |
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EX-32.1 - EX-32.1 - RHI Entertainment, Inc. | y03805exv32w1.htm |
EX-32.2 - EX-32.2 - RHI Entertainment, Inc. | y03805exv32w2.htm |
EX-31.2 - EX-31.2 - RHI Entertainment, Inc. | y03805exv31w2.htm |
EX-31.1 - EX-31.1 - RHI Entertainment, Inc. | y03805exv31w1.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
001-34102
(Commission File Number)
RHI ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
36-4614616 (I.R.S. Employer Identification No.) |
1325 Avenue of Americas, 21st Floor
New York, NY 10019
(Address of principal executive offices)
New York, NY 10019
(Address of principal executive offices)
Registrants telephone number: (212) 977-9001
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the registrants common stock, par value $0.01 per share, outstanding
as of August 3, 2010 was 23,421,595.
RHI ENTERTAINMENT, INC.
INDEX
INDEX
Page | ||||
PART 1. FINANCIAL INFORMATION |
||||
Item 1. Financial Statements
|
3 | |||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
13 | |||
Item 3. Quantitative and Qualitative Disclosures about Risk
|
23 | |||
Item 4. Controls and Procedures
|
23 | |||
PART 2. OTHER INFORMATION |
||||
Item 1. Legal Proceedings
|
24 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
24 | |||
Item 3. Defaults upon Senior Securities
|
25 | |||
Item 4. (Removed and Reserved)
|
25 | |||
Item 5. Other Information
|
25 | |||
Item 6. Exhibits
|
25 | |||
Signatures
|
26 |
2
Part 1. Financial Information
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Balance Sheets
Unaudited Condensed Consolidated Balance Sheets
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands, except per share data) | ||||||||
ASSETS |
||||||||
Cash |
$ | 12,131 | $ | 25,120 | ||||
Accounts receivable, net of allowance for doubtful
accounts and discount to present value of $4,048 and
$5,350, respectively |
57,108 | 85,217 | ||||||
Film production costs, net |
457,791 | 461,232 | ||||||
Prepaid and other assets, net |
17,010 | 15,158 | ||||||
Intangible assets, net |
585 | 1,125 | ||||||
Total assets |
$ | 544,625 | $ | 587,852 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Accounts payable and accrued liabilities |
$ | 40,418 | $ | 21,610 | ||||
Accrued film production costs |
153,553 | 166,895 | ||||||
Debt |
609,171 | 609,171 | ||||||
Deferred revenue |
24,691 | 22,861 | ||||||
Total liabilities |
827,833 | 820,537 | ||||||
Stockholders deficit |
||||||||
Common stock, par value $0.01 per share;125,000
shares authorized and 23,422 shares issued
and outstanding |
$ | 234 | $ | 234 | ||||
Additional paid-in capital |
54,691 | 54,390 | ||||||
Accumulated deficit |
(338,133 | ) | (287,309 | ) | ||||
Total stockholders deficit |
(283,208 | ) | (232,685 | ) | ||||
Total liabilities and stockholders deficit |
$ | 544,625 | $ | 587,852 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Operations
Unaudited Condensed Consolidated Statements of Operations
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Revenue |
||||||||||||||||
Production revenue |
$ | 3,582 | $ | 11,832 | $ | 4,551 | $ | 11,832 | ||||||||
Library revenue |
2,402 | 10,851 | 9,832 | 23,854 | ||||||||||||
Total revenue |
5,984 | 22,683 | 14,383 | 35,686 | ||||||||||||
Cost of sales |
5,542 | 18,487 | 12,695 | 31,925 | ||||||||||||
Gross profit |
442 | 4,196 | 1,688 | 3,761 | ||||||||||||
Other costs and expenses: |
||||||||||||||||
Selling, general and administrative |
16,702 | 6,922 | 29,243 | 17,888 | ||||||||||||
Amortization of intangible assets |
270 | 285 | 540 | 599 | ||||||||||||
Loss from operations |
(16,530 | ) | (3,011 | ) | (28,095 | ) | (14,726 | ) | ||||||||
Other (expense) income: |
||||||||||||||||
Interest expense, net |
(10,660 | ) | (10,435 | ) | (21,060 | ) | (20,067 | ) | ||||||||
Interest income |
5 | 1 | 12 | 4 | ||||||||||||
Other expense, net |
(464 | ) | (953 | ) | (951 | ) | (1,647 | ) | ||||||||
Loss before income taxes and
non-controlling interest in
loss of consolidated entity |
(27,649 | ) | (14,398 | ) | (50,094 | ) | (36,436 | ) | ||||||||
Income tax provision |
(370 | ) | (543 | ) | (730 | ) | (518 | ) | ||||||||
Loss before non-controlling
interest in loss of
consolidated entity |
(28,019 | ) | (14,941 | ) | (50,824 | ) | (36,954 | ) | ||||||||
Non-controlling interest in loss of
consolidated entity |
| 6,320 | | 15,632 | ||||||||||||
Net loss |
$ | (28,019 | ) | $ | (8,621 | ) | $ | (50,824 | ) | $ | (21,322 | ) | ||||
Loss per Share: |
||||||||||||||||
Basic |
$ | (1.20 | ) | $ | (0.64 | ) | $ | (2.17 | ) | $ | (1.58 | ) | ||||
Diluted |
$ | (1.20 | ) | $ | (0.64 | ) | $ | (2.17 | ) | $ | (1.58 | ) | ||||
Weighted Average Shares Outstanding: |
||||||||||||||||
Basic |
23,422 | 13,505 | 23,422 | 13,505 | ||||||||||||
Diluted |
23,422 | 13,505 | 23,422 | 13,505 |
See accompanying notes to unaudited condensed consolidated financial statements.
4
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (50,824 | ) | $ | (21,322 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Amortization of film production costs |
11,072 | 22,008 | ||||||
Amortization of deferred debt financing cost |
1,689 | 1,689 | ||||||
Decrease of accounts receivable reserves |
(1,302 | ) | (4,281 | ) | ||||
Amortization of intangible assets |
540 | 599 | ||||||
Share-based compensation |
301 | 921 | ||||||
Depreciation and amortization of fixed assets |
110 | 106 | ||||||
Non-controlling interest in loss of consolidated entity |
| (15,632 | ) | |||||
Amortization of interest rate swap value |
| 3,032 | ||||||
Realized loss on interest rate swaps |
| 1,267 | ||||||
Deferred income taxes |
| 1,689 | ||||||
Change in operating assets and liabilities: |
||||||||
Decrease in accounts receivable |
29,411 | 44,604 | ||||||
(Increase) decrease in prepaid and other assets |
(3,651 | ) | 643 | |||||
Additions to film production costs |
(7,631 | ) | (35,789 | ) | ||||
Increase (decrease) in accounts payable and accrued liabilities |
18,808 | (2,069 | ) | |||||
Decrease in accrued film production costs |
(13,342 | ) | (25,793 | ) | ||||
Increase in deferred revenue |
1,830 | 888 | ||||||
Net cash used in operating activities |
(12,989 | ) | (27,440 | ) | ||||
Cash flows from investing activities |
||||||||
Purchase of property and equipment |
| (77 | ) | |||||
Net cash used in investing activities |
| (77 | ) | |||||
Cash flows from financing activities |
||||||||
Borrowings from credit facilities |
| 8,000 | ||||||
Repayments of credit facilities |
| (1,000 | ) | |||||
Net cash provided by financing activities |
| 7,000 | ||||||
Net decrease in cash |
(12,989 | ) | (20,517 | ) | ||||
Cash, beginning of period |
25,120 | 22,373 | ||||||
Cash, end of period |
$ | 12,131 | $ | 1,856 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | | $ | 24,085 | ||||
Cash paid for income taxes |
1,418 | 747 |
See accompanying notes to unaudited condensed consolidated financial statements.
5
RHI ENTERTAINMENT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Business and Organization
In these Notes to Unaudited Condensed Consolidated Financial Statements, unless the context
otherwise requires, the terms the Company, we, us and our refer to RHI Entertainment, Inc.
and its subsidiaries including RHI Entertainment Holdings II, LLC and RHI Entertainment, LLC.
On January 12, 2006, Hallmark Entertainment Holdings, LLC (Hallmark) sold its 100% interest in
Hallmark Entertainment, LLC (Hallmark Entertainment) to HEI Acquisition, LLC. HEI Acquisition, LLC
was immediately merged with and into Hallmark Entertainment and its name was changed to RHI
Entertainment, LLC (RHI LLC). Subsequent to the transaction, RHI LLCs sole member was RHI
Entertainment Holdings, LLC (Holdings), a limited liability company controlled by affiliates of
Kelso & Company L.P. (Kelso). RHI LLC is engaged in the development, production and distribution of
made-for-television movies, mini-series and other television programming (collectively, Films).
On June 23, 2008, RHI Entertainment, Inc. (RHI Inc.) completed its initial public offering
(the IPO). RHI Inc. was incorporated for the sole purpose of becoming the managing member of RHI
Entertainment Holdings II, LLC and had no operations prior to the IPO. Immediately preceding the
IPO, Holdings changed its name to KRH Investments LLC (KRH). KRH then contributed its 100%
ownership interest in RHI LLC to a newly formed limited liability company named RHI Entertainment
Holdings II, LLC (Holdings II) in consideration for 42.3% of the common membership units in
Holdings II and Holdings IIs assumption of all of KRHs obligations under its financial advisory
agreement with Kelso. Upon completion of the IPO, the net proceeds received were contributed by RHI
Inc. to Holdings II in exchange for 57.7% (13,500,100) of the common membership units in Holdings
II. Upon completion of the IPO, RHI Inc. became the sole managing member of Holdings II and held a
majority of the economic interests in Holdings II. KRH was the non-managing member of Holdings II
and held a minority of the economic interests in Holdings II. RHI Inc. held a number of common
membership units in Holdings II equal to the number of outstanding shares of RHI Inc. common stock.
Pursuant to the IPO, a total of 13,500,000 shares of Class A Common Stock were sold for
aggregate offering proceeds of $189.0 million. The underwriting discounts were $13.2 million and
the net proceeds from the IPO (before fees and expenses) totaled $175.8 million. RHI LLC used the
net proceeds of the IPO that were contributed by RHI Inc., together with the net proceeds from RHI
LLCs new $55.0 million senior second lien credit facility, approximately $52.2 million of
borrowings under RHI LLCs revolving credit facility (see Note 6) and $29.0 million of cash on
hand, as follows: (i) approximately $260.0 million was used to repay RHI LLCs existing senior
second lien credit facility in full; (ii) approximately $35.7 million was used to fund a
distribution to KRH intended to return capital contributions by KRH; (iii) approximately $0.5
million, net of reimbursements was used to pay fees and expenses in connection with the IPO; (iv)
approximately $9.8 million was used to pay fees and expenses in connection with the amendments to
RHI LLCs credit facilities, including accrued interest and a 1% prepayment premium on the existing
senior second lien credit facility; and (v) $6.0 million was paid to Kelso in exchange for the
termination of RHI LLCs fee obligations under the existing financial advisory agreement. An
additional $1.4 million of fees and expenses related to the IPO were paid subsequent to the IPO.
The Amended and Restated Limited Liability Company Operating Agreement of Holdings II, dated
as of June 23, 2008, by and between RHI Inc. and KRH, as amended (the LLC Agreement) provided KRH
with the right to exchange its membership units in Holdings II for, at RHI Inc.s option, either
(i) shares of RHI Inc. common stock, (ii) cash or (iii) a combination of both shares of common
stock and cash (the Exchange Right). On December 14, 2009, KRH provided notice to RHI Inc. of its
intent to exercise its Exchange Right for 100% of its 9,900,000 membership units in Holdings II. On
December 15, 2009, the Board of Directors of RHI Inc. determined that it was in the best interest
of the Company to issue KRH shares of RHI Inc. common stock, and authorized and approved the
issuance of such shares in exchange for the surrender and transfer of the 9,900,000 membership
units by KRH. On December 22, 2009, RHI Inc. issued 9,900,000 shares of its common stock to KRH. As
a result of the foregoing, RHI Inc. owns, as its sole material asset, 100% of the outstanding
membership units in Holdings II.
Liquidity and Restructuring
Market conditions confronting the media and entertainment industry have continued to be a
challenge for the Company. The business environment deteriorated substantially beginning in the
fourth quarter of 2008 and remained challenging throughout all of 2009. Specifically, total revenue
in 2009 declined significantly as compared to prior years. This was primarily due to 2009 fourth
quarter sales activity falling dramatically short of our expectations, resulting in significantly
lower fourth quarter revenue compared to
6
the prior year. While current market conditions have begun to strengthen in 2010, they remain
weaker than market conditions prior to the fourth quarter of 2008. As a result of the significant
weakening of the Companys financial position, results of operations and liquidity, the Company is
currently in default of certain covenants of its senior secured credit facilities and is in
discussions with its lenders regarding a restructuring of those facilities. However, management can
provide no assurance that it will be able to successfully restructure the Companys debt
obligations. Whether or not the Company is able to restructure its debt obligations or come to a
consensual agreement with its creditors, the Company will likely be required to seek protection
under Chapter 11 of the U.S. Bankruptcy Code and any such filing would result in RHI Inc.s current
equityholders receiving little or no continuing interest in the assets and operations of the
Company.
For films produced within the last fiscal year, the Companys production partners have
financed a substantial portion of the cost through the use of their own new or existing credit
facilities. In connection with these financings, the Company has consented to its production
partners pledging as collateral the associated distribution contracts they have with the Company.
To address liquidity constraints, the Company has entered into settlement agreements and continues
to renegotiate several of its distribution contracts with its production partners and/or their
financing sources in an effort to defer or restructure certain payments under those contracts which
have already come due or will come due in the near term. In some cases, such settlements and
restructuring involves giving up the Companys distribution rights for these films in certain
territories. The Company is currently involved in negotiations that would result in it giving up
distribution rights to fifteen completed titles having a combined book value of $38.9 million in
Film Production Costs, $3.0 million of Accounts Receivable, $47.3 million of Accrued Film
Production Costs and $2.5 million of Deferred Revenue recorded as of June 30, 2010. If the Company
is unsuccessful in renegotiating these contracts, the Company will either have to pay amounts the
Company owes, which would exacerbate the Companys liquidity concerns or default on its obligations
under those agreements, which could result in the termination of the Companys licensing rights to
these films and adversely affect the future working relationship with certain production partners.
Such outcomes could in turn adversely affect the Companys future revenues, profits, collection of
certain accounts receivable and/or require the Company to seek protection under Chapter 11 of the
U.S. Bankruptcy Code.
As a result of the foregoing, the Companys board of directors engaged Rothschild, Inc. as a
financial advisor in the fourth quarter of 2009 to assist in negotiating and implementing a
restructuring transaction, and the Company is in the midst of in-depth discussions with its lenders
and other creditors with respect to restructuring its indebtedness and capital structure.
Management expects these discussions to likely result in a significant or complete dilution of the
Companys existing equityholders interest through an issuance of preferred stock or common stock
of RHI Entertainment, LLC (or its successor) to some or all of its lenders and/or creditors. As a
result of these discussions, we may enter into various agreements and settlements with certain of
these creditors in the near future, in which we may agree to transfer, assign or surrender certain
rights or assets. No assurance can be given as to whether these discussions will be successful in
restructuring the Companys debt obligations. Even if the Company is successful in coming to a
consensual agreement with some or all of its creditors, any such restructuring would likely involve
a filing under Chapter 11 of the U.S. Bankruptcy Code and any such filing would result in RHI
Inc.s current equityholders receiving little or no continuing interest in the assets and
operations of the Company.
The Company has also engaged Robert Del Genio of Conway, Del Genio, Gries & Co., LLC as
Strategic Planning Officer of the Company. Mr. Del Genio is reporting to the Companys board of
directors, and is, among other functions, communicating frequently with the Companys lenders and
their representatives regarding the Companys activities, cash flows, cost controls and
restructuring efforts. Mr. Del Genio also is assisting the Company in connection with the
preparation for, and administration of, any filing under Chapter 11 of the U.S. Bankruptcy Code.
On May 20, 2010, the Company received a notice from The Nasdaq Stock Market (Nasdaq) stating
that the Company no longer meets the $10,000,000 stockholders equity requirement for continued
listing on Nasdaq in accordance with Listing Rule 5450(b)(1)(A). In addition, the Company failed to
meet the minimum bid price of $1.00 for 30 consecutive business days pursuant to Listing Rules
5450(a)(1) and the market value of publicly held shares of $5 million pursuant to 5450(b)(1)(B),
and the Company does not meet the continued listing requirements under the alternative standards
under Listing Rule 5450(b). In accordance with the ongoing restructuring initiative, the Company
decided not to submit a compliance plan that would support its ability to achieve
near term compliance with the continued listing requirements and to sustain such compliance over an
extended period of time. Further, the Company does not plan to request a hearing before a Nasdaq
Hearings Panel determination regarding these issues. Therefore, the Companys common stock was
suspended from trading on June 1, 2010 and a Form 25-NSE was filed with the Securities and Exchange
Commission removing the Companys common stock from listing and registration on Nasdaq. Further,
the Company is not applying to transfer its common stock to The Nasdaq Capital Market as it does
not satisfy all of the continued listing requirements of The Nasdaq Capital Market as set forth in
Listing Rule 5550.
7
These unaudited consolidated financial statements have been prepared on a going concern basis,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities
in the ordinary course of business, and do not reflect adjustments that could result if the Company
were unable to continue as a going concern. The Company has incurred net losses from operations and
net operating cash outflows in each of the past four fiscal years and at June 30, 2010 has an
accumulated deficit of $338.1 million. The Companys inability to borrow under its revolving credit
facility, in addition to other factors described above, has resulted in an inability to pay some of
its obligations as they come due. The liquidity constraints have also prevented the Company from
making certain expenditures to continue producing or acquiring as many films as it could have
otherwise. As a result, the Company decreased its production slate for 2009 and 2010, reduced its
selling, general and administrative expenses through cost-cutting measures that included, among
others, job reductions. The Company has taken and expects to continue to take additional steps,
including discussions with our landlords and various vendors, to preserve liquidity in the short
term. However, despite any additional cost-saving steps it may implement, unless the Company
successfully restructures its debt, obtains other sources of liquidity and significantly improves
its operating results, the Company will not have the resources to continue as a going concern.
There can be no assurance that the Company will be successful in such endeavors. The Companys
independent auditors included an explanatory paragraph in their Report of Independent Registered
Public Accounting Firm included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2009, which was filed with the SEC on March 26, 2010, that noted factors which raised
substantial doubt about the Companys ability to continue as a going concern.
Refer to Note 6 Debt for a further discussion of defaults under the Companys senior secured
credit facilities.
(2) Basis of Presentation
The unaudited financial statements as of June 30, 2010 and for the three and six months ended
June 30, 2010 and 2009, have been prepared according to U.S. generally accepted accounting
principles and include, in the opinion of management, adjustments consisting only of normal
recurring adjustments, which the company considers necessary for a fair presentation of the
financial position and results of operations of the Company for these periods on a going concern
basis, as discussed above. The consolidated financial statements include the accounts of RHI Inc.
and its consolidated subsidiary, Holdings II (which consolidates RHI LLC). All intercompany
accounts and transactions have been eliminated. Results for the aforementioned periods are not
necessarily indicative of the results to be expected for the full year.
(3) Summary of Significant Accounting Policies
For a complete discussion of the Companys accounting policies, refer to the consolidated
financial statements and related notes included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2009, which was filed with the SEC on March 26, 2010.
(a) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires the Company to make estimates and assumptions that affect the reported amounts
in the financial statements and footnotes thereto. Actual results could differ from those
estimates.
(b) Comprehensive Loss
Comprehensive loss consists of net loss and other gains/losses (comprised of unrealized
gains/losses associated with the Companys previously held interest rate swaps) affecting
stockholders deficit that, under U.S. generally accepted accounting principles, are excluded from
net loss. Comprehensive loss for the three months ended June 30, 2010 and 2009 were $28.0 million
and $7.9 million, respectively. Comprehensive loss for the six months ended June 30, 2010 and 2009
were $50.8 million and $19.2 million, respectively.
(c) Segment Information
The Company operates in a single segment: the development, production and distribution of
made-for-television movies, mini-series and other television programming. Long-lived assets located
in foreign countries are not material. Revenue earned from foreign licensees represented
approximately 32% and 27% of total revenue for the three months ended June 30, 2010 and 2009,
respectively. Revenue earned from foreign licensees represented approximately 18% and 29% of total
revenue for the six months ended June 30,
8
2010 and 2009, respectively. These revenues, generally denominated in U.S. dollars, were
primarily from sales to customers in Europe.
(d) New Accounting Pronouncements Adopted
No new accounting pronouncements were adopted during the three and six months ended June 30,
2010.
(4) Loss Per Share, Basic and Diluted
Basic loss per share is computed on the basis of the weighted average number of common shares
outstanding. Diluted loss per share is computed on the basis of the weighted average number of
common shares outstanding plus the effect of potentially dilutive common stock options and
restricted stock using the treasury stock method. Since the Company has a net loss for the periods
presented, outstanding common stock options and restricted stock units are anti-dilutive. As of
June 30, 2010, the Company has no potentially dilutive securities outstanding. The weighted average
number of basic and diluted shares outstanding for the three and six months ended June 30, 2010 and
2009 was 23,421,595 and 13,505,100, respectively.
(5) Film Production Costs, Net
Film production costs are comprised of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Completed films |
$ | 790,616 | $ | 783,246 | ||||
Crown Film Library |
89,707 | 89,683 | ||||||
Films in process and development |
7,190 | 7,966 | ||||||
887,513 | 880,895 | |||||||
Accumulated amortization |
(429,722 | ) | (419,663 | ) | ||||
$ | 457,791 | $ | 461,232 | |||||
The following table illustrates the amount of overhead and interest costs capitalized to film
production costs as well as amortization expense associated with completed films and the Crown Film
Library (in thousands):
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
Overhead costs capitalized |
$ | 1,250 | $ | 2,432 | $ | 3,250 | $ | 4,785 | ||||||||
Interest capitalized |
| 161 | | 256 | ||||||||||||
Amortization of completed films |
4,386 | 12,270 | 9,842 | 19,930 | ||||||||||||
Amortization of Crown Film Library |
70 | 281 | 217 | 611 |
Approximately 65% of completed film production costs have been amortized and/or impaired
through June 30, 2010. The Company further anticipates that approximately 6% of completed film
production costs will be amortized through June 30, 2011. The Company anticipates that
approximately 41% of unamortized film production costs as of June 30, 2010 will be amortized over
the next three years and that approximately 80% of unamortized film production costs will be
amortized within five years. The Crown Film Library has a remaining amortization period of 16 years
and 6 months as of June 30, 2010.
(6) Debt
Debt consists of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
First Lien Term Loan |
$ | 175,000 | $ | 175,000 | ||||
Revolver |
339,589 | 339,589 | ||||||
Second Lien Term Loan |
75,000 | 75,000 | ||||||
Interest rate swap termination obligation |
19,582 | 19,582 | ||||||
$ | 609,171 | $ | 609,171 | |||||
The Company has two credit agreements. The Companys first lien credit agreement, as amended
(the First Lien Credit Agreement), is comprised of two facilities: (i) a $175.0 million term loan
(First Lien Term Loan) and (ii) a $350.0 million revolving
9
credit facility, including a letter of credit sub-facility (Revolver). The Companys second
lien credit agreement, as amended (Second Lien Credit Agreement), is comprised of a seven-year
$75.0 million term loan (Second Lien Term Loan).
The First Lien Term Loan is scheduled to amortize in three installments of 10%, 20% and 70% on
April 13, 2011, 2012 and 2013, respectively and bears interest at the Alternate Base Rate (ABR) or
LIBOR plus an applicable margin of 1.00% or 2.00% per annum, respectively. The scheduled maturity
date of the Revolver is April 13, 2013, and the Revolver bears interest at either the ABR or LIBOR
plus an applicable margin of 1.00% or 2.00% per annum, respectively. The Second Lien Term Loan is
scheduled to mature on June 23, 2015 and bears interest at ABR or LIBOR plus an applicable margin
of 6.50% or 7.50% per annum, respectively.
Interest payments for all loans were previously due, at the Companys election, according to
interest periods of one, two or three months. The Revolver also requires an annual commitment fee
of 0.375% on the unused portion of the commitment. At June 30, 2010, the interest rates associated
with the First Lien Term Loan, Revolver and Second Lien Term Loan were 6.25%, 6.25%, and 9.75%,
respectively. Pursuant to the Companys default under its First Lien Credit Agreement and Second
Lien Credit Agreement (see discussion below), all of its outstanding debt balances were converted
to three month ABR as of December 23, 2009 for the First Lien Credit Agreement, February 12, 2010
for $20 million of the Second Lien Credit Agreement and March 1, 2010 for the remaining $55 million
of the Second Lien Credit Agreement and are subject to 2.00% annual default interest in addition to
the applicable margins noted above. The interest rates noted are inclusive of this default
interest. Due to the over-advance position of the Companys borrowing base and the Companys
default under its First and Second Lien Credit Agreements (see discussions below), it is precluded
from accessing its revolving credit facility.
The First Lien Credit Agreement and Second Lien Credit Agreement, as amended, include
customary affirmative and negative covenants, including among others: (i) limitations on
indebtedness, (ii) limitations on liens, (iii) limitations on investments, (iv) limitations on
guarantees and other contingent obligations, (v) limitations on restricted junior payments and
certain other payment restrictions, (vi) limitations on consolidation, merger, recapitalization or
sale of assets, (vii) limitations on transactions with affiliates, (viii) limitations on the sale
or discount of receivables, (ix) limitations on lines of business, (x) limitations on production
and acquisition of product and (xi) certain reporting requirements. Additionally, the First Lien
Credit Agreement includes a Minimum Consolidated Tangible Net Worth covenant (as defined therein)
and both the First Lien Credit Agreement and the Second Lien Credit Agreement contain a Coverage
Ratio covenant (as defined therein). The First Lien Credit Agreement and Second Lien Credit
Agreement also include customary events of default, including among others, a change of control
(including the disposition of capital stock of certain subsidiaries that guarantee the credit
agreement). The First Lien and Second Lien Credit Agreements are collateralized by a perfected
security interest in substantially all of the Companys and its subsidiaries assets.
Defaults and Forbearance
The Company is currently in default under both its First Lien and Second Lien Credit
Agreements. On December 23, 2009, the Company acknowledged defaults on the First Lien Credit
Agreement resulting from (1) an over-advance on its Revolver due to a reduction in its borrowing
base and consequent failure to make mandatory prepayment to cure, and (2) a failure to pay
settlement amounts payable and due upon the termination of its interest rate swaps on December 22,
2009 (see further discussion below). On February 12, 2010, the Company acknowledged a default on
the Second Lien Credit Agreement resulting from its failure to make a scheduled interest payment.
On December 23, 2009, the Company entered into a forbearance agreement with the first lien
agent and lenders holding a majority in principal amount of the loans under its first lien credit
facilities and swap counterparties. That forbearance agreement was subsequently amended on January
22, 2010 and again on March 5, 2010. On February 12, 2010, the Company entered into a separate
forbearance agreement with the second lien agent and lenders holding a majority in principal amount
of the loans under the second lien credit facility, which was subsequently amended on March 5,
2010. Under each of these forbearance agreements, the agents and lenders (and in the case of the
first lien forbearance, the swap counterparties) had agreed to forbear from exercising certain of
their rights and agreed to waive some of the existing or prospective defaults until March 31, 2010.
On December 23, 2009, the Company terminated its interest rate swap agreements. As of the date
of termination, the interest rate swaps had a value of $19.6 million in favor of the swap
counterparties, including approximately $1.1 million related to the net interest settlement of the
interest rate swaps. Although this $19.6 million was contractually due immediately upon termination
of the interest rate swap agreements, such obligation was deferred in connection with the
forbearance agreement entered into between the Company and its First Lien Credit Facility lenders.
The Company and its lenders did not extend the forbearance agreements upon their expiration on
March 31, 2010. Therefore, the agents and lenders under the respective credit facilities and swap
counterparties may exercise all of their rights and remedies,
10
including the acceleration of the loans and foreclosure on collateral. Although the Company
continues to engage in productive discussions with its lenders regarding a restructuring, if the
agents and lenders under the respective credit facilities and swap counterparties make such
elections, the Company would likely avail itself of the protection under Chapter 11 of the U.S.
Bankruptcy Code, and any such filing would result in RHI Inc.s current equityholders receiving
little or no continuing interest in the assets or operations of the Company. Even if the Company
is able to restructure its debt obligations or come to a consensual agreement with its creditors,
the Company will likely be required to seek protection under Chapter 11 of the U.S. Bankruptcy
Code, and any such filing would result in RHI Inc.s current equityholders receiving little or no
continuing interest in the assets and operations of the Company.
(7) Share-based Compensation
In February 2010, the Companys Chairman and Chief Executive Officer entered into surrender
agreements whereby each individual irrevocably surrendered, cancelled and forfeited any and all of
their respective RSUs that were due to vest on February 9, 2010. A total of 166,667 RSUs were
forfeited. Subject to the Chief Executive Officers continued employment with the Company, his
remaining RSUs will vest on February 9, 2011 and February 9, 2012. The RSUs that vest on these
future dates have not been surrendered, cancelled nor forfeited and are not subject to the
surrender agreements.
On June 30, 2010, in connection with the conclusion of his development services to the
Company, the Companys Chairman forfeited his vested option to purchase 116,667 shares of the
Companys common stock, unvested options to purchase 233,333 shares of the Companys common stock
and the remaining 233,333 unvested RSUs granted to him on February 9, 2009. Expense totaling
approximately $0.5 million and $0.2 million associated with the unvested options and RSUs was
reversed during the three and six months ended June 30, 2010, respectively.
During the three months ended June 30, 2010, options to purchase 142,167 shares of the
Companys common stock and 55,263 RSUs were forfeited in connection with headcount reductions
associated with the ongoing restructuring of the Company. During the six months ended June 30,
2010, options to purchase 154,751 shares of the Companys common stock and 69,024 RSUs were
forfeited.
(8) Commitments and Contingencies
Putative Shareholder Class Action Lawsuit
On October 9, 2009, RHI Entertainment, Inc. and two of its officers were named as defendants
in a putative shareholder class action filed in the United States District Court for the Southern
District of New York (the Lawsuit), alleging violations of federal securities laws by issuing a
registration statement in connection with the Companys June 2008 initial public offering that
purportedly contained untrue statements of material facts and omitted other facts necessary to make
certain statements not misleading. The central allegation of the Lawsuit is that the registration
statement and prospectus overstated the projected number of made-for-television (MFT) movies and
mini-series the Company expected to develop, produce and distribute in 2008, while it failed to
disclose that the Company would not be able to complete the expected number of MFT movies and
miniseries in 2008 due to the declining state of the credit markets, changing media technologies
and other negative factors then impacting the Companys business. The Lawsuit seeks unspecified
damages and interest. On May 3, 2010, the defendants filed a motion to dismiss the complaint. The
plaintiffs filed an opposition to the motion on June 25, 2010. The motion is pending. The
Company believes that the Lawsuit has no merit and intends to defend itself and its officers
vigorously in this litigation.
Flextech Litigation
On April 7, 2009, RHI Entertainment Distribution, LLC and RHI Entertainment, LLC were served
with a Complaint filed in the United States District Court for the Southern District of New York
alleging that they had breached an agreement with Flextech Rights Limited (Flextech), a British
distributor, by failing to make the second of two installment payments. A judgment in the amount of
approximately $0.9 million was entered against the defendants on February 17, 2010. The final
installment on the $0.9 million was paid to Flextech in June 2010 and no further obligation remains
as of June 30, 2010.
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
11
dated September 25, 2009. The Complaint seeks approximately $7.0 million in damages, plus
interest and attorneys fees, for which the Company believes it has accrued an appropriate amount
as of June 30, 2010. On April 15, 2010, the Company moved to dismiss the complaint and compel
arbitration. MAT IV filed an opposition to the Companys motion on April 29, 2010. The motion is
pending. The Company intends to defend itself vigorously in this litigation.
Restructuring
The Company has been actively engaged in discussions with its lenders and other creditors
regarding a restructuring transaction. As part of this restructuring effort, the Company has
deferred certain payment deadlines and failed to make certain payments when due. As a result of
these discussions, we may enter into various agreements and settlements with certain of these
creditors in the near future, in which we may agree to transfer, assign or surrender certain rights
or assets. If these discussions are not successful, we could face litigation from creditors,
including but not limited to production partners, lenders, former employees, landlords and labor
unions.
The Company is involved in various other legal proceedings and claims incidental to the normal
conduct of its business. Although it is impossible to predict the outcome of any outstanding legal
proceedings, the Company believes that such outstanding legal proceedings and claims, individually
and in the aggregate, are not likely to have a material effect on its financial position or results
of operations.
12
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This discussion may contain forward-looking statements that reflect our current views with
respect to, among other things, future events and financial performance. We generally identify
forward-looking statements by terminology such as outlook, believes, expects, potential,
continues, may, will, could, should, seeks, approximately, predicts, intends,
plans, estimates, anticipates or the negative version of those words or other comparable
words. Any forward-looking statements contained in this discussion are based upon the historical
performance of us and our subsidiaries and on our current plans, estimates and expectations. The
inclusion of this forward-looking information should not be regarded as a representation by us, or
any other person that the future plans, estimates or expectations contemplated by us will be
achieved. Such forward-looking statements are subject to various risks and uncertainties and
assumptions relating to our operations, financial results, financial condition, business prospects,
growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize,
or if our underlying assumptions prove to be incorrect, our actual results may vary materially from
those indicated in these statements. These factors should not be construed as exhaustive and should
be read in conjunction with the other cautionary statements that are included in this Form 10-Q.
Unless required by law, we do not undertake any obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future developments or
otherwise.
In this discussion, unless the context otherwise requires, the terms RHI Inc., the
Company, we, us and our refer to RHI Entertainment, Inc. and its subsidiaries including RHI
Entertainment Holdings II, LLC and RHI Entertainment, LLC.
Overview
We develop, produce and distribute new made-for-television (MFT) movies, mini-series and other
television programming worldwide. We also selectively produce new episodic series programming for
television. In addition to our development, production and distribution of new content, we own an
extensive library of existing long-form television content, which we license primarily to broadcast
and cable networks worldwide.
Our revenue and operating results are typically seasonal in nature. A significant portion of
the films that we develop, produce and distribute are delivered to the broadcast and cable networks
in the second half of each year. Typically, programming for a particular year is developed either
late in the preceding year or in the early portion of the current year. Generally, planning and
production take place during the spring and summer and completed film projects are delivered in the
third and fourth quarters of each year. As a result, our first, second and third quarters of our
fiscal year typically generate less revenue than the fourth quarter of such fiscal year.
Additionally, the timing of the film deliveries from year-to-year may vary significantly.
Importantly, the results of one quarter are not necessarily indicative of results for the next or
any future quarter.
Each year, we develop and distribute a new list, or slate, of film content, consisting
primarily of MFT movies and mini-series. The investment required to develop and distribute each new
slate of films is our largest operating cash expenditure. A portion of this investment in film each
year is financed through the collection of license fees during the production process. Each new
slate of films is added to our library in the year subsequent to its initial year of delivery. Cash
expenditures associated with the distribution of the library film content are not significant.
We refer to the revenue generated from the licensing of rights in the fiscal year in which a
film is first delivered to a customer as production revenue. Any revenue generated from the
licensing of rights to films in years subsequent to the films initial year of delivery is referred
to as library revenue. The growth and interaction of these two revenue streams is an important
metric we monitor as it indicates the current market demand for both our new content (production
revenue) and the content in our film library (library revenue). We also monitor our gross profit,
which allows us to determine the overall profitability of our film content. We focus on the
profitability of our new film slates rather than volume. As such, we strive to manage the scale of
our individual production budgets to meet market demand and enhance profitability.
Discussion of consolidated financial information
Revenue
We derive our revenue from the distribution of our film content. Historically, most of our
revenue has been generated from the licensing of rights to our film content to broadcast and cable
networks for specified terms, in specified media and territories. The timing of film deliveries
during the year can have a significant impact on revenue.
13
Cost of sales
We capitalize costs incurred for the acquisition and development of story rights, film
production costs, film production-related interest and overhead, residuals and participations.
Residuals and participations represent contingent compensation payable to parties associated with
the film including producers, writers, directors or actors. Residuals represent amounts payable to
members of unions or guilds such as the Screen Actors Guild, Directors Guild of America and
Writers Guild of America based on the performance of the film in certain media and/or the guild
members salary level.
Cost of sales includes the amortization of capitalized film costs, as well as exploitation
costs associated with bringing a film to market.
Selling, general and administrative expense
Selling, general and administrative expense includes salaries, rent and other expenses net of
amounts included in capitalized overhead.
Interest expense, net
Interest expense, net represents interest incurred on the Companys credit facilities
(inclusive of amortization of deferred debt issuance costs and amortization of fair market value of
interest rate swaps de-designated as hedges). Interest expense is reflected net of interest
capitalized to film production costs.
Income taxes
Our operations are conducted through our indirect subsidiary, RHI LLC. Holdings II and RHI LLC
are organized as limited liability companies. For U.S. federal income tax purposes, Holdings II is
treated as a partnership and RHI LLC is disregarded as a separate entity from Holdings II.
Partnerships are generally not subject to income tax, as the income or loss is included in the tax
returns of the individual partners.
The consolidated financial statements of RHI Inc. include a provision for corporate income
taxes associated with RHI Inc.s membership interest in Holdings II as well as an income tax
provision related to RHI International Distribution, Inc., a wholly-owned subsidiary of RHI LLC,
which is a taxable U.S. corporation.
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates that we expect to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. We record a valuation allowance to reduce
our deferred tax assets to the amount that is more likely than not to be realized. In evaluating
our ability to recover our deferred tax assets, we consider all available positive and negative
facts and circumstances and allowances, if any, are adjusted during each reporting period.
Significant judgment is required in evaluating our tax positions and determining our provision
for income taxes. During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. We establish reserves for
tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes
and interest and penalties will be due. These reserves are established when, despite our belief
that our tax return positions are supportable, we believe certain positions are likely to be
challenged and such positions may more likely than not be sustained on review by tax authorities.
We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax
audit. The provision for income taxes includes the impact of reserve provisions and changes to the
reserves that are considered appropriate, as well as the associated net interest and penalties.
In addition, we are subject to the examination of our tax returns by the IRS and other tax
authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. While we believe that we
have adequately provided for our tax liabilities, including the likely outcome of these
examinations, it is possible that the amount paid upon resolution of issues raised may differ from
the amount provided. Differences between the reserves for tax contingencies and the amounts owed by
us are recorded in the period they become known.
14
The ultimate outcome of these tax contingencies could have a material effect on our
financial position, results of operations and cash flows.
Results of operations
Three months ended June 30, 2010 compared to the three months ended June 30, 2009
The results of operations for the three months ended June 30, 2010 and 2009 are summarized as
follows:
Three months ended June 30, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Revenue |
||||||||||||
Production revenue |
$ | 3,582 | $ | 11,832 | $ | (8,250 | ) | |||||
Library revenue |
2,402 | 10,851 | (8,449 | ) | ||||||||
Total revenue |
5,984 | 22,683 | (16,699 | ) | ||||||||
Cost of sales |
5,542 | 18,487 | (12,945 | ) | ||||||||
Gross profit |
442 | 4,196 | (3,754 | ) | ||||||||
Other costs and expenses: |
||||||||||||
Selling, general and administrative |
16,702 | 6,922 | 9,780 | |||||||||
Amortization of intangible assets |
270 | 285 | (15 | ) | ||||||||
Loss from operations |
(16,530 | ) | (3,011 | ) | (13,519 | ) | ||||||
Other (expense) income: |
||||||||||||
Interest expense, net |
(10,660 | ) | (10,435 | ) | (225 | ) | ||||||
Interest income |
5 | 1 | 4 | |||||||||
Other expense, net |
(464 | ) | (953 | ) | 489 | |||||||
Loss before income taxes and non-controlling interest in loss of
consolidated entity |
(27,649 | ) | (14,398 | ) | (13,251 | ) | ||||||
Income tax provision |
(370 | ) | (543 | ) | 173 | |||||||
Loss before non-controlling interest in loss of consolidated entity |
(28,019 | ) | (14,941 | ) | (13,078 | ) | ||||||
Non-controlling interest in loss of consolidated entity |
| 6,320 | (6,320 | ) | ||||||||
Net loss |
$ | (28,019 | ) | $ | (8,621 | ) | $ | (19,398 | ) | |||
Basic and diluted loss per share. |
$ | (1.20 | ) | $ | (0.64 | ) | $ | (0.56 | ) | |||
15
Revenue, cost of sales and gross profit
Three Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
As a | As a | |||||||||||||||||||||||
Percentage | Percentage | $ Increase/ | % Increase/ | |||||||||||||||||||||
Amount | of Revenue | Amount | of Revenue | (Decrease) | (Decrease) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Production revenue |
$ | 3,582 | 60 | % | $ | 11,832 | 52 | % | $ | (8,250 | ) | (70 | )% | |||||||||||
Library revenue |
2,402 | 40 | % | 10,851 | 48 | % | (8,449 | ) | (78 | )% | ||||||||||||||
Total revenue |
5,984 | 100 | % | 22,683 | 100 | % | (16,699 | ) | (74 | )% | ||||||||||||||
Cost of sales |
5,542 | 93 | % | 18,487 | 82 | % | (12,945 | ) | (70 | )% | ||||||||||||||
Gross profit |
$ | 442 | 7 | % | $ | 4,196 | 18 | % | $ | (3,754 | ) | (89 | )% | |||||||||||
Total revenue decreased $16.7 million, or 74%, to $6.0 million during the three months ended
June 30, 2010 from $22.7 million during the same period in 2009.
Production revenue was $3.6 million in the three months ended June 30, 2010 compared to $11.8
million during the same period in 2009. The decrease of $8.3 million was primarily due to the
delivery of fewer films and the mix of films delivered during the three months ended June 30, 2010
compared to the prior year. During the three months ended June 30, 2010 three MFT films were
delivered compared to four MFT films and two mini-series during the same period in 2009. Our
liquidity constraints have prevented us from making certain expenditures to continue producing or
acquiring rights in as many films in 2010 as we could have otherwise.
Library revenue decreased $8.4 million, or 78%, to $2.4 million in the three months ended June
30, 2010 from $10.9 million during the comparable period in 2009. The decrease in Library revenue
during the three months ended June 30, 2010 is primarily due to the termination of our agreement
with ION effective as of June 30, 2009 as well as the reversal of certain revenue recorded in prior
periods. During the three months ended June 30, 2009, we recognized $2.6 million of revenue related
to our programming on ION compared to nil during the three months ended June 30, 2010. The revenue
reversals of $1.8 million were related to the amendment of a license agreement. In addition,
library revenue continues to be negatively impacted by the slow-down in sales activity resulting
from weak market conditions that began in the fourth quarter of 2008 and continued into 2010.
Cost of sales decreased $12.9 million to $5.5 million during the three months ended June 30,
2010 from $18.5 million during the same period in 2009. Cost of sales as a percentage of revenue
increased to 93% during the three months ended June 30, 2010 from 82% during the same period in
2009. Cost of sales is comprised of film cost amortization, certain distribution expenses and,
through June 30, 2009, amortization of minimum guarantee payments made to ION. The decrease in
gross profit during the three months ended June 30, 2010 compared to the same period is primarily
due to the decrease in revenue for the quarter and an increase in the film cost amortization rate.
The film cost amortization rate for the three months ended June 30, 2010 was 90% compared to 61%
during the same period in 2009. The increase in the film cost amortization rate is primarily the
result of our ultimate revenue assessment completed in December 2009 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.
Other costs and expenses
Three Months Ended | ||||||||||||||||
June 30, | $ Increase/ | % Increase/ | ||||||||||||||
2010 | 2009 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Selling, general and administrative |
$ | 16,702 | $ | 6,922 | $ | 9,780 | 141 | % | ||||||||
Amortization of intangible assets |
270 | 285 | (15 | ) | (5 | )% |
Selling, general and administrative expenses increased $9.8 million to $16.7 million in the
three months ended June 30, 2010, from $6.9 million in the same period in 2009. The increase of
141% is primarily due to an additional $6.6 million of professional fees related to the ongoing
restructuring of our capital structure, which were not incurred during the three months ended June
30, 2009 and an additional $1.9 million of severance costs associated with headcount reductions
compared to the same period of 2009. Additionally, a credit of $2.9 million was recorded during the
three months ended June 30, 2009 associated with the reversal of a bad debt reserve established in
2008. Notwithstanding the above, recurring selling, general and administrative expenses such as
salaries, rent and other
16
operating expenses decreased approximately $1.6 million for the three months ended June 30,
2010 compared to the same period in the prior year due to the Companys decision to reduce overhead
costs during 2009 and the first half of 2010.
Interest expense, net
Interest expense, net increased $0.2 million to $10.7 million for the three months ended June
30, 2010 from $10.4 million during the comparable period in 2009. The increase in interest expense
is primarily a result of the increase in the weighted average interest rate due to an additional 2%
default penalty as a result of our default under the First and Second Lien Credit Agreements. For
the three months ended June 30, 2010, the average interest rate was 6.5% compared to 3.4% for the
three months ended June 30, 2009. Additionally, the weighted average debt outstanding increased to
$609.2 million for the three months ended June 30, 2010, compared to $579.1 million for the three
months ended June 30, 2009 due to the additional debt outstanding as a result of the termination of
the interest rate swaps and additional borrowings in the second half of 2009. Partially offsetting
these increases was a decrease in interest expense of $5.7 million during the three months ended
June 30, 2010, compared to the same period of 2009, as a result of not having interest rate swaps
in 2010.
Other expense, net
For the three months ended June 30, 2010, Other expense, net primarily represents realized
foreign currency losses resulting from the settlement of customer accounts denominated in foreign
currencies. For the three months ended June 30, 2009, Other expense, net includes a loss of $1.3
million resulting from the change in fair market value of our previously held interest rate swaps
offset by realized foreign currency gains of $0.3 million resulting from the settlement of customer
accounts denominated in foreign currencies.
Income tax provision
The income tax provision for the three months ended June 30, 2010 and 2009 is primarily
attributable to foreign taxes related to license fees from customers located outside the United
States. No tax benefit has been provided for 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.
Net loss
The net loss for the three months ended June 30, 2010 was $28.0 million, compared to $8.6
million for the three months ended June 30, 2009. Notwithstanding the fluctuations described
above, net loss is not comparable to the prior year due to the elimination of the non-controlling
interest in loss of consolidated entity for the three months ended June 30, 2010.
17
Six months ended June 30, 2010 compared to the six months ended June 30, 2009
The results of operations for the six months ended June 30, 2010 and 2009 are summarized as
follows:
Six months ended June 30, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Revenue |
||||||||||||
Production revenue |
$ | 4,551 | $ | 11,832 | $ | (7,281 | ) | |||||
Library revenue |
9,832 | 23,854 | (14,022 | ) | ||||||||
Total revenue |
14,383 | 35,686 | (21,303 | ) | ||||||||
Cost of sales |
12,695 | 31,925 | (19,230 | ) | ||||||||
Gross profit |
1,688 | 3,761 | (2,073 | ) | ||||||||
Other costs and expenses: |
||||||||||||
Selling, general and administrative |
29,243 | 17,888 | 11,355 | |||||||||
Amortization of intangible assets |
540 | 599 | (59 | ) | ||||||||
Loss from operations |
(28,095 | ) | (14,726 | ) | (13,369 | ) | ||||||
Other (expense) income: |
||||||||||||
Interest expense, net |
(21,060 | ) | (20,067 | ) | (993 | ) | ||||||
Interest income |
12 | 4 | 8 | |||||||||
Other expense, net |
(951 | ) | (1,647 | ) | 696 | |||||||
Loss before income taxes and non-controlling interest in loss of
consolidated entity |
(50,094 | ) | (36,436 | ) | (13,658 | ) | ||||||
Income tax provision |
(730 | ) | (518 | ) | (212 | ) | ||||||
Loss before non-controlling interest in loss of consolidated entity |
(50,824 | ) | (36,954 | ) | (13,870 | ) | ||||||
Non-controlling interest in loss of consolidated entity |
| 15,632 | (15,632 | ) | ||||||||
Net loss |
$ | (50,824 | ) | $ | (21,322 | ) | $ | (29,502 | ) | |||
Basic and diluted loss per share. |
$ | (2.17 | ) | $ | (1.58 | ) | $ | (0.59 | ) | |||
Revenue, cost of sales and gross profit
Six Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
As a | As a | |||||||||||||||||||||||
Percentage | Percentage | $ Increase/ | % Increase/ | |||||||||||||||||||||
Amount | of Revenue | Amount | of Revenue | (Decrease) | (Decrease) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Production revenue |
$ | 4,551 | 32 | % | $ | 11,832 | 33 | % | $ | (7,281 | ) | (62 | )% | |||||||||||
Library revenue |
9,832 | 68 | % | 23,854 | 67 | % | (14,022 | ) | (59 | )% | ||||||||||||||
Total revenue |
14,383 | 100 | % | 35,686 | 100 | % | (21,303 | ) | (60 | )% | ||||||||||||||
Cost of sales |
12,695 | 88 | % | 31,925 | 89 | % | (19,230 | ) | (60 | )% | ||||||||||||||
Gross profit |
$ | 1,688 | 12 | % | $ | 3,761 | 11 | % | $ | (2,073 | ) | (55 | )% | |||||||||||
Total revenue decreased $21.3 million, or 60%, to $14.4 million during the six months ended
June 30, 2010 from $35.7 million during the same period in 2009.
Production revenue was $4.6 million in the six months ended June 30, 2010 compared to $11.8
million during the same period in 2009. The decrease of $7.3 million was due to the delivery of
fewer MFT films and mini-series for which the initial domestic license fees were recognized during
the six months ended June 30, 2010 compared to the prior year. During the six months ended June
30, 2010 five MFT films were delivered, for which only three films had domestic initial license
fees, compared to four MFT films and two mini-series during the same period in 2009. Our liquidity
constraints have prevented us from making certain expenditures to continue producing or acquiring
rights in as many films in 2010 as we could have otherwise.
Library revenue decreased $14.0 million, or 59%, to $9.8 million in the six months ended June
30, 2010 from $23.9 million during the comparable period in 2009. The decrease in Library revenue
during the six months ended June 30, 2010 is primarily due to the termination of our agreement with
ION effective as of June 30, 2009 and the reversal of certain revenue recorded in prior periods.
During the six months ended June 30, 2009, we recognized $5.6 million of revenue related to our
programming on ION compared to
18
nil during the six months ended June 30, 2010. The revenue reversals of $4.8 million were
related to the cancellation or amendment of license agreements primarily resulting from the ongoing
restructuring and related renegotiation of certain distribution contracts with our production
partners. In addition, library revenue continues to be negatively impacted by the slow-down in
sales activity resulting from weak market conditions that began in the fourth quarter of 2008 and
continued into 2010.
Cost of sales decreased $19.2 million to $12.7 million during the six months ended June 30,
2010 from $31.9 million during the same period in 2009. Cost of sales as a percentage of revenue
decreased to 88% during the six months ended June 30, 2010 from 89% during the same period in 2009.
Cost of sales is comprised of film cost amortization, certain distribution expenses and, through
June 30, 2009, amortization of minimum guarantee payments made to ION. The decrease in cost of
sales as a percentage of revenue is primarily due to a decrease in other cost of sales as a result
of the termination of our agreement with ION effective as of June 30, 2009 and the fact that we
were no longer required to make minimum guarantee payments as of that date. During the six months
ended June 30, 2009, we incurred $6.6 million expense associated with the amortization of minimum
guarantee payments compared to nil during the six months ended June 30, 2010. The decrease
associated with the amortization of minimum guarantee payments made to ION was partially offset by
an increase in film cost amortization as a percentage of revenue due to an increase in amortization
rates as a result of our annual ultimate revenue assessment completed in December 2009 and its
impact on the amortization rates associated with our films. The film cost amortization rate for the
six months ended June 30, 2010 was 77% compared to 62% during the same period in 2009. 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.
Other costs and expenses
Six Months Ended | ||||||||||||||||
June 30, | $ Increase/ | % Increase/ | ||||||||||||||
2010 | 2009 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Selling, general and administrative |
$ | 29,243 | $ | 17,888 | $ | 11,355 | 63 | % | ||||||||
Amortization of intangible assets |
540 | 599 | (59 | ) | (10 | )% |
Selling, general and administrative expenses increased $11.4 million to $29.2 million in the
six months ended June 30, 2010, from $17.9 million in the same period in 2009. The increase of 63%
is primarily due to an additional $10.6 million of professional fees related to the ongoing
restructuring of our capital structure, which were not incurred during the six months ended June
30, 2009 and an additional $2.9 million of severance costs associated with headcount reductions
compared to the same period of 2009. Additionally, a credit of $2.3 million was recorded during the
six months ended June 30, 2009 associated with the reversal of a bad debt reserve established in
2008. Notwithstanding the above, recurring selling, general and administrative expenses such as
salaries, rent and other operating expenses decreased approximately $4.4 million for the six months
ended June 30, 2010 compared to the same period in the prior year due to the Companys decision to
reduce overhead costs during 2009 and the first half of 2010.
Interest expense, net
Interest expense, net increased $1.0 million to $21.1 million for the six months ended June
30, 2010 from $20.1 million during the comparable period in 2009. The increase in interest expense
is primarily a result of the increase in the weighted average interest rate due to an additional 2%
default penalty as a result of our default under the First and Second Lien Credit Agreements. For
the six months ended June 30, 2010, the average interest rate was 6.5% compared to 4.0% for the six
months ended June 30, 2009. Additionally, the weighted average debt outstanding increased to $609.2
million for the six months ended June 30, 2010, compared to $578.0 million for the six months ended
June 30, 2009 due to the additional debt outstanding as a result of the termination of the interest
rate swaps and additional borrowings in the second half of 2009. Partially offsetting these
increases was a decrease in interest expense of $9.1 million during the six months ended June 30,
2010, compared to the same period of 2009, as a result of not having interest rate swaps in 2010.
Other expense, net
For the six months ended June 30, 2010, Other expense, net primarily represents realized
foreign currency losses resulting from the settlement of customer accounts denominated in foreign
currencies. For the six months ended June 30, 2009, Other expense, net includes a loss of $1.3
million resulting from the change in fair market value of our previously held interest rate swaps
as well as realized foreign currency losses of $0.4 million resulting from the settlement of
customer accounts denominated in foreign currencies.
19
Income tax provision
The income tax provision for the six months ended June 30, 2010 is primarily attributable to
foreign taxes related to license fees from customers located outside the United States. The income
tax provision for the six months ended June 30, 2009 is primarily attributable to foreign taxes
related to license fees from customers located outside the United States offset by an income tax
benefit resulting from the pre-tax loss of our corporate subsidiary. No tax benefit has been
provided for 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.
Net loss
The net loss for the six months ended June 30, 2010 was $50.8 million, compared to $21.3
million for the six months ended June 30, 2009. Notwithstanding the fluctuations described above,
net loss is not comparable to the prior year due to the elimination of the non-controlling interest
in loss of consolidated entity for the six months ended June 30, 2010.
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 June 30, 2010 and December 31, 2009, all of our debt was variable rate and totaled $609.2
million outstanding. As of June 30, 2010 we had $12.1 million of cash compared to $25.1 million as
of December 31, 2009. As of June 30, 2010, we had no additional borrowings available under our
revolving credit facility.
Market conditions confronting the media and entertainment industry have continued to be a
challenge for us. The business environment deteriorated substantially beginning in the fourth
quarter of 2008 and remained challenging throughout all of 2009. Specifically, total revenue in
2009 declined significantly as compared to prior years. This was primarily due to 2009 fourth
quarter sales activity falling dramatically short of our expectations, resulting in significantly
lower fourth quarter revenue compared to the prior year. While current market conditions have begun
to strengthen in 2010, they still remain weaker than market conditions prior to the fourth quarter
of 2008. As a result of the significant weakening of our financial position, results of operations
and liquidity, we are currently in default of certain covenants of our senior secured credit
facilities and in discussions with our lenders regarding a restructuring of those credit
facilities. However, we can provide no assurance that we will be able to successfully restructure
our debt obligations. Whether or not we are able to restructure our debt obligations or 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 and any such filing would result in RHI Inc.s current
equityholders receiving little or no continuing interest in the assets and operations of the
Company.
For films produced within the last fiscal year, our production partners have financed a
substantial portion of the cost through the use of their own new or existing credit facilities. In
connection with these financings, we have consented to our production partners pledging as
collateral the associated distribution contracts they have with us. To address liquidity
constraints, we have entered into settlements and continue to renegotiate several of our
distribution contracts with our production partners and/or their financing sources in an effort to
defer or restructure certain payments under those contracts which have already come due or will
come due in the near term. In some cases, such settlements and restructuring involves giving up our
distribution rights for these films in certain territories. We are currently involved in
negotiations that would result in us giving up distribution rights to fifteen completed titles
having a combined book value of $38.9 million in Film Production Costs, $3.0 million of Accounts
Receivable, $47.3 million of Accrued Film Production Costs and $2.5 million of Deferred Revenue
recorded as of June 30, 2010. If we are unsuccessful in renegotiating these contracts, we will
either have to pay amounts we owe, which would exacerbate our lack of liquidity or default on our
obligations under those agreements, which could result in the termination of our licensing rights
to these films and adversely affect the future working relationship with certain production
partners. Such outcomes could in turn adversely affect our future revenues, profits,
collectability of certain accounts receivable and/or require us to seek protection under Chapter 11
of the U.S. Bankruptcy Code.
As a result of the foregoing, we engaged Rothschild, Inc. as a financial advisor in the fourth
quarter of 2009 to assist us in negotiating and implementing a restructuring transaction, and we
are in the midst of in-depth discussions with our lenders with respect to restructuring our
indebtedness and capital structure. We expect these discussions to likely result in a significant
or complete dilution of our existing equityholders interest through an issuance of preferred stock
or common stock of RHI Entertainment, LLC (or its successor) to some or all of our lenders and/or
creditors. As a result of these discussions, we may enter into various agreements and settlements
with certain of these creditors in the near future, in which we may agree to transfer, assign or
surrender certain rights or
20
assets. No assurance can be given as to whether these discussions will be successful in
restructuring our debt obligations. Even if we are successful in coming to a consensual agreement
with some or all of our creditors, any such restructuring would likely involve a filing under
Chapter 11 of the U.S. Bankruptcy Code and any such filing would result in RHI Inc.s current
equityholders receiving little or no continuing interest in the assets and operations of the
Company.
The Company has also engaged Robert Del Genio of Conway, Del Genio, Gries & Co., LLC as
Strategic Planning Officer of the Company. Mr. Del Genio is reporting to the Companys board of
directors, and is, among other functions, communicating frequently with the Companys lenders and
their representatives regarding the Companys activities, cash flows, cost controls and
restructuring efforts. Mr. Del Genio also is assisting the Company in connection with the
preparation for, and administration of, any filing under Chapter 11 of the U.S. Bankruptcy Code.
The unaudited consolidated financial statements included in this report have been prepared on
a going concern basis, which contemplates continuity of operations, realization of assets, and
liquidation of liabilities in the ordinary course of business, and do not reflect adjustments that
might result if the Company were unable to continue as a going concern. In addition, any filing
under Chapter 11 of the U.S. Bankruptcy Code will likely result in substantial changes to amounts
recorded in our financial statements for a period after the date of such filing. The Companys
independent auditors included an explanatory paragraph in their Report of Independent Registered
Public Accounting Firm included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2009, which was filed with the SEC on March 26, 2010, that noted factors which raised
substantial doubt about the Companys ability to continue as a going concern.
We are currently in default under both our first lien and second lien senior secured credit
facilities. On December 23, 2009, we acknowledged defaults on the first lien facilities resulting
from (x) an over-advance on our revolver due to a reduction in our borrowing base and consequent
failure to make mandatory prepayment to cure, and (y) a failure to pay settlement amounts payable
and due upon the termination of our interest rate swaps on December 22, 2009. On February 12, 2010,
we acknowledged a default on the second lien facility resulting from our failure to make a
scheduled interest payment.
On December 23, 2009, we entered into a forbearance agreement with the first lien agent and
lenders holding a majority in principal amount of the loans under our first lien credit facilities
and swap counterparties. That forbearance agreement was subsequently amended and extended on
January 22, 2010 and again on March 5, 2010. On February 12, 2010, we entered into a separate
forbearance agreement with the second lien agent and lenders holding a majority in principal amount
of the loans under the second lien credit facility, which was subsequently amended and extended on
March 5, 2010. Under each of these forbearance agreements, the agents and lenders (and in the case
of the first lien forbearance, the swap counterparties) had agreed to forbear from exercising
certain of their rights and agreed to waive some of the existing or prospective defaults until
March 31, 2010.
The Company and its lenders did not extend the forbearance agreement upon their expiration on
March 31, 2010, therefore, the agents and lenders under the respective credit facilities and swap
counterparties may exercise all of their rights and remedies, including the acceleration of the
loans and foreclosure on collateral. Although the Company continues to engage in productive
discussions with its lenders regarding a restructuring, if the agents and lenders under the
respective credit facilities and swap counterparties make such elections, the Company would likely
avail itself of the protection under Chapter 11 of the U.S. Bankruptcy Code, and any such filing
would result in its current equityholders receiving little or no continuing interest in the
Company.
The chart below shows our cash flows for the six months ended June 30, 2010 and 2009.
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Net cash used in operating activities |
$ | (12,989 | ) | $ | (27,440 | ) | ||
Net cash used in investing activities |
| (77 | ) | |||||
Net cash provided by financing activities |
| 7,000 | ||||||
Cash (end of period) |
12,131 | 1,856 |
Operating activities
Cash used in operating activities in the six months ended June 30, 2010 was $13.0 million, as
compared to $27.4 million for the comparable period in 2009. Operating cash flows reflect spending
related to production, distribution, selling, general and administrative expenses and interest,
offset by the collection of cash associated with the distribution of our MFT movies, mini-series
and other television programming. The $14.5 million improvement in operating cash flows was
primarily the result of a decrease in interest payments of $24.1 million due to not paying interest
on our first and second lien credit facilities, a decrease in production
21
spending of approximately $16.3 million and a decrease in payments of accrued film production
costs of approximately $19.2 million due to not making certain payments to our production partners
during the six months ended June 30, 2010. These decreases in cash outflows were partially offset
by a decrease in cash receipts of approximately $32.0 million and a $12.7 million increase in
payments for professional fees related to the ongoing restructuring of our capital structure during
the six months ended June 30, 2010.
Investing activities
During the six months ended June 30, 2010 and 2009, we used nil and $77,000, respectively, in
investing activities, reflecting the purchase of property and equipment.
Financing activities
No cash was provided or used by financing activities during the six months ended June 30, 2010
compared to cash provided by financing activities of $7.0 million related to borrowings from credit
facilities during the six months ended June 30, 2009.
Contractual obligations
The following table sets forth our contractual obligations as of June 30, 2010:
Payments Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Off balance sheet arrangements: |
||||||||||||||||||||
Operating lease commitments (1) |
$ | 34,268 | $ | 4,079 | $ | 7,767 | $ | 7,467 | $ | 14,955 | ||||||||||
Purchase obligations (2) |
| | | | | |||||||||||||||
34,268 | 4,079 | 7,767 | 7,467 | 14,955 | ||||||||||||||||
Contractual obligations reflected on the balance sheet: |
||||||||||||||||||||
Debt obligations (3) |
609,171 | 37,082 | 497,089 | 75,000 | | |||||||||||||||
Accrued film production costs (4) |
50,217 | 50,030 | 187 | | | |||||||||||||||
Other contractual obligations (5) |
8,524 | 5,524 | 2,000 | 1,000 | | |||||||||||||||
667,912 | 92,636 | 499,276 | 76,000 | | ||||||||||||||||
Total contractual obligations (6) |
$ | 702,180 | $ | 96,715 | $ | 507,043 | $ | 83,467 | $ | 14,955 | ||||||||||
(1) | Operating lease commitments represent future minimum payment obligations on various long-term noncancellable leases for office and storage space. | |
(2) | Purchase obligation amounts represent a contractual commitment to exclusively license the rights in and to a film that is not complete. | |
(3) | Debt obligations include future principal payments due upon the maturity of our bank debt and interest rate swap termination obligations (see Note 6 in our unaudited consolidated financial statements), but excludes interest payments. We have been in default of our first and second lien credit facilities since December 23, 2009 and February 12, 2010, respectively, and, as a result, our lenders have the ability to accelerate those obligations. | |
(4) | Accrued film production costs represent contractual amounts payable for completed films as well as costs incurred for the settlement of certain participations. Obligations for residual payments to various guilds have not been included due to the uncertain nature of the amounts and timing of future payments. | |
(5) | Other contractual obligations primarily represent commitments to settle various accrued liabilities. | |
(6) | Excluded from the table are $2.3 million of unrecognized tax obligations for which the timing of payment is not estimable. |
Off-balance sheet arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such
as variable interest entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes.
22
Critical accounting policies and estimates
For a complete discussion of our accounting policies, see the information under the heading
Managements discussion and analysis of financial condition and results of operations Critical
accounting policies and estimates in our Annual Report on Form 10-K for the year ended December
31, 2009, which was filed with the SEC on March 26, 2010. We believe there have been no material
changes to the critical accounting policies and estimates disclosed in the Companys Form 10-K.
Recent accounting pronouncements
No new accounting pronouncements were adopted during the three and six months ended June 30,
2010.
Item 3. Quantitative and Qualitative Disclosures about Risk
Interest rate risk
We are subject to market risks resulting from fluctuations in interest rates as our credit
facilities are variable rate credit facilities.
Foreign currency risk
Our reporting currency is the U.S. Dollar. We are subject to market risks resulting from
fluctuations in foreign currency exchange rates through some of our international licensees and we
incur certain production and distribution costs in foreign currencies. The primary foreign currency
exposures relate to adverse changes in the relationships of the U.S. Dollar to the British Pound,
the Euro, the Canadian Dollar and the Australian Dollar. However, there is a natural hedge against
foreign currency changes due to the fact that, while certain receipts for international sales may
be denominated in a foreign currency certain production and distribution expenses are also
denominated in foreign currencies, mitigating fluctuations to some extent depending on their
relative magnitude.
Historically, foreign exchange gains (losses) have not been significant. Foreign exchange
gains (losses) for the three months ended June 30, 2010 and 2009 were $(0.5) million and $0.3
million, respectively. Foreign exchange gains (losses) for the six months ended June 30, 2010 and
2009 were $(1.0) million and $(0.4) million, respectively.
Credit risk
We are exposed to credit risk from our licensees. These parties may default on their
obligations to us, due to bankruptcy, lack of liquidity, operational failure or other reasons.
Item 4. Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) are effective, in all material respects, to ensure that
information we are required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
In addition, no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has
materially affected, or is likely to materially affect, our internal control over financial
reporting.
23
Part 2. Other Information
Item 1. Legal Proceedings
Putative Shareholder Class Action Lawsuit
On October 9, 2009, RHI Entertainment, Inc. and two of its officers were named as defendants
in a putative shareholder class action filed in the United States District Court for the Southern
District of New York (the Lawsuit), alleging violations of federal securities laws by issuing a
registration statement in connection with the Companys June 2008 initial public offering that
purportedly contained untrue statements of material facts and omitted other facts necessary to make
certain statements not misleading. The central allegation of the Lawsuit is that the registration
statement and prospectus overstated the projected number of made-for-television (MFT) movies and
mini-series the Company expected to develop, produce and distribute in 2008, while it failed to
disclose that the Company would not be able to complete the expected number of MFT movies and
miniseries in 2008 due to the declining state of the credit markets, changing media technologies
and other negative factors then impacting the Companys business. The Lawsuit seeks unspecified
damages and interest. On May 3, 2010, the defendants filed a motion to dismiss the complaint. The
plaintiffs filed an opposition to the motion on June 25, 2010. The motion is pending. The Company
believes that the Lawsuit has no merit and intends to defend itself and its officers vigorously in
this litigation.
Flextech Litigation
On April 7, 2009, RHI Entertainment Distribution, LLC and RHI Entertainment, LLC were served
with a Complaint filed in the United States District Court for the Southern District of New York
alleging that they had breached an agreement with Flextech Rights Limited (Flextech), a British
distributor, by failing to make the second of two installment payments. A judgment in the amount of
approximately $0.9 million was entered against the defendants on February 17, 2010. The final
installment on the $0.9 million was paid to Flextech in June 2010 and no further obligation remains
as of June 30, 2010.
MAT IV Litigation
On February 22, 2010, RHI Entertainment Distribution, LLC was served with a Complaint filed in
the United States District Court for the Southern District of New York alleging that the Company
had breached a contract with MAT Movies and Television Productions GmnH & Co. Project IV KG (MAT
IV), a German investment fund, by failing to pay amounts due under an agreement dated September
25, 2009. The Complaint seeks approximately $7.0 million in damages, plus interest and attorneys
fees, for which we believe we have accrued the appropriate amount as of June 30, 2010. On April 15,
2010, the Company moved to dismiss the complaint and compel arbitration. MAT IV filed an opposition
to the Companys motion on April 29, 2010. The motion is pending. The Company intends to defend
itself vigorously in this litigation.
The Company is involved in various other legal proceedings and claims incidental to the normal
conduct of its business. Although it is impossible to predict the outcome of any outstanding legal
proceedings, the Company believes that such outstanding legal proceedings and claims, individually
and in the aggregate, are not likely to have a material effect on its financial position or results
of operations.
Item 1a. Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the
heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009,
which was filed with the SEC on March 26, 2010. There have been no material changes to the risk
factors as disclosed in the Companys Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There have not been any unregistered sales of equity securities or repurchases of the
Companys common stock during the three months ended June 30, 2010.
24
Item 3. Defaults upon Senior Securities
Item 4. (Removed and Reserved)
Item 5. Other Information
Item 6. Exhibits
Exhibit | ||
Number | Exhibit | |
31.1* | Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2* | Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1* | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2* | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 5, 2010 | By: | /s/ Robert A. Halmi, Jr. | ||
Robert A. Halmi, Jr. | ||||
President & Chief Executive Officer (Principal Executive Officer) |
||||
Date: August 5, 2010 | By: | /s/ William J. Aliber | ||
William J. Aliber | ||||
Chief Financial Officer (Principal Financial Officer) |
26
EXHIBIT INDEX
Exhibit | ||
Number | Exhibit | |
31.1* | Certification of the Chief Executive Officer, pursuant to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
31.2* | Certification of the Chief Financial Officer, pursuant to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
32.1* | Certification of the Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
32.2* | Certification of the Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
27