UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
001-34102
(Commission File Number)
RHI ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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36-4614616
(I.R.S. Employer
Identification No.)
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1325 Avenue of Americas, 21st Floor
New York, NY 10019
(Address of principal executive offices)
Registrants telephone number: (212) 977-9001
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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
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Accelerated filer
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Non-accelerated filer
þ
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
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No
þ
The number of shares of the Registrants common stock, par value $0.01 per share, outstanding
as of May 6, 2009 was 13,505,100.
RHI ENTERTAINMENT, INC.
INDEX
i
Part 1. Financial Information
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Balance Sheets
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March 31,
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December 31,
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2009
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2008
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(In thousands, except per share data)
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ASSETS
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Cash
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$
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9,093
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$
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22,373
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Accounts receivable, net of allowance for doubtful
accounts and discount to present value of $11,401 and
$11,933, respectively
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150,188
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180,125
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Film production costs, net
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781,527
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780,122
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Property and equipment, net
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343
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370
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Prepaid and other assets, net
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24,400
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28,928
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Intangible assets, net
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1,950
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2,264
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Total assets
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$
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967,501
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$
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1,014,182
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LIABILITIES AND STOCKHOLDERS EQUITY
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Accounts payable and accrued liabilities
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$
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46,459
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$
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51,477
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Accrued film production costs
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173,465
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195,328
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Debt
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576,789
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576,789
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Deferred revenue
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12,829
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13,530
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Total liabilities
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809,542
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837,124
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Stockholders equity
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Common
stock, par value $0.01 per share; 125,000
shares authorized and 13,505 shares issued and
outstanding
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135
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135
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Additional paid-in capital
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149,885
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149,609
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Accumulated deficit
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(48,897
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)
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(36,195
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Accumulated other comprehensive loss
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(9,981
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)
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(11,387
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)
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Total RHI Inc. stockholders equity
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91,142
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102,162
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Non-controlling interest in consolidated entity
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66,817
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74,896
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Total stockholders equity
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157,959
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177,058
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Total liabilities and stockholders equity
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$
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967,501
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$
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1,014,182
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See accompanying notes to unaudited condensed consolidated financial statements.
1
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Operations
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(Successor)
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(Predecessor)
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Three Months
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Three Months
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Ended
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Ended
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March 31, 2009
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March 31, 2008
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(In thousands, except per share data)
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Revenue
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Production revenue
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$
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$
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4,941
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Library revenue
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13,003
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17,280
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Total revenue
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13,003
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22,221
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Cost of sales
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13,438
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17,578
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Gross (loss) profit
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(435
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4,643
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Other costs and expenses:
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Selling, general and administrative
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10,966
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12,889
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Amortization of intangible assets
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314
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357
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Management fees paid to related parties
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150
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Loss from operations
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(11,715
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(8,753
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Other (expense) income:
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Interest expense, net
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(9,632
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(11,754
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Interest income
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3
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19
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Other (expense) income, net
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(694
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887
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Loss before income taxes and non-controlling interest in loss of
consolidated entity
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(22,038
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(19,601
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Income tax benefit (provision)
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25
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(593
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Loss before non-controlling interest in loss of consolidated entity
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(22,013
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(20,194
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Non-controlling interest in loss of consolidated entity
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9,311
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Net loss
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$
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(12,702
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$
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(20,194
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Loss per Share:
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Basic
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$
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(0.94
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N/A
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Diluted
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$
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(0.94
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N/A
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Weighted Average Shares Outstanding:
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Basic
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13,505
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N/A
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Diluted
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13,505
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N/A
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See accompanying notes to unaudited condensed consolidated financial statements.
2
RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
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(Successor)
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(Predecessor)
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Three Months
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Three Months
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Ended
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Ended
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March 31, 2009
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March 31, 2008
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(In thousands)
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Cash flows from operating activities
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Net loss
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$
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(12,702
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$
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(20,194
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Adjustments to reconcile net loss to net cash used in operating
activities:
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Non-controlling interest in loss of consolidated entity
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(9,311
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Amortization of film production costs
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8,222
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13,006
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Amortization
of deferred debt financing costs
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845
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287
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Decrease of accounts receivable reserves
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(532
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(489
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Share-based compensation
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478
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484
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Amortization of intangible assets
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314
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357
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Deferred income taxes
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89
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(1,156
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Depreciation and amortization of fixed assets
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52
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49
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Loss on disposal of fixed assets
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1
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Amortization of debt discount
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186
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Change in operating assets and liabilities:
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Decrease in accounts receivable
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30,469
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16,636
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Decrease in prepaid and other assets
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3,594
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3,109
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Additions to film production costs
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(9,627
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(27,413
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(Decrease) increase in accounts payable and accrued liabilities
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(2,582
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401
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(Decrease) increase in accrued film production costs
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(21,863
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3,288
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(Decrease) increase in deferred revenue
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(701
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1,309
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Net cash used in operating activities
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(13,254
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(10,140
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Cash flows from investing activities
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Purchase of property and equipment
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(26
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(39
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Net cash used in investing activities
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(26
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(39
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Cash flows from financing activities
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Borrowings from credit facilities
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1,000
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28,243
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Repayments of credit facilities
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(1,000
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(8,943
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Member capital contributions
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20
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Net cash provided by financing activities
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19,320
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Net (decrease) increase in cash
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(13,280
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)
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9,141
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Cash, beginning of period
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22,373
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1,407
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Cash, end of period
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$
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9,093
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$
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10,548
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Supplemental disclosure of cash flow information:
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Cash paid for interest
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$
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10,730
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$
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12,709
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Cash paid for income taxes
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356
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1,557
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See accompanying notes to unaudited condensed consolidated financial statements.
3
RHI ENTERTAINMENT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Business and Organization
On January 12, 2006, Hallmark Entertainment Holdings, LLC (Hallmark) sold its 100% interest in
Hallmark Entertainment, LLC (Hallmark Entertainment or the Initial Predecessor Company) to HEI
Acquisition, LLC. HEI Acquisition, LLC was immediately merged with and into Hallmark Entertainment
and its name was changed to RHI Entertainment, LLC (RHI LLC or the Predecessor Company). Subsequent
to the transaction, RHI LLCs sole member was RHI Entertainment Holdings, LLC (Holdings), a limited
liability company controlled by affiliates of Kelso & Company L.P. (Kelso). RHI LLC is engaged in
the development, production and distribution of made-for-television movies, mini-series and other
television programming.
On June 23, 2008, RHI Entertainment, Inc. (RHI Inc. or the Successor Company) completed its
initial public offering (the IPO). RHI Inc. was incorporated for the sole purpose of becoming the
managing member of RHI Entertainment Holdings II, LLC and had no operations prior to the IPO.
Immediately preceding the IPO, Holdings changed its name to KRH Investments LLC (KRH). KRH then
contributed its 100% ownership interest in RHI LLC to a newly formed limited liability company
named RHI Entertainment Holdings II, LLC (Holdings II) in consideration for 42.3% of the common
membership units in Holdings II and Holdings IIs assumption of all of KRHs obligations under its
financial advisory agreement with Kelso. Upon completion of the IPO, the net proceeds received were
contributed by RHI Inc. to Holdings II in exchange for 57.7% (13,500,100) of the common membership
units in Holdings II. Upon completion of the IPO, RHI Inc. became the sole managing member of
Holdings II and holds a majority of the economic interests. KRH is the non-managing member of
Holdings II and holds a minority of the economic interests. To the extent that distributions are
made, they will be in accordance with the relative economic interests of RHI Inc. and KRH in
Holdings II. RHI Inc. holds a number of common membership units in Holdings II equal to the number
of outstanding shares of RHI Inc. common stock.
The Company has incurred net losses and has had negative cash flows from operations in each of
the past three years and for the three months ended March 31,
2009 and at March 31, 2009 has an accumulated deficit of $48,897. The ability to
meet debt and other obligations and to reduce the Companys total debt depends on its future
operating performance and on economic, financial, competitive and other factors. Management is
continually reviewing its operations for opportunities to adjust the timing of expenditures to
ensure that sufficient resources are maintained. It has the ability to manage the timing and
related expenditures of certain of these productions. The timing surrounding the commencement of
production of movies and mini-series and the related financings are the most significant items that
can be altered in terms of managing our resources. For example, we have asked our production
partners to finance a significant portion of the cost of each new production without short-term
financial support from us. If one of the Companys production partners cannot finance a substantial
portion of a films cost through the use of new or existing credit facilities of their own, the
Company may not develop or produce that film. As a result, the number of films the Company produces
may be reduced, which could have an adverse impact on our production revenue. Management believes
that cash on hand, available borrowings under our revolving credit facility and projected cash
flows from operations will be sufficient to satisfy the Companys financial obligations through at
least the next twelve months.
(2) Basis of Presentation
The financial information presented herein has been prepared according to U.S. generally
accepted accounting principles. In managements opinion, the information presented herein reflects
all adjustments necessary to fairly present the financial position and results of operations of the
Predecessor Company and Successor Company (collectively, the Company).
The consolidated financial statements of the Predecessor Company include the accounts of RHI
LLC and its consolidated subsidiaries. The consolidated financial statements of the Successor
Company include the accounts of RHI Inc. and its consolidated subsidiary, Holdings II (which
consolidates RHI LLC). All intercompany accounts and transactions have been eliminated.
The unaudited financial statements as of March 31, 2009 (Successor) and for the three months
ended March 31, 2009 (Successor), and the three months ended March 31, 2008 (Predecessor) include,
in the opinion of management, all adjustments consisting only of normal recurring adjustments,
which the company considers necessary for a fair presentation of the financial position and results
of operations of the company for these periods. Results for the aforementioned periods are not
necessarily indicative of the results to be expected for the full year.
4
(3) Summary of Significant Accounting Policies
For a complete discussion of the Companys accounting policies, refer to the consolidated
financial statements and related notes included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2008, which was filed with the SEC on March 5, 2009.
(a) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires the Company to make estimates and assumptions that affect the reported amounts
in the financial statements and footnotes thereto. Actual results could differ from those
estimates.
(b) Comprehensive Loss
Comprehensive loss consists of net loss and other losses (comprised of unrealized gains/losses
associated with interest rate swaps with respect to the Company) affecting stockholders equity
that, under U.S. generally accepted accounting principles are excluded from net loss. Comprehensive
loss for the three months ended March 31, 2009 (Successor) and March 31, 2008 (Predecessor) totaled
approximately $11.3 million and $31.0 million, respectively.
(c) Segment Information
The Company operates in a single segment: the development, production and distribution of
made-for-television movies, mini-series and other television programming. Long-lived assets located
in foreign countries are not material. Revenue earned from foreign licensees represented
approximately 33% and 39% of total revenue for the three months ended March 31, 2009 (Successor)
and March 31, 2008 (Predecessor), respectively. These revenues, generally denominated in U.S.
dollars, were primarily from sales to customers in Europe.
(d) New Accounting Pronouncements Adopted
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. Under SFAS 157, fair
value refers to the price that would be received from the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in which the
reporting entity does business. It also clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing the asset or liability. SFAS 157 applies
under other accounting pronouncements that require or permit fair value measurements. Accordingly,
this Statement does not require any new fair value measurements. However, for some entities, the
application of SFAS 157 could change current practices. SFAS 157 was effective for financial
statements issued with fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, however, the effective date for SFAS 157 was deferred until fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities. The
company adopted SFAS 157 effective January 1, 2009 for nonfinancial assets and nonfinancial
liabilities, which did not have an impact on its consolidated financial statements.
In November 2007, the EITF reached a consensus on Issue No. 07-1, Accounting for
Collaboration Arrangements Related to the Development and Commercialization of Intellectual
Property, or EITF 07-1. EITF 07-1 provides guidance on how the parties to a collaborative
agreement should account for costs incurred and revenue generated on sales to third parties, how
sharing payments pursuant to a collaboration agreement should be presented in the income statement
and certain related disclosure questions. EITF 07-1 was adopted by the company as of January 1,
2009. The adoption of EITF 07-1 by the Company had no impact on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or
SFAS 141R. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date. SFAS 141R is effective for the company for business combinations
for which the acquisition date is on or after January 1, 2009. SFAS 141R was adopted by the Company
as of January 1, 2009. The adoption of SFAS 141R by the Company had no impact on its consolidated
financial statements.
In December 2007, the FASB issued SFAS 160 that will change the current accounting and
financial reporting for non-controlling (minority) interests. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. SFAS 160 will be applied prospectively; however, certain
disclosure requirements of SFAS 160 require retrospective treatment. SFAS 160 was adopted by the
5
Company on January 1, 2009. As a result of the adoption, the companys non-controlling
interest is now classified as a separate component of equity, not as a liability as it was
previously presented.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161), which amends SFAS No. 133. SFAS 161 requires companies with
derivative instruments to disclose information that should enable financial statement users to
understand how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS 133 and related Interpretations, and how
derivative instruments and related hedged items affect a companys financial position, financial
performance, and cash flows. Entities shall select the format and the specifics of disclosures
relating to their volume of derivative activity that are most relevant and practicable for their
individual facts and circumstances. SFAS 161 expands the current disclosure framework in SFAS 133
and is effective prospectively for all periods beginning on or after November 15, 2008. SFAS 161
was adopted by the Company as of January 1, 2009. SFAS 161 did not have a significant impact on
the Companys consolidated financial statements. See Note 7 for the required disclosures.
(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 period,
outstanding common stock options and restricted stock units are anti-dilutive. As of March 31,
2009, the Company has no potentially dilutive securities outstanding. The weighted average basic
and diluted shares outstanding for the three months ended March 31, 2009 (Successor) was
13,505,100.
(5) Non-Controlling Interest
As discussed in Note 2, Basis of Presentation, RHI Inc. consolidates the financial results of
Holdings II and its wholly-owned subsidiary, RHI LLC. The 42.3% minority interest of Holdings II
(9,900,000 membership units) held by KRH is recorded as non-controlling interest in the
consolidated entity, which results in an associated reduction in additional paid-in capital of RHI
Inc. The non-controlling interest in the consolidated entity on the consolidated balance sheet was
established in accordance with Emerging Issues Task Force (EITF) 94-2, Treatment of Minority
Interests in Certain Real Estate Investment Trusts by multiplying the net equity of Holdings II
(after reflecting the contributions of KRH and RHI Inc. and costs related to the offering and
reorganization) by KRHs percentage ownership in Holdings II. The non-controlling interest in loss
of consolidated entity on the consolidated statement of operations represents the portion of
Holdings IIs net loss attributable to KRH.
The non-controlling interest associated with the initial investment by RHI Inc. in Holdings II
and subsequent transactions are calculated as follows (in thousands):
|
|
|
|
|
Total Holdings II members equity as of June 22, 2008
|
|
$
|
108,766
|
|
RHI Inc. investment in Holdings II
|
|
|
173,984
|
|
Non-controlling interest associated with distribution to KRH
|
|
|
(34,972
|
)
|
|
|
|
|
Total post-IPO Holdings II members equity
|
|
|
247,778
|
|
Non-controlling interest of KRH
|
|
|
42.3
|
%
|
|
|
|
|
Initial allocation of non-controlling interest in consolidated entity
|
|
|
104,810
|
|
Non-controlling interest in share-based compensation
|
|
|
473
|
|
Non-controlling interest in unrealized loss on interest rate swaps
|
|
|
(3,853
|
)
|
|
|
|
|
Non-controlling interest allocation for the period from June 23, 2008 to December 31, 2008
|
|
|
(3,380
|
)
|
Non-controlling interest in loss of consolidated entity for the period from June 23, 2008 to December 31, 2008
|
|
|
(26,534
|
)
|
|
|
|
|
Non-controlling interest in consolidated entity as of December 31, 2008
|
|
$
|
74,896
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in share-based compensation
|
|
|
202
|
|
Non-controlling interest in unrealized loss on interest rate swaps
|
|
|
1,030
|
|
|
|
|
|
Non-controlling interest allocation for the three months ended March 31, 2009
|
|
|
1,232
|
|
Non-controlling interest in loss of consolidated entity for the three months ended March 31, 2009
|
|
|
(9,311
|
)
|
|
|
|
|
Non-controlling interest in consolidated entity as of March 31, 2009
|
|
$
|
66,817
|
|
|
|
|
|
6
(6) Film Production Costs, Net
Film production costs are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Completed films
|
|
$
|
987,302
|
|
|
$
|
984,805
|
|
Crown Film Library
|
|
|
145,326
|
|
|
|
145,290
|
|
Films in process and development
|
|
|
24,874
|
|
|
|
18,012
|
|
|
|
|
|
|
|
|
|
|
|
1,157,502
|
|
|
|
1,148,107
|
|
Accumulated amortization
|
|
|
(375,975
|
)
|
|
|
(367,985
|
)
|
|
|
|
|
|
|
|
|
|
$
|
781,527
|
|
|
$
|
780,122
|
|
|
|
|
|
|
|
|
The following table illustrates the amount of overhead and interest costs capitalized to film
production costs as well as amortization expense associated with completed films and the Crown Film
Library (in thousands):
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
(Predecessor)
|
|
|
Three Months
|
|
Three Months
|
|
|
Ended
|
|
Ended
|
|
|
March 31, 2009
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
Overhead costs capitalized
|
|
$
|
2,353
|
|
|
$
|
3,595
|
|
Interest capitalized
|
|
|
95
|
|
|
|
141
|
|
Amortization of completed films
|
|
|
7,660
|
|
|
|
11,567
|
|
Amortization of Crown Film Library
|
|
|
330
|
|
|
|
1,275
|
|
Approximately 37% of completed film production costs have been amortized through March 31,
2009. The Company further anticipates that approximately 10% of completed film production costs
will be amortized through March 31, 2010. The Company anticipates that approximately 46% of
completed film production costs as of March 31, 2009 will be amortized over the next three years
and that approximately 80% of film production costs will be amortized within five years. The Crown
Film Library has a remaining amortization period of 17 years and 9 months as of March 31, 2009.
(7) Debt
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Revolver
|
|
|
326,789
|
|
|
|
326,789
|
|
Second Lien Term Loan
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
$
|
576,789
|
|
|
$
|
576,789
|
|
|
|
|
|
|
|
|
The Company has two credit agreements. The Companys first lien credit agreement, as amended
(the First Lien Credit Agreement), is comprised of two facilities: (i) a $175.0 million term loan
(First Lien Term Loan) and (ii) a $350.0 million revolving credit facility, including a letter of
credit sub-facility (Revolver). The Companys second lien credit agreement, as amended (Second Lien
Credit Agreement), is comprised of a seven-year $75.0 million term loan (Second Lien Term Loan).
The First Lien Term Loan amortizes in three installments of 10%, 20% and 70% on April 13,
2011, 2012 and 2013, respectively and bears interest at the Alternate Base Rate (ABR) or LIBOR plus
an applicable margin of 1.00% or 2.00% per annum, respectively. The maturity date of the Revolver
is April 13, 2013 and the Revolver bears interest at either the ABR or LIBOR plus an applicable
margin of 1.00% or 2.00% per annum, respectively. The New Second Lien Term Loan matures on June 23,
2015 and bears interest at ABR or LIBOR plus an applicable margin of 6.50% or 7.50% per annum,
respectively. Any prepayment of principal of the New Second Lien Term Loan made prior to June 23,
2009 requires a 1% premium on the loans repaid.
Interest payments for all loans are due, at the Companys election, according to interest
periods of one, two or three months. The Revolver also requires an annual commitment fee of 0.375%
on the unused portion of the commitment. At March 31, 2009, the
7
interest rates associated with the First Lien Term Loan, Revolver and New Second Lien Term
Loan were 3.17%, 3.22%, and 8.74%, respectively. At March 31, 2009, the Company had availability of
$19.8 million under its revolver, net of $3.4 million of stand-by letters of credit outstanding.
The First Lien Credit Agreement and Second Lien Credit Agreement, as amended, include
customary affirmative and negative covenants, including among others: (i) limitations on
indebtedness, (ii) limitations on liens, (iii) limitations on investments, (iv) limitations on
guarantees and other contingent obligations, (v) limitations on restricted junior payments and
certain other payment restrictions, (vi) limitations on consolidation, merger, recapitalization or
sale of assets, (vii) limitations on transactions with affiliates, (viii) limitations on the sale
or discount of receivables, (ix) limitations on lines of business, (x) limitations on production
and acquisition of product and (xi) certain reporting requirements. Additionally, the First Lien
Credit Agreement includes a Minimum Consolidated Tangible Net Worth covenant (as defined therein)
and both the First Lien Credit Agreement and the Second Lien Credit Agreement contain a Coverage
Ratio covenant (as defined therein). The First Lien Credit Agreement and Second Lien Credit
Agreement also include customary events of default, including among others, a change of control
(including the disposition of capital stock of subsidiaries that guarantee the credit agreement).
On March 2, 2009, the Company further amended its First Lien Credit Agreement to revise a
consolidated net worth covenant. The amended covenant excludes the Companys intangible assets and
interest rate swaps and any impact they may have on the Companys balance sheet and statement of
operations in the annual determination of Consolidated Tangible Net Worth (as defined in the First
Lien Credit Agreement). The amendment was effective as of December 31, 2008.
The Company was in compliance with all required financial covenants as of March 31, 2009.
Interest Rate Swaps
The Company utilizes derivative financial instruments to reduce interest rate risk. The
Company does not hold or issue derivative financial instruments for trading purposes. In accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, the interest rate swaps held by the Company initially were designated as cash flow
hedges and qualified for hedge accounting in accordance with method 1 of SFAS No. 133
Implementation Issue No. G7. The critical terms of the interest rate swaps and hedged variable-rate
debt coincided and cash flows due to the hedge exactly offset cash flows resulting from
fluctuations in the variable rates.
Under hedge accounting, changes in the fair value of the interest rate swaps are reported as a
component of accumulated other comprehensive loss in the Companys consolidated balance sheet. The
fair value of the swap contracts and any amounts payable to or receivable from counterparties are
reflected as assets or liabilities in the Companys consolidated balance sheet. Upon termination of
the interest rate swaps or variable-rate debt, all unrealized gains or losses and any cash payments
or receipts will be recorded to results of operations.
As of March 31, 2009 and December 31, 2008, the Company had two identical interest rate swap
agreements to manage its exposure to interest rate movements associated with $435.0 million of its
credit facilities by effectively converting its variable rate to a fixed rate. These interest rate
swaps provided for the exchange of variable rate payments for fixed rate payments. The variable
rate was based on three month LIBOR and the fixed rate was 4.98%. The interest rate swaps were
scheduled to terminate on April 27, 2010. The aggregate fair market value of the interest rate
swaps was approximately $(17.3) million and $(19.7) million as of March 31, 2009 and December 31,
2008, respectively.
On April 21, 2009, the Company amended its existing interest rate swap agreements and
de-designated them as cash flow hedges in accordance with SFAS No. 133. As a result of the
de-designation, the fair market value of the swaps immediately preceding the amendments will be
recorded as interest expense in the consolidated statement of operations during the period from
April 21, 2009 through April 27, 2010. The amended interest rate swaps have not been designated as
cash flow hedges and, therefore, changes to their fair value will be recorded as Other income
(expense) in the consolidated statement of operations.
The amended interest rate swap agreements are with three counterparties and continue to cover
$435.0 million of the Companys credit facilities and provide for the exchange of variable rate
payments for fixed rate payments. The variable rates are based on one month LIBOR and the weighted
average fixed rate is 3.81%. The amended interest rate swaps terminate on April 27, 2010 ($90.3
million), June 27, 2011 ($39.6 million) and April 27, 2012 ($305.1 million).
8
The Company is exposed to credit loss in the event of non-performance by the counterparties to
the interest rate swap agreements. However, the Company does not anticipate non-performance by the
counterparties.
(8) Related Party Transactions
In 2006, the Company agreed to pay Kelso an annual management fee of $600,000 in connection
with planning, strategy, oversight and support to management (financial advisory agreement). This
management fee was paid on a quarterly basis. A total of $150,000, of this management fee was
recorded as management fees paid to related parties in the unaudited consolidated statements of
operations for the three months ended March 31, 2008 (Predecessor). Concurrent with the closing of
the IPO, the Company paid Kelso $6.0 million in exchange for the termination of its fee obligations
under the existing financial advisory agreement.
In August 2008, certain affiliates of Kelso guaranteed $20.0 million of the Second Lien Term
Loans held by JPMorgan Chase Bank, N.A. (JPM) (but not any subsequent assignee) and also agreed to
purchase the loans from JPM on December 7, 2008 if JPM had not sold such loans to third parties or
if the loans have not otherwise been repaid by that date. In September 2008, $5.0 million of these
loans were syndicated to a third party. As of March 31, 2009,
the remaining $15.0 million continued
to be guaranteed by affiliates of Kelso, as the requirement to purchase has been extended by JPM
until May 6, 2009. Affiliates of Kelso have agreed to purchase
such loans from JPM on May 6, 2009.
(9) Share-based Compensation
On February 9, 2009, the Company granted stock options and RSUs to its chief executive officer
and its newly appointed Chairman of the Board of Directors (Chairman). The Companys chief
executive officer was granted 550,000 non-qualified stock options and 150,000 restricted stock
units (RSUs). The Companys Chairman was granted 350,000 non-qualified stock options and 350,000
RSUs. All stock options granted to both the Chairman and chief executive officer have an exercise
price equal to $4.04 per share, the closing price per share of the Companys common stock on
February 9, 2009 (the date of grant) and expire 10 years from the date of grant. Subject to each
recipients continued service with the Company, as of each applicable vesting date,
33
1
/
3
% of the stock options and RSUs will generally vest on each of the
first three anniversaries of the date of grant. With respect to each of the stock options and
restricted stock units, (i) 1/3 of the shares that become vested on each anniversary date will
become exercisable (with respect to shares subject to stock options) or transferable (with respect
to shares subject to RSUs) immediately upon vesting, (ii) 1/3 of the shares that become vested on
each anniversary will become exercisable or transferable, as applicable, upon the attainment of a
$9.00 stock price performance hurdle and (iii) 1/3 of the shares that become vested on each
anniversary will become exercisable or transferable, as applicable, upon the attainment of a $14.00
stock price performance hurdle. The stock options and RSUs provide for accelerated vesting if there
is a change in control (as defined in the RSU and stock option agreements). The RSUs were valued
at $4.04 per share based on the closing price of the Companys stock on the date of grant. The
stock options granted were valued using a Monte Carlo simulation model and have a grant date fair
values associated with each vesting tranche ranging from $2.05 $2.45 per share.
Additionally, the Companys Chairman and chief executive officer were provided with certain
distribution rights under the Second Amended and Restated Limited Liability Company Agreement of
KRH. The Companys chief executive officer forfeited 500 Value Units (profit interest in KRH) and
certain distribution rights in exchange for his new distribution rights. These Value Unit and
distribution right adjustments only impact the return to, and only dilute the interests of, the
owners of KRH, and will not impact the return to, or dilute the interest of, the direct holders of
the Companys common stock.
(10) Commitments and Contingencies
The Company is involved in various legal proceedings and claims incidental to the normal
conduct of its business. Although it is impossible to predict the outcome of any outstanding legal
proceedings, the Company believes that such outstanding legal proceedings and claims, individually
and in the aggregate, are not likely to have a material effect on its financial position or results
of operations.
9
Item 2.
Managements Discussion and analysis of Financial Condition and Results of Operations
This discussion may contain forward-looking statements that reflect RHI Entertainment Inc.s
(RHI Inc) current views with respect to, among other things, future events and financial
performance. RHI Inc. generally identifies forward-looking statements by terminology such as
outlook, believes, expects, potential, continues, may, will, could, should,
seeks, approximately, predicts, intends, plans, estimates, anticipates or the
negative version of those words or other comparable words. Any forward-looking statements contained
in this discussion are based upon the historical performance of us and our subsidiaries and on our
current plans, estimates and expectations. The inclusion of this forward-looking information should
not be regarded as a representation by us, or any other person that the future plans, estimates or
expectations contemplated by us will be achieved. Such forward-looking statements are subject to
various risks and uncertainties and assumptions relating to our operations, financial results,
financial condition, business prospects, growth strategy and liquidity. If one or more of these or
other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect,
our actual results may vary materially from those indicated in these statements. These factors
should not be construed as exhaustive and should be read in conjunction with the other cautionary
statements that are included in this Form 10-Q. Unless required by law, RHI Inc. does not undertake
any obligation to publicly update or review any forward-looking statement, whether as a result of
new information, future developments or otherwise.
The historical consolidated financial data discussed below reflect the historical results of
operations of RHI Entertainment, LLC (RHI LLC) and its subsidiaries as RHI Inc. did not have any
historical operations prior to June 23, 2008. See Notes to RHI Inc.s Condensed Consolidated
Financial Statements included elsewhere in this Form 10-Q.
In this discussion, unless the context otherwise requires, the terms RHI Inc., the
Company, we, us and our refer to RHI Entertainment, Inc. and its subsidiaries including RHI
Entertainment Holdings II, LLC and RHI Entertainment, LLC.
Overview
We develop, produce and distribute new made-for-television (MFT) movies, mini-series and other
television programming worldwide. We also selectively produce new episodic series programming for
television. In addition to our development, production and distribution of new content, we own an
extensive library of existing long-form television content, which we license primarily to broadcast
and cable networks worldwide.
Our revenue and operating results are seasonal in nature. A significant portion of the films
that we develop, produce and distribute are delivered to the broadcast and cable networks in the
second half of each year. Typically, programming for a particular year is developed either late in
the preceding year or in the early portion of the current year. Generally, planning and production
take place during the spring and summer and completed film projects are delivered in the third and
fourth quarters of each year. As a result, our first, second and third quarters of our fiscal year
typically have less revenue than the fourth quarter of such fiscal year. Additionally, the timing
of the film deliveries from year-to-year may vary significantly. Importantly, the results of one
quarter are not necessarily indicative of results for the next or any future quarter.
Each year, we develop and distribute a new list, or slate, of film content, consisting
primarily of MFT movies and mini-series. The investment required to develop and distribute each new
slate of films is our largest operating cash expenditure. A portion of this investment in film each
year is financed through the collection of license fees during the production process. Each new
slate of films is added to our library in the year subsequent to its initial year of delivery. Cash
expenditures associated with the distribution of the library film content are not significant.
We refer to the revenue generated from the licensing of rights in the fiscal year in which a
film is first delivered to a customer as production revenue. Any revenue generated from the
licensing of rights to films in years subsequent to the films initial year of delivery is referred
to as library revenue. The growth and interaction of these two revenue streams is an important
metric we monitor as it indicates the current market demand for both our new content (production
revenue) and the content in our film library (library revenue). We also monitor our gross profit,
which allows us to determine the overall profitability of our film content. We focus on the
profitability of our new film slates rather than volume. As such, we strive to manage the scale of
our individual production budgets to meet market demand and enhance profitability.
10
Discussion of consolidated financial information
Revenue
We derive our revenue from the distribution of our film content. Historically, most of our
revenue has been generated from the licensing of rights to our film content to broadcast and cable
networks for specified terms, in specified media and territories.
The timing of film deliveries during the year can have a significant impact on revenue. Each
year, we develop and distribute a new slate of film content, consisting primarily of MFT movies and
mini-series. We refer to the revenue generated from the licensing of rights in the fiscal year in
which a film is first delivered to a customer as production revenue. Any revenue generated from
the licensing of rights to films in years subsequent to the films initial year of delivery is
referred to as library revenue.
Cost of sales
We capitalize costs incurred for the acquisition and development of story rights, film
production costs, film production-related interest and overhead, residuals and participations.
Residuals and participations represent contingent compensation payable to parties associated with
the film including producers, writers, directors or actors. Residuals represent amounts payable to
members of unions or guilds such as the Screen Actors Guild, Directors Guild of America and
Writers Guild of America based on the performance of the film in certain media and/or the guild
members salary level.
Cost of sales includes the amortization of capitalized film costs, as well as exploitation
costs associated with bringing a film to market.
Selling, general and administrative expense
Selling, general and administrative expense includes salaries, rent and other expenses net of
amounts included in capitalized overhead. We expect increases in general and administrative expense
as we incur additional expenses in connection with operating as a publicly traded company.
Interest expense, net
Interest expense, net represents interest incurred on the Companys credit facilities
(inclusive of amortization of deferred debt issuance costs and original issue discount). Interest
expense is reflected net of interest capitalized to film production costs.
Income taxes
Our operations are conducted through our indirect subsidiary, RHI LLC. Holdings II and RHI LLC
are organized as limited liability companies. For U.S. federal income tax purposes, Holdings II is
treated as a partnership and RHI LLC is disregarded as a separate entity from Holdings II.
Partnerships are generally not subject to income tax, as the income or loss is included in the tax
returns of the individual partners.
The consolidated financial statements of RHI Inc. include a provision for corporate income
taxes associated with RHI Inc.s membership interest in Holdings II as well as an income tax
provision related to RHI International Distribution, Inc., a wholly-owned subsidiary of RHI LLC,
which is a taxable U.S. corporation.
KRH is entitled to exchange its common membership units in Holdings II for, at our option,
cash or shares of RHI Inc. common stock on a one-for-one basis (as adjusted to account for stock
splits, recapitalizations or similar events) or a combination of both stock and cash. These
exchanges may result in increases in the tax basis of the assets of Holdings II that otherwise
would not have been available. These increases in our proportionate share of tax basis may increase
depreciation and amortization deductions for tax purposes and therefore reduce the amount of tax
that RHI Inc. would otherwise be required to pay in the future, although the IRS may challenge all
or part of that tax basis increase, and a court could sustain such a challenge.
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.
11
Results of operations
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
The results of operations for the three months ended March 31, 2009 and 2008 are summarized as
follows (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue
|
|
$
|
|
|
|
$
|
4,941
|
|
|
$
|
(4,941
|
)
|
Library revenue
|
|
|
13,003
|
|
|
|
17,280
|
|
|
|
(4,277
|
)
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
13,003
|
|
|
|
22,221
|
|
|
|
(9,218
|
)
|
Cost of sales
|
|
|
13,438
|
|
|
|
17,578
|
|
|
|
(4,140
|
)
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(435
|
)
|
|
|
4,643
|
|
|
|
(5,078
|
)
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,966
|
|
|
|
12,889
|
|
|
|
(1,923
|
)
|
Amortization of intangible assets
|
|
|
314
|
|
|
|
357
|
|
|
|
(43
|
)
|
Management fees paid to related parties
|
|
|
|
|
|
|
150
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,715
|
)
|
|
|
(8,753
|
)
|
|
|
(2,962
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(9,632
|
)
|
|
|
(11,754
|
)
|
|
|
2,122
|
|
Interest income
|
|
|
3
|
|
|
|
19
|
|
|
|
(16
|
)
|
Other (expense) income, net
|
|
|
(694
|
)
|
|
|
887
|
|
|
|
(1,581
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and non-controlling interest in loss of
consolidated entity
|
|
|
(22,038
|
)
|
|
|
(19,601
|
)
|
|
|
(2,437
|
)
|
Income tax benefit (provision)
|
|
|
25
|
|
|
|
(593
|
)
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
Loss before non-controlling interest in loss of consolidated entity
|
|
|
(22,013
|
)
|
|
|
(20,194
|
)
|
|
|
(1,819
|
)
|
Non-controlling interest in loss of consolidated entity
|
|
|
9,311
|
|
|
|
|
|
|
|
9,311
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,702
|
)
|
|
$
|
(20,194
|
)
|
|
$
|
7,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.94
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Revenue, cost of sales and gross (loss) profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
Amount
|
|
|
of Revenue
|
|
|
Amount
|
|
|
of Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
Production revenue
|
|
$
|
|
|
|
|
0
|
%
|
|
$
|
4,941
|
|
|
|
22
|
%
|
|
$
|
(4,941
|
)
|
|
|
(100
|
)%
|
Library revenue
|
|
|
13,003
|
|
|
|
100
|
%
|
|
|
17,280
|
|
|
|
78
|
%
|
|
|
(4,277
|
)
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
13,003
|
|
|
|
100
|
%
|
|
|
22,221
|
|
|
|
100
|
%
|
|
|
(9,218
|
)
|
|
|
(41
|
)%
|
Cost of sales
|
|
|
13,438
|
|
|
|
103
|
%
|
|
|
17,578
|
|
|
|
79
|
%
|
|
|
(4,140
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
$
|
(435
|
)
|
|
|
(3
|
)%
|
|
$
|
4,643
|
|
|
|
21
|
%
|
|
$
|
(5,078
|
)
|
|
|
(109
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased $9.2 million, or 41%, to $13.0 million during the three months ended
March 31, 2009 from $22.2 million during the same period in 2008.
There was no production revenue during the three months ended March 31, 2009, a decrease of
$4.9 million compared to the same period in 2008. In the three months ended March 31, 2009, there
were no original MFT movies or original mini-series delivered, while five MFT movies were delivered
during the three months ended March 31, 2008. We significantly
slowed down our production activity in the fourth quarter of 2008 due to the difficult economic environment and did not begin any
films for the 2009 slate. Film production activity did increase during the first quarter and we
are on track to deliver approximately 35 films in 2009, with the majority of these films to be
delivered in the third and fourth quarters.
Library revenue decreased $4.3 million to $13.0 million in the three months ended March 31,
2009 from $17.3 million during the comparable period in 2008. The decrease of approximately 25%
primarily resulted from slow down in sales activity during the fourth quarter of 2008. Library
revenue is recognized based upon when the window for a particular film becomes open and available
for a network to air. Sales made in one quarter often are not recognized as revenue until
subsequent quarters due to this issue. Also contributing to the decrease was a $1.5 million
reduction in revenue related to the distribution of programming on ION during the three months
ended March 31, 2009 compared to the same period in the prior year as a result of a weaker
advertising market.
Cost of sales decreased $4.1 million to $13.4 million during the three months ended March 31,
2009 from $17.6 million during the same period of 2008. Cost of sales as a percentage of revenue
increased to 103% during the three months ended March 31, 2009 from 79% during the same period of
2008. Cost of sales is comprised of film cost amortization, certain distribution expenses and
amortization of minimum guarantee payments made to ION. While film cost amortization as a
percentage of revenue was slightly higher in 2009 than in 2008 (see discussion below), the gross
loss during the three months ended March 31, 2009 was primarily a result of the reduction in
revenue recognized in the three months ended March 31, 2009 and the fact that the distribution
expenses and ION minimum guarantee expense are not driven by revenue recognition.
Film cost amortization as a percentage of revenue was 63% during the three months ended March 31,
2009 compared to 59% during the same period of 2008. The average amortization rate on library
revenue was higher than in 2008 due to the mix of films for which revenue was recognized in each
period. Amortization is on a film-by-film basis and, on average, the films for which revenue was
recognized during the three months ended March 31, 2009 had higher rates of amortization than those
in the same period of 2008. It should be noted that while the rate of margin on library revenue
recognized in the quarter slipped slightly, due to the mix of films, the Company has no reason to
believe that the full year margin on the 2009 slate and library product will not be consistent with prior
years.
Other cost of goods sold were slightly higher during the three months ended March 31, 2009 as
compared to the same period of 2008 due to an increase in costs associated with our ION agreement,
including the amortization of minimum guarantee payments made to ION. The increase in amortization
of the minimum guarantee payments is due to an increase in required payments during the second year
of the agreement with ION.
13
Other costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Increase/
|
|
%Increase/
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Decrease)
|
|
(Decrease)
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
10,966
|
|
|
$
|
12,889
|
|
|
$
|
(1,923
|
)
|
|
|
(15
|
)%
|
Amortization of intangible assets
|
|
|
314
|
|
|
|
357
|
|
|
|
(43
|
)
|
|
|
(12
|
)%
|
Fees to related parties
|
|
|
|
|
|
|
150
|
|
|
|
(150
|
)
|
|
|
(100
|
)%
|
Selling, general and administrative expenses decreased $1.9 million to $11.0 million in the
three months ended March 31, 2009, from $12.9 million in the same period in 2008. During the three
months ended March 31, 2008, we incurred approximately $2.8 million of costs associated with
severance agreements. Similar costs were not incurred during the three months ended March 31, 2009.
Although weve begun to see benefits from our fourth quarter 2008 decision to reduce our overhead
costs, we also incurred certain expenses during the three months ending March 31, 2009 related to
operating as public company which were not incurred in the first quarter of 2008.
Interest expense, net
Interest expense, net decreased $2.1 million to $9.6 million for the three months ended March
31, 2009 from $11.8 million during the comparable period in 2008. The decrease in interest expense
is largely due to lower average interest rates during the three months ended March 31, 2009 as
compared to the comparable period of 2008 resulting from the reductions in the benchmark interest
rates (i.e. LIBOR). The average interest rate during the three months ended March 31, 2009 was
4.5%, compared to 6.4% during the comparable period of 2008. Also contributing to the decrease in
interest expense, net were lower weighted average debt balances outstanding during the three months
ended March 31, 2009 compared to 2008. During the three months ended March 31, 2009, we had an
average debt balance of $576.8 million compared to $673.2 million during the comparable period of
2008. Partially offsetting the reduction in interest rates and weighted average debt outstanding
was an increase in interest expense recorded in connection with our interest rate swap contracts
resulting from the aforementioned reduction in LIBOR. Approximately $3.4 million in interest
expense was recorded in connection with our interest rate swap contracts during the three months
ended March 31, 2009, compared to $1.3 million in the three months ended March 31, 2008.
Other (expense) income, net
Other (expense) income, net primarily represents realized foreign currency (losses) gains
resulting from the settlement of customer accounts denominated in foreign currencies. For the three
months ended March 31, 2009, we realized a foreign currency loss of $695,000 as compared to a
foreign currency gain of $887,000 during the three months ended March 31, 2008.
Income tax benefit (provision)
The income tax benefit (provision) for the three month periods ended March 31 is related to
the pre-tax loss/income of our corporate subsidiary and to foreign taxes related to license fees
from customers located outside the United States. No tax benefit has been provided for RHI Inc.s
interest in the net loss because insufficient evidence is available that would support that it is
more likely than not that we will generate sufficient income during the year to utilize the net
operating loss generated by RHI Inc. in the three months ended March 31, 2009.
Net loss
The net loss for the three months ended March 31, 2009 was $(12.7) million, compared to
$(20.2) million for the three months ended March 31, 2008. The
reduction is the result of the non-controlling interest in loss of
consolidated entity recorded in the three months ended March 31, 2009.
Liquidity and capital resources
Our credit facilities currently include: (i) two first lien facilities, a $175.0 million term
loan and a $350.0 million revolving credit facility; and (ii) a $75.0 million senior second lien
term loan. As of March 31, 2009, all of our debt was variable rate and totaled $576.8 million
outstanding. To manage the related interest rate risk, we have entered into interest rate swap
agreements. As of March 31, 2009, we had floating to fixed interest rate swaps outstanding in the
notional amount of $435.0 million, effectively converting that amount of debt from variable rate to
fixed rate. The interest rate swaps were amended in April 2009 (refer to footnote
14
7 of our unaudited condensed consolidated financial statements) which will result in significant cash
interest savings over the next twelve months. As of March 31, 2009, we had $9.1 million of cash
compared to $22.4 million of cash at December 31, 2008. As of March 31, 2009, we had $19.8 million
available under our revolving credit facility, net of an outstanding letter of credit, subject to
the terms and conditions of that facility. The decrease in cash
reflects our production spending during the three months ended
March 31, 2009. Historically, we have financed our operations with funds
from operations, capital contributions from our owners and the use of credit facilities.
Additionally, from time-to-time, we may seek additional capital through the incurrence of debt, the
issuance of equity or other financing alternatives.
Our ability to meet our debt and other obligations and to reduce our total debt depends on our
future operating performance and on economic, financial, competitive and other factors. High levels
of interest expense could have negative effects on our future operations. Interest expense, which
is net of capitalized interest and includes amortization of debt issuance costs, totaled $9.6
million for the three months ended March 31, 2009. A substantial portion of our cash flow from
operations must be used to pay our interest expense and will not be available for other business
purposes.
Management is continually reviewing its operations for opportunities to adjust the timing of
expenditures to ensure that sufficient resources are maintained. The majority of our films are in
production in the summer months so that they can be delivered late in the third quarter and during
the fourth quarter. As such, the second half of the year is typically the period during the year
when our revolving credit facility is most fully drawn. We have the ability to manage the timing
and related expenditures of certain of these productions. The timing surrounding the commencement
of production of movies and mini-series is the most significant item we can alter in terms of
managing our resources.
For example, we have asked our production partners to finance a significant portion of the
cost of each new production without short-term financial support from us. If our production
partners cannot finance a substantial portion of a films cost through the use of new or existing
credit facilities of their own, we may not develop or produce that film. See Risk Factors Risks
related to our business Our focus on managing our resources in the most efficient manner may
result in a reduction in our production slate in our Annual Report on Form 10-K for the year ended
December 31, 2008, which was filed with the SEC on March 5, 2009.
We believe our cash on hand, available borrowings under our revolving credit facility and
projected cash flows from operations will be sufficient to satisfy our financial obligations
through at least the next twelve months. However, a development that significantly decreases our
revenue or significantly increases our expenses or cash needs may result in the need for additional
financing. Given current credit and equity market conditions, our ability to attract additional
capital may be significantly more difficult than it has been in the past. See Risk Factors
Risks related to our business Our substantial indebtedness could adversely affect our financial
health and prevent us from fulfilling our obligations under our existing senior secured credit
facilities in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed
with the SEC on March 5, 2009.
The chart below shows our cash flows for the three months ended March 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2009
|
|
2008
|
|
|
(Successor)
|
|
(Predecessor)
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(13,254
|
)
|
|
$
|
(10,140
|
)
|
Net cash used in investing activities
|
|
|
(26
|
)
|
|
|
(39
|
)
|
Net cash provided by financing activities
|
|
|
|
|
|
|
19,320
|
|
Cash (end of period)
|
|
|
9,093
|
|
|
|
10,548
|
|
Operating activities
Cash used in operating activities in the three months ended March 31, 2009 was $13.3 million,
and reflects 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. In the three months ended March 31, 2009,
$10.7 million of interest was paid.
Cash used in operating activities in the three months ended March 31, 2008 was $10.1 million,
and reflects 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. In the three months ended March 31, 2008,
$12.7 million of interest was paid.
15
Investing activities
During the three months ended March 31, 2009 and 2008, we used $26,000 and $39,000,
respectively, in investing activities, reflecting the purchase of property and equipment.
Financing activities
During the three months ended March 31, 2009, there was no cash provided by financing
activities.
During the three months ended March 31, 2008, $19.3 million of cash was provided by financing
activities from borrowings under our credit facilities (net of repayments of $8.9 million),
principally to fund our operating activities.
Contractual obligations
The following table sets forth our contractual obligations as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
Off balance sheet arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments (1)
|
|
$
|
36,963
|
|
|
$
|
3,723
|
|
|
$
|
7,334
|
|
|
$
|
6,989
|
|
|
$
|
18,917
|
|
Obligations pursuant to ION Agreement (2)
|
|
|
25,450
|
|
|
|
23,450
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Purchase obligations (3)
|
|
|
17,143
|
|
|
|
9,371
|
|
|
|
7,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,556
|
|
|
|
36,544
|
|
|
|
17,106
|
|
|
|
6,989
|
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations reflected on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations (4)
|
|
|
576,789
|
|
|
|
|
|
|
|
17,500
|
|
|
|
484,289
|
|
|
|
75,000
|
|
Accrued film production costs (5)
|
|
|
71,193
|
|
|
|
58,271
|
|
|
|
12,922
|
|
|
|
|
|
|
|
|
|
Other contractual obligations (6)
|
|
|
8,495
|
|
|
|
4,495
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656,477
|
|
|
|
62,766
|
|
|
|
32,422
|
|
|
|
486,289
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
736,033
|
|
|
$
|
99,310
|
|
|
$
|
49,528
|
|
|
$
|
493,278
|
|
|
$
|
93,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating lease commitments represent future minimum payment obligations on various long-term
noncancellable leases for office and storage space.
|
|
(2)
|
|
Obligations pursuant to the ION Agreement represent minimum guarantee payments associated
with our arrangement to provide programming to ION for its primetime weekend schedule.
|
|
(3)
|
|
Purchase obligation amounts represent contractual commitments to exclusively license the
rights in and to films that are not complete.
|
|
(4)
|
|
Debt obligations exclude interest payments and include future principal payments due on our
bank debt (see Note 7).
|
|
(5)
|
|
Accrued film production costs represent contractual amounts payable for the completed films
as well as costs incurred for the buy out of certain participations.
|
|
(6)
|
|
Other contractual obligations primarily represent commitments to settle various accrued
liabilities.
|
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.
16
Critical accounting policies and estimates
For a complete discussion of our accounting policies, see the information under the heading
Managements discussion and analysis of financial condition and results of operations Critical
accounting policies and estimates in our Annual Report on Form 10-K for the year ended December
31, 2008, which was filed with the SEC on March 5, 2009. We believe there have been no material
changes to the critical accounting policies and estimates disclosed in the Companys Form 10-K.
Recent accounting pronouncements
There are no recent accounting pronouncements that the Company has not yet adopted that will
have a material effect on the Companys financial statements. For a description of recent
accounting pronouncements adopted, see Note 3 Summary of Significant Accounting Policies in the
Notes to Unaudited Condensed Consolidated Financial Statements.
17
Item 3.
Quantitative and Qualitative Disclosures about Risk
Interest rate risk
We are subject to market risks resulting from fluctuations in interest rates as our credit
facilities are variable rate credit facilities. To manage the related risk, we enter into interest
rate swap agreements. As of March 31, 2009, we have swaps outstanding that total $435.0 million,
effectively converting that portion of debt from variable rate to fixed rate. The interest rate
swaps were amended in April 2009 (refer to footnote 7 of our unaudited condensed consolidated
financial statements).
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 (losses) gains have not been significant. Foreign exchange
(losses) gains for the three months ended March 31, 2009 and 2008 were $(695,000) and $887,000,
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. As
of March 31, 2009, we have an allowance for uncollectible accounts of $3.5 million, which is
primarily related to two customers, Tele Munchen and Sogecable, whose payments owed to us are past
due.
Item 4.
Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) are effective, in all material respects, to ensure that
information we are required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
In addition, no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has
materially affected, or is likely to materially affect, our internal control over financial
reporting.
Part 2. Other Information
Item 1.
Legal Proceedings
None.
Item 1a.
Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the
heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008,
which was filed with the SEC on March 5, 2009 There have been no material changes to the risk
factors as disclosed in the Companys Form 10-K.
18
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 quarter ended March 31, 2009.
Item 3.
Defaults upon Senior Securities
None.
Item 4.
Submissions of Matters to a Vote on Security Holders
None.
Item 5.
Other Information
None.
19
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.
|
20
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: May 6, 2009
|
By:
|
/s/
Robert A. Halmi, Jr
|
|
|
|
Robert A. Halmi, Jr.
|
|
|
|
President & Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
Date: May 6, 2009
|
By:
|
/s/
William J. Aliber
|
|
|
|
William J. Aliber
|
|
|
|
Chief Financial Officer
(Principal Accounting Officer)
|
|
21
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.
|
22
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