UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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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
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Commission File
No. 001-34102
RHI ENTERTAINMENT,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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36-4614616
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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1325 Avenue of Americas,
21st
Floor New York, New York
(Address of Principal
Executive Offices)
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10019
(Zip Code)
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Registrants telephone number, including area code:
(212) 977-9001
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value
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NASDAQ Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of the registrants knowledge, in the definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting company
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(Do not check if a smaller reporting company)
Indicate by check whether the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes o
NO
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Based on the closing sales price of $3.19 per share on
June 30, 2009, the aggregate market value of the common
stock held by non-affiliates of the registrant was
$43,081,269 million. The number of shares outstanding of
the registrants common stock, par value $0.01 per share,
was 23,416,000 as of March 24, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2010
Annual Meeting of Stockholders are incorporated by reference
into Part III of this
Form 10-K.
RHI
ENTERTAINMENT, INC.
FORM 10-K
TABLE OF
CONTENTS
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AVAILABLE
INFORMATION
Our website address is www.rhitv.com. We make available
free of charge on the Investor Relations section of our website
(http://ir.rhitv.com)
our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed or
furnished with the Securities and Exchange Commission
(SEC) pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. We also make available through
our website other reports filed with or furnished to the SEC
under the Exchange Act, including our Proxy Statements and
reports filed by officers and directors under Section 16(a)
of that Act, as well as our Code of Business Conduct. We do not
intend for information contained in our website to be part of
this
Form 10-K.
Any materials we file with the SEC may be read and copied at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, DC, 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC.
In this report, except where the context requires otherwise,
references to: (1) RHI LLC refers to RHI
Entertainment, LLC, a Delaware limited liability company that is
the current operating company for our business, and is the sole
asset of RHI Entertainment Holdings II, LLC;
(2) Holdings II refers to RHI Entertainment
Holdings II, LLC, a Delaware limited liability company which
holds RHI LLC as its sole asset; (3) RHI,
RHI Inc., the Company, we,
us, and our refer to RHI Entertainment,
Inc., a Delaware corporation, and its consolidated subsidiaries,
including Holdings II and RHI LLC and their subsidiaries
and predecessor companies; (4) KRH refers to
KRH Investments LLC, a Delaware limited liability company, which
was a member of Holdings II until December 22, 2009,
when it received shares of RHI Inc. in consideration for its
membership interests in Holdings II; (5) Kelso
refers to Kelso & Company L.P. a Delaware limited
partnership, an affiliate of the principal investor in KRH;
(6) Initial Predecessor Company refers to
Hallmark Entertainment, LLC, our operating company prior to
January 12, 2006 (for purposes of our financial data);
(7) Predecessor Company refers to RHI LLC, our
operating company from January 12, 2006 (inception) to
June 22, 2008 (for purposes of our financial data);
(8) Successor Company refers to RHI Inc. from
June 23, 2008 (the date of the its initial public offering)
(9) Hallmark Cards refers to Hallmark Cards
Inc., a Delaware corporation; (10) Crown Media
refers to Crown Media Holdings, Inc., a Delaware corporation and
a subsidiary of Hallmark Cards; and (11) Hallmark
Entertainment refers to Hallmark Entertainment LLC, a
Delaware limited liability company, its consolidated
subsidiaries and the predecessor company of RHI LLC before it
was acquired and renamed in January 2006.
FORWARD-LOOKING
STATEMENTS
This report includes forward-looking statements. All statements
other than statements of historical facts contained in this
report, including statements regarding our future results of
operations and financial position, business strategy and plans
and our objectives for future operations, are forward-looking
statements. The words believe, may,
will, seek, estimate,
plan, continue, anticipate,
intend, expect and similar expressions
are intended to identify forward-looking statements. We have
based these forward-looking statements largely on our current
expectations and projections about future events and financial
trends that we believe may affect our financial condition,
results of operations, business strategy, short-term and
long-term business operations and objectives, ability to meet
our working capital needs, capital expenditures and other
liquidity needs, our ability to maintain compliance with the
covenants contained in the agreements governing our indebtedness
and financial needs. These forward-looking statements are
subject to a number of risks, uncertainties and assumptions,
including those described in Risk factors. In light
of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially
and adversely from those anticipated or implied in the
forward-looking statements.
Moreover, we operate in a competitive and rapidly changing
market environment. New risks emerge from time to time. It is
not possible for our management to predict all risks, nor can we
assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements we may make. Before investing in our
common shares,
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investors should be aware that the occurrence of the risks,
uncertainties and events described in the section entitled
Risk factors and elsewhere in this report could have
a material adverse effect on our business, financial condition
and results of operations.
You should not rely upon forward-looking statements as
predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee that the future results, levels
of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to update publicly any
forward- looking statements for any reason after the date of
this report or to conform these statements to actual results or
to changes in our expectations.
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PART I
Overview
We develop, produce and distribute new
made-for-television
movies, mini-series and other television programming worldwide.
We are the leading provider of new long-form television content,
including domestic
made-for-television,
or MFT, movies and mini-series. We also selectively produce new
episodic series programming for television. In addition to our
development, production and distribution of new content, we own
an extensive library of existing long-form television content,
which we license primarily to broadcast and cable networks
worldwide.
Our business is comprised of the licensing of new film
production and the licensing of existing content from our film
library in territories around the world. Licensing rights to our
film library generate contractual accounts receivable. The
contractual accounts receivable reflect license agreements we
have entered into with third parties for rights to our film
content in future periods.
Development
and production
Made-for-television
movies
Our MFT movie franchise focuses on the production of films with
dramatic, suspenseful, or more recently, action/thriller
storylines which are generally two broadcast hours in length.
With production costs of $1.0 to $2.0 million per broadcast
hour, our MFT movies limit our financial risk with their short
production cycles and pre-sales which typically recoup the
majority of our cost of production. In 2007, 2008 and 2009 our
pre-sales equaled 84%, 70% and 78% of our MFT movie production
costs, respectively. Historically, our pre-sale percentage has
been higher. The lower pre-sale percentage over the past two
years reflects the difficult economic conditions that were
confronted and specifically the significant drop in worldwide
advertising revenue. This decline put pressure on broadcast and
cable networks financial performance and resulted in
reduced spending on television programming, including our MFT
movies and mini-series.
MFT movies are ordered by broadcast and cable networks and have
become an integral part of the broadcast strategies of these
programmers. Networks license the rights to air films that meet
the characteristics of the networks genre and therefore
will appeal to their viewers. In 2009, we delivered multiple MFT
movies to the Hallmark Channel, Lifetime, Syfy and Spike TV.
Mini-series
Over more than 20 years, we have shaped the mini-series
industry with award winning and highly-rated releases like
Lonesome Dove, Gullivers Travels, Human Trafficking,
Mitch Alboms The Five People You Meet in Heaven, Tin Man
and Alice. A mini-series is typically four broadcast hours
in length and production costs are approximately $2 to
$5 million per broadcast hour of content. Typically,
mini-series are ordered by broadcast and cable networks on a
picture-by-picture
basis. In 2008 and 2009, the pre-sale percentage for our
mini-series were 80% and 72%, respectively, of our production
costs for mini-series, reflecting the lower sales activity
resulting from the general economic slowdown which began in the
fourth quarter of 2008 and the worldwide decline in advertising
revenue as noted above.
Episodic
series
In addition to MFT movies and mini-series, we have selectively
produced episodic series programming in the past for broadcast
and cable television if pre-ordered by our customers. The
initial order for a television series is typically 13 episodes
and a customer will generally increase its initial order to 22
episodes if the series is generating high ratings for such
customer. We do not undertake production of a series unless a
portion of the production costs are covered by the initial
networks license fee. We may selectively engage in series
development in the future.
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Long-form
television library
With more than 1,000 titles, comprising over 3,500 broadcast
hours of long-form television programming, our library is an
important source of contractual cash flow, revenue and growth
for our business. Our film library is enhanced each year with
the addition of new MFT movies, mini-series and other television
programming as their initial licenses expire. These new
productions add value to the film library and ensure that it
remains current. We believe that the talent and recognizability
of the actors and actresses starring in our productions, along
with the subject matter, result in our library having a long
shelf life. Classic MFT movies and mini-series such as
Cleopatra, Alice In Wonderland, Call of the
Wild, Dinotopia, Arabian Nights,
Merlin, The Odyssey and The Lion in Winter
are examples of our library content which have been
repeatedly licensed to our customers over the last several years.
The
production, marketing and distribution of our films
Project
development
Our production process begins in project development, which
requires relatively low expenditures to acquire the rights and
commission new scripts for potential films. Projects are
developed in-house or are commissioned by broadcast and cable
networks. A portion of development we undertake each year
(typically MFT movies) is commissioned and paid for by broadcast
and cable networks. As part of this process, we work with both
our internal staff and outside parties to develop a script and
formulate a budget for the film.
For the development of some mini-series, and those projects not
commissioned by networks, we have a small internal staff that
reviews scripts and sources project ideas. Once the management
team has targeted projects to further develop, produce and
distribute, a pre-sale process is initiated to determine the
interest of the potential licensee and the feasibility of
bringing the project to fruition. Broadcast and cable networks
are approached based on the subject matter and genre of a film,
with the intention of maximizing audience appeal.
Prior to beginning full production, senior management reviews
and approves all projects to determine economic viability (in a
process called greenlighting). During greenlighting sessions, we
review all key aspects of a film project including total
production budget as compared to the aggregate fees expected
from initial license contracts or expected foreign license
distribution, production incentives and subsidies, and ancillary
distribution opportunities such as home video sales.
Licensing
The first step in the sale process is negotiating an initial
license with broadcast or cable networks. A network pays to
acquire the right to air our content for a defined period of
time. This period generally ends after a specific number of
telecasts, but generally not later than seven years (depending
on the type of content) after delivery. Our general practice is
to not begin production of a MFT movie or mini-series without
securing an initial license agreement. Most of our existing
license agreements are not tied to ratings performance when
aired, nor is there a penalty if ratings for a particular
project do not meet expectations. See Risk
Factors Risks related to our business
Our success depends on our ability to develop, produce and
distribute quality MFT movies and mini-series that achieve
acceptance from our target audiences.
The exhibition rights licensed to a domestic licensee are
generally limited to the United States and its territories. We
usually are able to simultaneously license the same programming
to international broadcast and cable networks. We have long-term
relationships with broadcast and cable networks and distributors
in many countries including the United Kingdom, Germany, Spain,
France, Italy and Australia. Due to our long history of
delivering content that satisfies international market demand,
many of our international customers commit to licensing all or
part of our annual production slate of MFT movies and
mini-series prior to production. Fees from these foreign
licensing arrangements, together with domestic license fees,
generally equal or exceed the costs associated with these
productions. Foreign licensees acquire the exclusive right to
air our content for typically two to six years within their
specific country of operation. Generally, we will not begin
production of a MFT movie, mini-series or other television
programming unless a significant number of these foreign license
agreements are secured or are in negotiation.
The licensing process does not end when we secure the initial
domestic and foreign licenses. If the initial domestic licensee
is a broadcast network, we will also negotiate an exclusive
subsequent license with a cable
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network. Broadcast and cable networks also license from us the
second and third cycles of our film content. Internationally, we
will often license successive second and third cycles of our
film product. Similarly, we license our content to distribution
platforms such as home video.
Production
When the initial license agreement is secured, the production
process begins. Although we have key employees who evaluate
certain aspects of a project, we rely on third party production
companies to produce our MFT movies, mini-series and other
television programming. In consultation with RHI management,
these third parties are responsible for hiring key talent,
including actors, directors, writers and film production crews.
In consultation with our senior management team, these third
party production companies also determine the location of
filming, finalize the production budget and schedule.
MFT movies are generally filmed in 25 to 30 days, while
mini-series have a production timeline of approximately 40 to
60 days. All programming is filmed using either 35
millimeter or high definition cameras, enabling easy adoption to
various distribution platforms.
Upon completion of filming, the core visuals and dialogue are in
place and post-production commences. Post-production can include
scene editing, addition of special effects and sound effects,
and addition of a musical score. A final version of the project
is then delivered to the initial licensee. The initial licensee
may then air the film at will, in accordance with its licensing
agreement. Further, the film is simultaneously delivered to our
foreign licensees.
Production
incentives and subsidies
Production incentives and subsidies for film productions are
widely used throughout the television industry and are important
in helping to offset production costs. Many foreign countries,
the United States and individual states have programs designed
to attract production. Production incentives and subsidies are
used to reduce production costs and such incentives take
different forms, including direct government rebates, sale and
leaseback transactions or transferable tax credits. We have
benefited from these incentives and subsidies in Canada as well
as in Germany, the United Kingdom, Ireland, Hungary, South
Africa, Australia, New Zealand and the United States. In many
cases, co-production treaties between countries allow us to
receive production incentives and subsidies from more than one
country with respect to a single production. See Risk
factors We have accessed a variety of film
production incentives and subsidies offered by foreign countries
and the United States which reduce our production costs. If
these incentives and subsidies become less accessible to us or
our production partners, or if they are eliminated, modified,
denied or revoked for any reason, our production costs could
substantially increase.
Talent
Over the years, we have been able to attract a highly talented
and diverse group of actors and actresses to star in our MFT
movies, mini-series and other television programming. Our
programming has included such actors as Jon Voight, Robert
Duvall, Sigourney Weaver, Glenn Close and Patrick Stewart.
Recently, as we have produced more diversified content, we have
been able to attract actors such as Katherine Heigl, Sean Astin,
Mira Sorvino and Zooey Deschanel. We expect to continue engaging
well-known talented actors and actresses to star in our
productions without compromising our production costs and
operating budget.
Sales
and distribution
Our sales force continuously makes presentations to broadcast
and cable networks worldwide in order to generate orders for
both our new productions and existing content from our film
library. Our content is licensed on either an individual or
multi-picture basis, depending on the needs of the distribution
platform. Recent sales have included several multi-film
agreements for licensing of new content. The majority of our new
productions automatically qualify for inclusion in several of
our existing international distribution agreements with European
broadcast and cable networks, providing secured foreign market
distribution.
Twice a year, we attend large sales conferences in Cannes,
France. These conferences bring together buyers and sellers from
around the world. We produce various marketing and sales
materials for these events and host numerous meetings with
prospective clients.
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Customers
Our customers include a variety of domestic broadcast and cable
networks, such as ABC, NBC, CBS, the Hallmark Channel, Lifetime,
Syfy and Spike TV, as well as large international broadcasters,
including Antena-3, M6, PROSIEBEN-SAT1, Seven Network, Sky and
TF1. In addition, our on-going new production and extensive
library provide us with the ability to exploit new business
opportunities beyond our traditional distribution channels.
Seasonality
Our revenue and operating results are seasonal in nature. A
significant portion of the films that we develop, produce and
distribute are delivered to the broadcast and cable networks in
the second half of each year. Typically, programming for a
particular year is ordered either late in the preceding year or
in the early portion of the current year. Planning and
production generally takes place during the spring and summer
and completed film projects are generally delivered in the third
and fourth quarters of each year. As a result, our first, second
and third quarters of our fiscal year typically have less
revenue than the fourth quarter of such fiscal year.
Importantly, the results of one quarter are not necessarily
indicative of results for the next or any future quarter. See
Risk Factors Risks related to our
business Delays and changed delivery dates have had
a material impact on the timing of our revenue recognition and
receipt of cash, which has affected our financial results and
ultimately has decreased the value of our stock price.
2008
through 2009 Quarterly Revenues as a Percentage of
Total Revenue
Intellectual
property
Our most valuable assets are our intellectual property and other
legal rights to our film library, including our copyright
ownership and interests therein. We currently conduct an active
program to maintain and protect our intellectual property and
other legal rights in the United States and abroad including the
timely registration and recordation of our copyright interests
with the United States Copyright Office and our trademarks with
the United States Patent and Trademark Office. Copyright laws of
the United States and most other countries provide substantial
civil and criminal penalties for unauthorized duplication and
exhibition of our films. As necessary, we will take appropriate
and reasonable measures to secure, protect and maintain
copyright protection for all of our pictures under the laws of
the applicable jurisdictions.
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Many foreign countries are signatories to the Berne Convention,
and we, therefore, expect that our intellectual property rights
are protectable in those countries. However, certain other
foreign countries do not have laws which protect United States
holders of intellectual property rights equivalent to the laws
of the United States, and, therefore, our rights may be
difficult to enforce, or may be unenforceable in those countries.
Competition
The developing, producing and distributing of MFT movies,
mini-series and other television programming is a highly
competitive business. The most important competitive factors
include quality, subject matter and timeliness of delivery. Our
primary competitors in MFT movie content include Disney/ABC
International Television, CBS Paramount International
Television, Sony Pictures Television International and Warner
Brothers International Television Distribution. Similarly, there
are numerous companies that develop, produce and distribute
mini-series content. They are, among others, A&E
International, CBS Paramount International Television,
Disney/ABC International Television, HBO, NBC Universal
International Television Distribution and Warner Brothers
International Distribution.
Employees
As of December 31, 2009, we had 80 full-time employees
with 72 employed in the United States, six in the United Kingdom
and two in Australia. In addition, we have numerous independent
contractors and consultants in creative, marketing and
production areas.
Recent
Developments
Market conditions confronting the media and entertainment
industry have continued to be a challenge for us. The business
environment deteriorated substantially beginning in the fourth
quarter of 2008 and remained challenging throughout all of 2009.
Specifically, total revenue in 2009 declined significantly as
compared to prior years. This was primarily due to 2009 fourth
quarter sales activity falling dramatically short of our
expectations as well as fourth quarter revenue from the prior
year. As a result of the significant weakening of our financial
position, results of operations and liquidity in 2009, we are
currently in default of certain covenants of our senior secured
facilities and in discussions with our lenders regarding a
restructuring of our senior secured credit facilities. However,
we can provide no assurance that we will be able to successfully
restructure our debt obligations. If we are unsuccessful in
restructuring our debt obligations or unable to come to a
consensual agreement with our creditors, we will likely be
required to seek protection under Chapter 11 of the
U.S. Bankruptcy Code. We have retained the services of
outside advisors to assist us in instituting and implementing a
restructuring transaction. See Risk Factors
Risks related to our business We expect to pursue a
strategic restructuring, refinancing or other transaction in
order to preserve our long-term financial condition, and current
market conditions could limit our ability to consummate such a
transaction, which would likely have a material adverse effect
on our financial condition.
Even if we are successful in coming to a consensual agreement
with some or all of our creditors, any such restructuring would
likely involve a filing under Chapter 11 of the
U.S. Bankruptcy Code and any such filing would result in
our current equityholders receiving little or no continuing
interest in the Company. See Risk Factors
Risks related to investments in our common stock If
we seek protection under Chapter 11 of the
U.S. Bankruptcy Code, all of our outstanding shares of
capital stock would likely be cancelled and holders of our
capital stock would not be entitled to any payment in respect of
their shares. The accompanying financial statements have
been prepared on a going concern basis, which contemplates
continuity of operations, realization of assets, and liquidation
of liabilities in the ordinary course of business, and do not
reflect adjustments that might result if the Company were unable
to continue as a going concern. In addition, any filing under
Chapter 11 of the U.S. Bankruptcy Code will likely
result in substantial changes to amounts recorded in our
financial statements for periods after the date of such filing.
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In connection with the discussion above, certain recent events,
which are summarized below, have occurred over the last several
months.
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We have incurred net losses from operations and net operating
cash outflows in each of the past four years and at
December 31, 2009 have an accumulated deficit of
$287.3 million. Our inability to borrow under our revolving
credit facility, coupled with other factors described above, has
resulted in liquidity constraints and an inability to pay some
of our obligations as they come due. The liquidity constraints
are also preventing us from making certain expenditures to
continue producing and acquiring as many films as we could have
otherwise. As a result, we decreased our production slate for
2009, reduced our selling, general and administrative expenses
through cost-cutting measures that included, among others, job
reductions and we expect to take additional steps to preserve
liquidity. However, despite any additional cost-saving steps we
may implement, unless we successfully restructure our debt
and/or
obtain other sources of liquidity and generate sufficient
revenue and cash flows from operations, we will not have the
resources to continue as a going concern. There can be no
assurance that we will be successful in such endeavors. The
report of our independent registered public accounting firm
included elsewhere in this Annual Report contains an explanatory
paragraph expressing substantial doubt regarding our ability to
continue as a going concern.
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As a result of the foregoing, we engaged Rothschild, Inc. as a
financial advisor in the fourth quarter of 2009, and are in the
midst of in-depth discussions with our first and second lien
lenders with respect to restructuring our indebtedness and
capital structure. We expect these discussions to likely result
in a significant or complete dilution of our existing
equityholders interest through an issuance of preferred
stock or common stock to some or all of our lenders
and/or
creditors. It is also possible that these discussions could
result in a sale of some or all of the Companys assets for
less than their book value. No assurance can be given as to
whether these discussions will be successful. If we are not
successful in restructuring our debt obligations or unable to
come to a consensual agreement with our creditors, we will
likely be required to seek protection under Chapter 11 of
the U.S. Bankruptcy Code. Even if we are successful in
coming to a consensual agreement with some or all of our
creditors, any such restructuring would likely involve a filing
under Chapter 11 of the U.S. Bankruptcy Code and any
such filing under Chapter 11 of the U.S. Bankruptcy
Code would result in our current equityholders receiving little
or no continuing interest in the Company.
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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.
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On December 23, 2009, we entered into a forbearance
agreement with the first lien agent and lenders holding a
majority in principal amount of the loans under our first lien
credit facilities and swap counterparties. That forbearance
agreement was subsequently amended and extended on
January 22, 2010 and again on March 5, 2010. On
February 12, 2010, we entered into a separate forbearance
agreement with the second lien agent and lenders holding a
majority in principal amount of the loans under the second lien
credit facility, which was subsequently amended and extended on
March 5, 2010. Under each of these forbearance agreements,
the agents and lenders (and in the case of the first lien
forbearance, the swap counterparties) have agreed to forbear
from exercising certain of their rights and agreed to waive some
of the existing or prospective defaults until March 31,
2010 unless such forbearance agreement is earlier terminated due
to further unanticipated defaults or other factors. The
forbearance agreements are short term arrangements that allow us
to work with the agents and lenders under our senior secured
credit facilities to develop a longer-term strategy for
restructuring our liabilities. Under the forbearance agreements,
we agreed, among other things, that:
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we cannot borrow additional loans or issue additional letters of
credit under the credit agreement governing our first lien
credit facility;
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default interest of 2% will accrue on all loans under the credit
agreement governing our first and second lien credit facilities
and on the swap settlement amounts, in addition to the rate of
interest otherwise applicable;
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certain covenants under the credit agreement governing our first
lien credit facility (including those relating to investments,
restricted payments, permitted liens, asset sales, subsidiary
guarantors, control agreements, and cash expenditures and
distributions) will become more restrictive;
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we will provide additional information to the lender and their
counsel, including among other things a cash flow schedule that
is updated weekly;
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we will limit the amounts and timing of our cash expenditures to
the amounts itemized in the cash flow schedule, subject to a
variance;
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we will maintain a minimum cash balance; and
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we will provide monthly and
year-to-date
financial information and an updated draft valuation report of
our film library.
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If we are not able to cure all defaults or enter into a new
forbearance agreement for each of our credit facilities by
March 31, 2010 (or any earlier date that the forbearance
agreements may be terminated), then the agents and lenders under
the respective credit facilities and swap counterparties may
exercise all of their rights and remedies, including the
acceleration of the loans and foreclosure on collateral. Upon
the occurrence of such events, the Company would likely avail
itself of the protection under Chapter 11 of the
U.S. Bankruptcy Code, which would result in our current
equityholders receiving little or no continuing interest in the
Company.
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On December 24, 2009, we received a letter from The NASDAQ
Stock Market (NASDAQ) notifying us that we are currently not in
compliance with certain NASDAQ listing requirements,
specifically the market value of publicly held shares and the
minimum bid price. We have a grace period of 180 days to
regain compliance, but we currently have not met the
requirements to achieve compliance and can provide no assurance
the we will achieve compliance. See Risk
Factors Risks Related to an investment in our common
stock We are currently not in compliance with the
continued listing requirements of NASDAQ, which will likely
result in the delisting of our common stock if we cannot regain
compliance.
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We review the ultimate revenues associated with our films. This
analysis considers various data points, including current market
conditions, library sales activity, pricing, the delivery of our
annual film slate and the results of the annual independent
valuation of the unsold rights to our film library. This
assessment, performed as of December 31, 2009, was
completed in February of 2010. As a result of the continued weak
market conditions, sales data, pricing and other factors present
during the fourth quarter of 2009 and into 2010, as well as the
significant decline in the annual independent valuation of the
unsold rights to our film library, this analyses resulted in a
significant reduction of the ultimate revenues for the majority
of films in our library. In addition, based upon a qualitative
analysis and assessment of recent sales activity, we now assume
that there will be no future revenues for certain films. A
reduction in the ultimate revenue associated with a film results
in a higher rate of amortization over that films remaining
accounting life and causes a reduction in that films
prospective profit margin. The reduction in ultimate revenues
resulted in a decrease in the fair value of films to an amount
below their net book value. As a result, impairment charges were
recorded totaling $338.9 million during the year ended
December 31, 2009 to reduce the net book value of those
films to an amount approximating their fair value. In addition,
the reduction in ultimate revenues resulted in a
$1.1 million increase to film cost amortization for the
year ended December 31, 2009 related to films for which
revenue has been recognized during the period. Refer to
Note 6 of our consolidated financial statements included
herein.
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As referenced above, the annual third party valuation report of
our film library required by our lenders under our first lien
credit facility (the Valuation Report) was completed in March of
2010. The Valuation Report indicates a material and substantial
reduction of approximately 50% of the non-contracted value of
the films in our film library at December 31, 2009 as
compared to the third party valuation at December 31, 2008
using similar methodologies. The decrease in the value of our
film library directly and materially reduces the borrowing base
governing the revolving credit facility under the First Lien
Credit Agreement. This result of the Valuation Report is also a
contributing factor our annual assessment of ultimate revenues.
7
Risks
related to our business
You should carefully consider each of the following risks and
all of the other information set forth in this Annual Report on
Form 10-K.
Based on the information currently known to us, we believe that
the following information identifies the most significant risk
factors affecting our company. However, the risks and
uncertainties our company faces are not limited to those
described below. Additional risks and uncertainties not
presently known to us or that we currently believe to be
immaterial may also adversely affect our business.
We are
currently in default of our First Lien and Second Lien Credit
Agreements and are in negotiations with our lenders to
restructure our debt, which will likely result in significant
dilution of our equity holders or extinguishment of our
equityholders interest in our company. We expect to pursue
a strategic restructuring, refinancing or other transaction in
order to preserve our long-term financial condition, and current
market conditions could limit our ability to consummate such a
transaction, which would likely have a material adverse effect
on our financial condition.
Our inability to borrow under our revolving credit facility,
coupled with other factors described above, is causing liquidity
constraints resulting in an inability to pay some of our
obligations as they come due. The liquidity constraints are
preventing us from making certain expenditures relating to new
productions and acquisition of other content that would
otherwise enhance our business. We decreased our production
slate for 2009, reduced our selling, general and administrative
expenses through cost-cutting measures that included among
others, job reductions and we expect to take additional steps to
preserve liquidity. However, despite any additional cost-saving
steps we may implement, unless we successfully restructure our
debt and/or
obtain other sources of liquidity, we do not have the resources
to continue as a going concern.
As a result of the foregoing, we engaged Rothschild, Inc. as a
financial advisor in the fourth quarter of 2009, and are in the
midst of in depth discussions with our first and second lien
lenders with respect to restructuring our indebtedness and
capital structure. We expect these discussions to likely result
in a significant or complete dilution of our existing
equityholders through an issuance of preferred stock or common
stock to some or all of our lenders
and/or
creditors. It is also possible that these discussions could
result in a sale of some or all of the Companys assets for
less than their book value. No assurance can be given as to
whether these discussions will be successful. If we are
unsuccessful in restructuring our debt obligations or unable to
come to a consensual agreement with our creditors, we will
likely be required to seek protection under Chapter 11 of
the U.S. Bankruptcy Code. Even if we are successful in
coming to a consensual agreement with some or all of our
creditors, any such restructuring would likely involve a filing
under Chapter 11 of the U.S. Bankruptcy Code and any
such filing would result in our current equityholders receiving
little or no continuing interest in the Company.
The
report of our independent registered public accounting firm
contains an explanatory paragraph expressing substantial doubt
about our ability to continue as a going concern, which could
adversely affect our relationships with our customers and
production partners.
Because of our limited capital resources and current
restructuring process described above, coupled with a history of
losses and negative cash flows, our independent registered
public accounting firm has included an explanatory paragraph in
its report on our consolidated financial statements found
elsewhere in this Annual Report that expresses substantial doubt
regarding our ability to continue as a going concern (the
Going Concern Opinion). The accompanying financial
statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets,
and liquidation of liabilities in the ordinary course of
business, and do not reflect adjustments that might result if
the Company were unable to continue as a going concern. The
Going Concern Opinion could adversely affect our relationships
with our customers and production partners. If any of these
customers or production partners lose confidence in our ability
to perform as a going concern subsequent to a restructuring of
our capital structure, our future results of operations could be
adversely impacted.
8
Our
substantial indebtedness and failure to comply with the
financial covenants contained in the credit agreements governing
our senior secured credit facilities will likely have a
continued material adverse affect on our operating results and
financial condition.
High levels of interest expense continue to have negative
effects on our operations. As of December 31, 2009, all of
our debt was variable rate and totaled $609.2 million
outstanding. To manage the related interest rate risk, we
entered into interest rate swap agreements. Until
December 23, 2009, we had floating to fixed interest rate
swaps outstanding in the notional amount of $435.0 million,
effectively converting that amount of debt from variable rate to
fixed rate. The interest rate swaps were amended in April 2009
and terminated on December 23, 2009 (refer to Note 11
of our consolidated financial statements included herein). As of
December 31, 2009, we had $25.1 million cash on hand.
See Management Discussion & Analysis
Liquidity and Capital Resources.
We are currently in default under both our first lien and second
lien senior secured credit facilities. On December 23,
2009, we acknowledged defaults on the first lien facilities
resulting from (x) an over-advance on our revolver due to a
reduction in our borrowing base and consequent failure to make
mandatory prepayment to cure, and (y) a failure to pay
settlement amounts payable and due upon the termination of our
interest rate swaps on December 22, 2009. On
February 12, 2010, we acknowledged a default on the second
lien facility resulting from our failure to make a scheduled
interest payment.
On December 23, 2009, we entered into a forbearance
agreement with the first lien agent and lenders holding a
majority in principal amount of the loans under our first lien
credit facilities and swap counterparties. The forbearance
agreements are short term arrangements that allow us to work
with the agents and lenders under our senior secured credit
facilities to develop a longer-term strategy for restructuring
our liabilities. The forbearance agreement executed on
December 23, 2009, has subsequently been amended and
extended on January 22, 2010 and again on March 5,
2010. On February 12, 2010, we entered into a separate
forbearance agreement with the second lien agent and lenders
holding a majority in principal amount of the loans under the
second lien credit facility, which was subsequently amended and
extended on March 5, 2010. Under each of these forbearance
agreements, the agents and lenders (and in the case of the first
lien forbearance, the swap counterparties) have agreed to
forbear from exercising certain of their rights and agree to
waive some of the existing or prospective defaults until
March 31, 2010 unless the forbearance agreement is earlier
terminated due to further unanticipated defaults or other
factors.
If we are not able to cure all defaults or enter into a new
forbearance agreement for each of our credit facilities by
March 31, 2010 (or any earlier date that the forbearance
agreements may be terminated), then the agents and lenders under
the respective credit facilities and swap counterparties may
exercise all of their rights and remedies, including
acceleration of the loans and foreclosure on collateral. Upon
the occurrence of such events, the Company would likely avail
itself of the protection under Chapter 11 of the
U.S. Bankruptcy Code, which would result in our current
equityholders receiving little or no continuing interest in the
Company.
We
have incurred net losses in the past and currently expect to
experience continued net losses in the future.
We have incurred net losses in the past largely due to
amortization of film production costs, inclusive of impairment
charges, and interest expense on our outstanding indebtedness.
During the year ended December 31, 2009, impairment charges
were recorded for the majority of our films totaling
$338.9 million to reduce the net book value for those films
to an amount approximating their fair value and film cost
amortization was increased $1.1 million related to films
for which revenue has been recognized during the period as a
result of the reduction in (and elimination of) ultimate
revenues from our annual review of ultimate revenues. During the
year ended December 31, 2008, a non-cash impairment charge
of $59.8 million with respect to goodwill was recorded as
the result of our stock price declining significantly to a level
implying a market capitalization below our book value. During
the year ended December 31, 2007, a loss on extinguishment
of debt was recorded with respect to the refinancing of our
credit facilities.
We
have incurred accelerated film amortization and significant
write-offs due to changes in our estimates of total revenue for
each film.
We use the individual film-forecast-computation method to
amortize our capitalized film production costs. We are required
to amortize capitalized film production costs over the expected
revenue streams as we recognize
9
revenue from each of the associated films. The amount of film
production costs that will be amortized depends on the amount of
ultimate revenue we expect to receive from each film. If
estimated ultimate revenue declines, amortization of capitalized
film costs will be accelerated and future margins may be lower
than expected. If estimated ultimate revenue is not sufficient
to recover the unamortized film production costs, the
unamortized film production costs will be written down to fair
value. Furthermore, we base our estimates of revenue on a
variety of information, including recent sales data from
domestic and major international licenses and other sources. If
the estimates are not correct or are subsequently revisited, and
our internal controls over such information do not detect such
an error or the revisions are not applied in a timely manner,
the amount of film production cost amortization that we record
could be incorrect, which could result in fluctuations in our
earnings.
We review the ultimate revenues associated with our films. This
analysis considers various data points, including current market
conditions, library sales activity, pricing, the delivery of our
annual film slate and the results of the annual independent
valuation of the unsold rights to our film library. This
assessment reflecting ultimate revenues as of December 31,
2009, was completed in February of 2010. As a result of the
continued weak market conditions, sales data, pricing and other
factors present during the fourth quarter of 2009 and into 2010
as well as the significant decline in the annual independent
valuation of the unsold rights to our film library, this
analyses resulted in a significant reduction of the ultimate
revenues for the majority of films in our library. In addition,
based upon a qualitative analysis and assessment of recent sales
activity, we now assume that there will be no future revenues
for certain films. A reduction in the ultimate revenue
associated with a film results in a higher rate of amortization
over that films remaining accounting life and causes a
reduction in that films prospective profit margin. The
reduction in ultimate revenues resulted in a decrease in the
fair value of films to an amount below their net book value. As
a result, impairment charges were recorded totaling
$338.9 million during the year ended December 31, 2009
to reduce the net book value of those films to an amount
approximating their fair value. Refer to Note 6 of our
consolidated financial statements included herein. In addition,
the reduction in ultimate revenues resulted in a
$1.1 million increase to film cost amortization for the
year ended December 31, 2009 related to films for which
revenue has been recognized during the period.
We
principally operate in one business: the development, production
and distribution of long-form television content; our lack of a
diversified business could adversely affect us.
We derive substantially all of our revenue from the development,
production and distribution of MFT movies, mini-series and other
television programming. Since we depend on demand for long-form
television content, our financial condition would suffer
significantly if audience demand for our product declines in the
future. This demand is driven by the interests of the viewers
and the financial strength of the various networks. Unlike our
major competitors, which are divisions of major media companies
that generate revenue from a variety of other operations, we
depend primarily on the success of our MFT movies and
mini-series. In recent years, the major U.S. broadcast
networks migrated away from airing long-form television programs
in favor of reality and other programming. If a new type of
content becomes popular in the television entertainment
industry, or the networks or other buyers of our content
perceive changes in audience demand for our content, the ability
to license our MFT movies, mini-series and other television
programming either domestically or internationally may be
negatively impacted and we may suffer significant financial
losses.
We
must continue to augment our film library with new titles from
our annual production slate in order to maintain contracted cash
flows generated by our film library, but managing our limited
resources in the most efficient manner of late has resulted in a
reduction in our production slate.
We must continue to add to the existing titles in our film
library. As audience tastes and demands change over time, some
of our older content loses a portion of its licensing value. To
meet market demand, we must continue to deliver new content that
will achieve high ratings and increased viewership. If we do not
augment our film library with new content that will meet market
and audience demand, our film library cash flow will decrease
and negatively impact our profits. Given our current financial
position and liquidity concerns, we will likely produce fewer
new films and we have asked our production partners to finance a
significant portion of the cost of each new production without
short-term financial support from us. If our production partners
cannot finance a substantial portion of a films cost
through the use of new or existing credit facilities of their
own, we will not develop or
10
produce that film. As a result, the number of films in our new
production slate may be further reduced, which would likely have
an adverse impact on our production revenue and the contracted
cash flows generated by our film library.
In addition, the size of our film library is expected to
decrease over time due to the expiration of our distribution
rights to certain titles in our film library. Although we own
the distribution rights in perpetuity for the majority of titles
in our library, our rights to approximately 34% of the titles in
our film library will ultimately expire. By December 31,
2012, our intellectual property rights to 52 of our films, or
approximately 5% of our existing titles, will terminate.
Therefore, we must continue to develop, produce and distribute
new content in an effort to replenish the titles available for
distribution and to sustain our business model.
Our
success depends on our ability to develop, produce and
distribute quality MFT movies and
mini-series
that achieve acceptance from our target audiences.
An uncertainty always exists with the production of television
content whose success is subject to viewer tastes and
preferences that can change in unpredictable ways. Generally,
the popularity of our programs depends on many factors,
including the critical acclaim they receive, the genre, the
specific subject matter, the actors and other key talent and the
format of their initial release. To respond to market demand, we
have developed and produced film content outside of our
traditional genres, including a number of action/thriller MFT
movies targeted at a younger
18-34 year
old demographic. We cannot assure you that there will continue
to be a demand for these action/thriller movies in broadcast
television, PPV
and/or home
video platforms. In addition, to respond to future market
demand, we may need to produce genres that we lack experience in
delivering. We cannot assure you that this programming will
achieve high ratings.
The delivery of a MFT movie or mini-series that does not achieve
high ratings can adversely affect our financial condition and
results of operations in at least three ways. First, we rely
heavily on our ability to license our original productions
several times, but the receipt of low ratings for a particular
MFT movie or mini-series will hinder our ability to re-license
that program to another customer in the future. Second, the
initial customer may decide against licensing the rights to any
of our future MFT movies or mini-series due to the lack of
profitability from the prior production. Third, one or more MFT
movies or mini-series that do not achieve high ratings may cause
a negative impact to our reputation and could also cause our
significant customers to look to one of our competitors to
fulfill their long-form television programming needs.
We are
seeking to renegotiate payment terms and certain rights under
several distribution license agreements.
Our production partners have financed a substantial portion of
the cost for each 2009 film through the use of new or existing
credit facilities of their own. In connection with these
financings, we have consented to our production partners
pledging as collateral the associated distribution contracts
they have with us. To address liquidity constraints, we are
currently renegotiating several of our 2009 slate distribution
contracts with our production partners and/or their financing
sources in an effort to defer or restructure certain payments
under those contracts which have already come due or will come
due in the near term. If we are unsuccessful in renegotiating
the amounts owed by us under these contracts, we will be
expected to pay amounts that will exacerbate our liquidity
concerns. In addition, non payment of amounts due under these
agreements could result in the termination of our licensing
rights to these films, affect the future working relationship
with certain production partners and/or require us to seek
protection under Chapter 11 of the U.S. Bankruptcy
Code, which would result in our current equityholders receiving
little or no continuing interest in the Company.
We
have a significant concentration of our revenue from a limited
number of licensees.
In 2009, approximately 73% of our revenue was earned from our
top ten customers, with approximately 20% from Lifetime, 16%
from broadcast and cable channels affiliated with Universal
Television (NBC, Syfy and Universal Televisions
international channels) and 5% from the Hallmark Channel. As a
percentage of our total original MFT movies and mini-series
productions licensed to broadcast and cable networks, the
Hallmark Channel comprised approximately 28% in 2007, 11% in
2008 and 27% in 2009. A disruption to, or termination of, our
relationship with any of our significant licensees could cause
our company to suffer significant financial losses.
11
Additionally, as of December 31, 2009, approximately
$78.3 million, or 87%, of the Companys accounts
receivable was due from our top ten customers. Because the
licensing of our content for network and cable television is
highly concentrated, an adverse change in our relationship with
any of our significant customers or an adverse change in the
financial condition of our customers could have a material
adverse impact on our financial condition.
In March 2010, Crown Media, the parent company of the Hallmark
Channel, filed its Annual Report on Form 10K with the SEC.
The report of Crown Medias independent registered public
accounting firm on their 2009 financial statements contains an
explanatory paragraph noting the significant short-term debt
obligations of Crown Media which raise substantial doubt
regarding Crown Medias ability to continue as a going
concern and referring to Crown Medias plans in regard to
those matters. Crown Medias financial statements note,
... the Company believes the ability of the Company to
continue its operations depends upon completion of the
Recapitalization. This proposed Recapitalization
(described in detail in Crown Medias Annual Report) has
been approved by Crown Media and by Hallmark Cards, the
substantial shareholder of Crown Media and the lender or
guarantor on Crown Medias short-term debt that would be
refinanced under the proposed recapitalization. Based upon our
discussions with Crown Medias management and review of
Crown Medias Annual Report and other publicly available
documents concerning the financial condition of Crown Media and
the details of the proposed recapitalization transaction, we
have concluded that a reserve against the accounts receivable
due from Crown Media ($42.4 million at December 31,
2009) is not necessary.
In 2009, we replaced Genius Products (Genius) as our domestic
video distributor and entered into an agreement with Vivendi
Entertainment (Vivendi) for video and digital distribution of
our content requiring Vivendi to provide us with monthly royalty
reports reflecting the financial performance of the titles
included under the agreement along with monthly royalty
payments. If Vivendi does not report or remit to us in a timely
manner, if Vivendi experiences financial difficulties, or if
Vivendi is not successful in distributing our content, it could
have a material effect on our business and results of operations.
We
rely on third party licensees to promote, market and advertise
our programming to their customer base in order to sustain high
television ratings.
We have licensed to broadcast and cable networks the right to
air our long-form television content. We also license our
content to other parties in order to take advantage of emerging
distribution platforms. Licensed distributors decisions
regarding the timing of release and promotional support of our
television content are important in determining the success of
our MFT movies, mini-series and other television programming. We
do not control the timing and manner in which our customers
distribute our productions. Because we rely on those with
initial rights to our content to create a high-level of interest
in our programming, any decision by them not to distribute or
promote one of our productions or, instead, to promote our
competitors television programs or related products more
than they promote ours could have a material adverse effect on
our business and financial condition. In addition, upon the
completion of a license term, we have the ability to re-license
the same programming to another party. If during the initial
license term, our programming does not enjoy high ratings, our
ability to re-license these programs in the future will become
difficult and our reputation and opportunity to license new
programming may be adversely affected.
We
place significant reliance on third party production companies
to produce our MFT movies and mini-series.
Although we have a team of creative personnel who read scripts
and evaluate talent, the filming, editing and final production
of our films is primarily performed by third party producers and
independent contractors. The success of our programming will
depend to a degree on our ability and the ability of these third
parties to avoid production problems and delays and to hire,
retain and motivate top creative talent. Making films is an
activity that requires the services of individuals, such as
actors, directors and producers, each of whom have unique
creative talents. If our production partners experience
difficulty in hiring, retaining or motivating creative talent,
the production of our films could be delayed or the success of
our films could be adversely affected. If any of these partners
were unable or unwilling to produce or assist in the production
of our MFT movies and mini-series, we would have to expend
significant time, money and resources to find another company to
produce our content and we may not be able to meet our creative
needs and timely completion of our content with a new production
company. In
12
addition, our production partners finance a substantial portion
of our films through the use of new or existing credit
facilities of their own. Although a majority of the films are in
production in the summer months so that they can be delivered
late in the third quarter and during the fourth quarter, a
portion of the funding for these films has been deferred to
future periods to better match the cash inflows related to sales
of this product. If our production partners cannot finance a
substantial portion of a films cost through the use of new
or existing credit facilities of their own, management will not
develop or produce that film. As a result, the number of films
produced may be further reduced, which could have an adverse
impact on our production revenue and contracted cash flows
generated from our film library. These risks are further
exacerbated by our recent deferral of payments to production
partners and other creditors, which may impair our relationship
with such parties and would likely result in a more challenging
environment to consummate new deals.
Our
business involves risks of liability claims for entertainment
content, which could adversely affect our business, results of
operations and financial condition.
As an owner and distributor of entertainment content, we may
face potential liability for:
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defamation;
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invasion of privacy;
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right of publicity or misappropriation;
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actions for royalties and accountings;
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breach of contract;
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negligence;
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copyright or trademark infringement (as discussed
below); and
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other claims based on the nature and content of the materials
distributed.
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These types of claims have been brought, sometimes successfully,
against broadcasters, producers and distributors of
entertainment content. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could
have a material adverse effect on our business, results of
operations and financial condition.
Our
success depends on certain key employees.
Our success greatly depends on our employees. In particular, we
are dependent upon the services of our President and Chief
Executive Officer, Robert Halmi, Jr., select members of our
senior management and certain creative employees such as
directors and producers. We have entered into employment
agreements with Mr. Halmi, Jr. and with all of our top
executive officers and production executives. However, although
it is standard in the television industry to rely on employment
agreements as a method of retaining the services of key
employees, these agreements cannot assure us of the continued
services of such employees. Although we carry key employee
insurance for Mr. Halmi, Jr., the proceeds from an
insurance payout would not compensate for the loss of our
President and Chief Executive Officers creativity and
knowledge of the long-form television business. The loss of
Mr. Halmi, Jr.s services or a substantial group
of key employees could have a material adverse effect on our
business and results of operations.
Recent
market conditions have negatively impacted our ability to
sustain our production model of generating contractual sales and
collecting a significant portion of our production costs in
advance of the delivery of our content to an initial
licensee.
Historically, our production model has enabled us to contract
for and collect license fees recouping the majority of our
production costs for our MFT movies and mini-series before
delivery of our content to an initial licensee. Although we
intend to adhere to our general practice of commencing
production when we have contracted license fees for a
significant portion of our production costs, we cannot assure
you that this will always be the case. Recent market conditions
have resulted in a lower pre-sale percentage for our films,
which has caused a substantial
13
negative impact to our revenues over the past two years than we
have historically experienced. We may rely on an alternative
means of revenue to recoup our production costs. We may
determine that there are other ways of licensing our content, or
our customers may change the way they license productions and
such alternative methods may not include an upfront license fee
that recoups a majority of our production costs before we
deliver the content. However, we cannot assure you that these
alternative means or methods will be available to us in the
future which would continue to negatively impact our financial
condition and results of operations.
We
face risks relating to the international distribution of our
films and related products.
Because we have historically derived a significant portion of
our revenue (44%, 37% and 59% in 2009, 2008 and 2007,
respectively) from the exploitation of our films in territories
outside of the United States, our business is subject to risks
inherent in international trade, many of which are beyond our
control. These risks include:
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laws and policies affecting trade, investment and taxes,
including laws and policies relating to the repatriation of
funds and withholding taxes and changes in these laws;
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differing cultural tastes and attitudes, including various
censorship laws;
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differing degrees of protection for intellectual property;
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financial instability and increased market concentration of
buyers in foreign television markets;
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the instability of foreign economies and governments;
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fluctuating foreign exchange rates; and
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war and acts of terrorism.
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The
advancement of video technologies may cause advertisers to shift
their expenditures to media in which their commercial messages
are not circumvented by technology, leading to a reduction in
television advertising and a reduction in demand for our
programming.
The entertainment industry in general and the television
industry in particular continue to undergo significant
technological developments. Advances in technologies or
alternative methods of product delivery or storage or certain
changes in consumer behavior driven by these or other
technologies and methods of delivery and storage could have a
negative effect on our business. In particular, broadcast and
cable networks place significant reliance on the revenue stream
generated from commercial advertising. Since the introduction of
video technology such as Digital Video Recording, or DVR,
television audiences now have the ability to circumvent
commercials while they view television programming, which could
negatively impact advertising demand for the advertisers for our
content, and could therefore adversely affect our revenue.
Similarly, further increases in the use of portable devices that
allow users to view content of their own choosing while avoiding
traditional commercial advertisements could adversely affect our
revenue. If we cannot successfully exploit these and other
emerging technologies, it could have a material adverse effect
on our business, results of operations and financial condition.
This technology has impacted the Nielsen ratings, which
advertisers utilize to determine the rates for advertising time
which they purchase from the television networks. Lower Nielsen
ratings may result in a decrease in the amount of advertising
revenue received by the networks and the networks may not have
sufficient cash flow to license our programming at favorable
rates for us, or choose not to license our programming at all.
We
could be adversely affected by strikes and other union
activity.
We do not have any union-represented employees within our
company, but we do rely on members of the Screen Actors Guild,
the Writers Guild of America, the Directors Guild of America and
other guilds in connection with most of our productions. We are
currently subject to collective bargaining agreements with these
unions and, therefore, must comply with all provisions of those
agreements in order to hire actors, directors or writers who are
members of these guilds. Provisions in each labor contract with
each of the Guilds obligate us to pay residuals to their members
based on various criteria including the airing of films or cash
collections. If we fail to pay such residuals to those entitled
to receive them, any of the unions that represent our actors,
writers and directors may have
14
the right to foreclose on the film giving rise to such residual
in order to compensate its union members accordingly.
Additionally, we may be adversely impacted by work stoppages or
strikes. A halt or delay in negotiating a new industry-wide
union contract, depending on the length of time involved, could
lead to a strike by union members and cause delays in the
development, production and completion of our films. Any new
collective bargaining agreements may increase our expenses in
the future.
Business
interruptions and disasters could adversely affect our
operations.
Our operations are vulnerable to outages and interruptions due
to fire, flood, power loss, telecommunications failures and
similar events beyond our control. In addition, we have a film
vault located in California and a backup storage facility
located in New Jersey. Our California film vault has, in the
past, and may, in the future, be subject to earthquakes as well
as electrical blackouts as a consequence of a shortage of
available electrical power. Although we have developed certain
plans to respond in the event of a disaster, there can be no
assurance that such plans will be effective in the event of a
specific disaster. In addition, we have business interruption
insurance as well as property damage insurance to cover losses
that stem from an event that could disrupt our business.
However, films are unique in nature and cannot be easily
reproduced. If our storage facilities were to suffer damage or
destruction such that our films were no longer able to be
licensed to third parties, our opportunity to generate revenue
by re-licensing our content would be limited and would
potentially impact our earnings and financial condition.
We may
incur significant expenses in order to protect and defend
against intellectual property claims, including claims where
others may assert intellectual property infringement claims
against us.
We currently own the rights to distribute more than 1,000 titles
in our film library. As such, our success depends, in part, upon
sufficient protection of our intellectual property. We cannot be
certain that we have good title to each of the films in our
library. Many of these films were produced by production
companies that we hired, but others were acquired. Most notably,
we acquired the domestic rights to approximately 550 titles from
Crown Media in December 2006. Although the seller made
representations that it had legal title to these films at the
time of sale, we cannot be certain that legal title to these
films was acquired when we consummated the acquisition. There
can be no assurance that infringement or misappropriation claims
(or claims for indemnification resulting from such claims) will
not be asserted or prosecuted against us, or that any assertions
or prosecutions will not materially adversely affect our
business, financial condition or results of operations.
Notwithstanding the validity or the successful assertion of such
claims, we would incur significant costs and diversion of
resources with respect to the defense thereof, which could have
a material adverse effect on our business, financial condition
or results of operations. If any claims or actions are asserted
against us, we may seek to obtain a license of a third
partys intellectual property rights. We cannot provide any
assurances, however, that under such circumstances a license
would be available on reasonable terms or at all.
We
face a potential loss in the copyrighted works in our library if
it is determined that authors or artists have a right to
recapture rights to those works under the U.S. Copyright
Act.
Under the U.S. Copyright Act, authors and their heirs have
a non-waiveable statutory right to terminate their earlier
assignments and licenses in many copyrighted works by sending
notice within a statutorily-defined window of time. The right of
termination does not apply to copyrights in works made for
hire which encompasses most of the copyrights we own.
However, with respect to copyrights we license or to the extent
that any of the works we have rights to are determined not to be
works made for hire, a termination right may exist
under the U.S. Copyright Act. These rights can provide
authors and their heirs an opportunity to renegotiate new and
more commercially advantageous arrangements. If that were to
come to pass, our net revenue associated with those works could
decrease.
Our
intellectual property rights may not be enforceable in certain
foreign jurisdictions.
We attempt to protect our proprietary and intellectual property
rights to our productions through available copyright and
trademark laws as well as through licensing and distribution
arrangements with reputable international companies in specific
territories and for limited durations. We rely on copyright laws
to protect the works of authorship created by us or transferred
to us via assignment or by operation of law as works made
for hire. We
15
have generally recorded or registered our copyright and
trademark interests in the United States. Despite these
precautions, existing copyright and trademark laws vary from
country to country and the laws of some countries in which our
productions are marketed may not protect our intellectual
property to the same extent as do U.S. laws, or at all.
Furthermore, although copyrights and trademarks that arise under
United States and United Kingdom law will be recognized in most
other countries (as most countries are signatories to the Berne
Convention, the Universal Copyright Convention and the Madrid
Protocol), we cannot guarantee that courts in other
jurisdictions will afford our copyrights and trademarks the same
treatment as do courts in the United States or the United
Kingdom. Although we believe that our intellectual property is
enforceable in most jurisdictions, we cannot guarantee such
validity or enforceability.
Competition
within our industry could reduce our licensing revenue and our
ability to achieve profitability.
We operate in the highly competitive business of developing,
producing and distributing long-form television programming. If
we are unable to compete effectively with large diversified
entertainment companies that have substantially greater
resources than us, our operating margins and market share could
be reduced, and the growth of our business inhibited. In
particular, we compete with other television production and
distribution companies, such as Buena Vista International
Television, Paramount Television and Sony Pictures Television. A
continuing trend towards business combinations and alliances in
the communications industries may create significant new
competitors for us or intensify existing competition. Many of
these combined entities have resources far greater than ours.
These combined entities may provide programming and other
services that compete directly with our offered programming. We
may need to reduce our prices or license additional programming
to remain competitive, and we may be unable to sustain future
pricing levels as competition increases. Our failure to achieve
or sustain market acceptance of our programming at desired
pricing levels could impair our ability to achieve profitability
or positive cash flow, which would negatively impact our results
of operations.
Furthermore, third party producers, whom we heavily rely on to
produce our productions, are capable of developing, producing
and distributing their own content to cable and broadcast
networks. If this were to occur, these third party producers
could subject us to further competition in the industry.
We
have accessed a variety of film production incentives and
subsidies offered by foreign countries and the United States
which reduce our production costs. If these incentives and
subsidies become less accessible to us or to our production
partners, or if they are eliminated, modified, denied or
revoked, our production costs could substantially
increase.
Production incentives and subsidies for film production are
widely used throughout the industry and are important in helping
to offset production costs. Many foreign countries, the United
States and individual states have programs designed to attract
production. Canada is a notable example. Incentives and
subsidies are used to reduce production costs and such
incentives and subsidies take different forms, including direct
government rebates, sale and leaseback transactions or
transferable tax credits. We have benefited from these financial
incentives and subsidies in Canada as well as in Germany, the
United Kingdom, Ireland, Hungary, South Africa, Australia, New
Zealand and the United States. The laws and procedures governing
these production incentives are subject to change. If we or our
production partners are unable to access any of these incentives
and subsidies because they are modified or eliminated, we may be
forced to restructure the financing of our film productions,
increasing the likelihood that our inability to offset
production costs will cause our profits to decrease. Further,
the applications for these incentives and subsidies often are
prepared and filed by our production partners, rather than by
us, and they are subject to guidelines and criteria mandated by
foreign, United States or state governments. We do not control
the application or approval processes. If these applications are
denied or revoked for any reason, impacting the operations of
our production partners, we may be forced to restructure the
financing of our film productions. Failure to achieve the cost
savings that we have historically achieved could have a material
adverse effect on our results of operations, financial condition
and cash flows. For further discussion on these production
incentives and subsidies, see Business The
production, marketing and distribution of our films
Production incentives and subsidies.
16
Delays
and changed delivery dates have had a material impact on the
timing of our revenue recognition and receipt of cash, which has
affected our financial results and ultimately has decreased the
value of our stock price.
A majority of our annual productions have been completed and
made available to our licensees during the third and fourth
quarter of our fiscal year. Typically, our MFT movies,
mini-series and other television programming are ordered in the
beginning of our fiscal year, and produced during the spring and
summer, with distribution beginning in the fall. In accordance
with GAAP, we do not recognize revenue from the distribution and
licensing of our productions until several criteria are met,
including such productions being made available for exhibition
by a third party distributor or licensee. To the extent that we
have any production delays due to weather, equipment
malfunctions, creative differences or labor strikes, the timing
can shift from one quarter to the next, which causes us to
recognize that revenue in the next quarter or fiscal year and
materially impacts our results of operations. If we decide to
give guidance on our financial condition or results of
operation, we may not achieve those projections due to a variety
of factors including those discussed in this report.
Furthermore, due to unpredictable factors that may occur during
production, we believe that quarterly comparisons of our
financial results should not be relied upon as an indication of
our future performance.
While
we believe we currently have adequate internal control over
financial reporting, we are required to assess our internal
control over financial reporting on an annual basis and any
future adverse results from such assessment could result in a
loss of investor confidence in our financial reports and have an
adverse effect on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the
accompanying rules and regulations promulgated by the SEC to
implement it require us to include in our
Form 10-K
an annual report by our management regarding the effectiveness
of our internal control over financial reporting. The report
includes, among other things, an assessment of the effectiveness
of our internal control over financial reporting as of the end
of our fiscal year. This assessment must include disclosure of
any material weaknesses in our internal control over financial
reporting identified by management. During this process, if our
management identifies one or more material weaknesses in our
internal control over financial reporting that cannot be
remediated in a timely manner, we will be unable to assert such
internal control is effective. While we currently believe our
internal control over financial reporting is effective, the
effectiveness of our internal controls in future periods is
subject to the risk that our controls may become inadequate
because of changes in conditions, and, as a result, the degree
of compliance of our internal control over financial reporting
with the applicable policies or procedures may deteriorate. If
we are unable to conclude that our internal control over
financial reporting is effective (or if our independent auditors
disagree with our conclusion), we could lose investor confidence
in the accuracy and completeness of our financial reports, which
would have an adverse effect on our stock price.
We
will incur costs and demands upon management as a result of
complying with the laws and regulations affecting public
companies, which could affect our operating
results.
We have incurred, and will continue to incur, significant legal,
accounting and other expenses associated with corporate
governance and public company reporting requirements, including
requirements under the Sarbanes-Oxley Act of 2002, as well as
rules implemented by the SEC and NASDAQ. As long as the SEC
requires the current level of compliance for public companies of
our size, we expect these rules and regulations to require
significant legal and financial compliance costs and to make
some activities time-consuming and costly. These rules and
regulations may make it more expensive for us to obtain director
and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage than was
previously available. As a result, it may be more difficult for
us to attract and retain qualified individuals to serve on our
Board of Directors or as our executive officers.
17
Risks
related to our corporate structure
We are
a holding company with no operations of our own, and we will
depend on the distributions from Holdings II to meet our
ongoing obligations and to pay cash dividends on our common
stock.
We are a holding company with no operations of our own and we
have no independent ability to generate revenue. Consequently,
our ability to obtain operating funds depends upon distributions
from Holdings II. The distribution of cash flows and other
transfers of funds by Holdings II to us will be subject to
statutory and contractual restrictions contained in RHI
LLCs existing senior secured credit facilities and the
Holdings II LLC Agreement. RHI LLCs existing senior
secured credit facilities limit RHI LLCs ability to
distribute cash to its members, including Holdings II, based
upon certain leverage tests. We will be unable to pay dividends
to our stockholders or pay other expenses outside the ordinary
course of business if Holdings II is unable to distribute
cash to us.
Because Holdings II is treated as a partnership for
U.S. federal and state income tax purposes, we, as the sole
member and 100% owner of Holdings II, will incur
U.S. federal and state income taxes on our proportionate
share of any net taxable income of Holdings II. To the extent we
need funds to pay such taxes or for any other purpose, and
Holdings II is unable to provide such funds because of
limitations in RHI LLCs existing senior secured credit
facilities or other restrictions, such inability to pay could
have a material adverse effect on our business, financial
condition, results of operations or prospects.
If we
are determined to be an investment company, we would become
subject to burdensome regulatory requirements and our business
activities could be restricted.
We do not believe that we are an investment company
under the Investment Company Act of 1940, as amended (the
ICA). As sole manager of Holdings II, we control
Holdings II, and our interest in Holdings II is not an
investment security as that term is used in the ICA.
If we were to stop participating in the management of Holdings
II, our interest in Holdings II could be deemed an
investment security for purposes of the ICA.
Generally, a company is an investment company if it
owns investment securities having a value exceeding 40% of the
value of its total assets (excluding U.S. government
securities and cash items). Our sole asset is our equity
interest in Holdings II. A determination that such asset was an
investment security could result in our being considered an
investment company under the ICA. As a result, we would become
subject to registration and other burdensome requirements of the
ICA. In addition, the requirements of the ICA could restrict our
business activities, including our ability to issue securities.
We intend to conduct our operations so that we are not deemed an
investment company under the ICA. However, if anything were to
occur that would cause us to be deemed to be an investment
company, we would become subject to restrictions imposed by the
ICA. These restrictions, including limitations on our capital
structure and our ability to enter into transactions with our
affiliates, could make it impractical for us to continue our
business as currently conducted and could have a material
adverse effect on our financial performance and operations.
Our
certificate of incorporation, bylaws and other material
agreements contain anti-takeover protections that may discourage
or prevent strategic transactions, including a takeover of our
company, even if such a transaction would be beneficial to our
stockholders.
Our certificate of incorporation, bylaws, the Holdings II
LLC Agreement, the director designation agreement, other
reorganization agreements, our credit agreements and provisions
of the Delaware General Corporation Law, or DGCL, could delay or
prevent a third party from entering into a strategic transaction
with us, even if such a transaction would benefit our
stockholders. For example, our certificate of incorporation and
bylaws:
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establish supermajority approval requirements by our directors
before our board may take certain actions;
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to increase
the number of outstanding shares, making a takeover more
difficult and expensive;
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establish a classified board of directors;
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allow removal of directors only for cause;
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18
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prohibit stockholder action by written consent;
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do not permit cumulative voting in the election of directors,
which would otherwise allow less than a majority of stockholders
to elect director candidates; and
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The foregoing provisions and restrictions, along with those in
our formation and reorganization documents, could keep us from
pursuing relationships with strategic partners and from raising
additional capital, which could impede our ability to expand our
business and strengthen our competitive position. These
restrictions could also limit stockholder value by impeding a
sale of us or Holdings II.
Risks
related to an investment in our common stock
If we
seek protection under Chapter 11 of the U.S. Bankruptcy
Code, all of our outstanding shares of capital stock would
likely be cancelled and holders of our capital stock would not
be entitled to any payment in respect of their
shares.
If we seek protection under Chapter 11 of the
U.S. Bankruptcy Code, all of our outstanding shares of
capital stock would likely be cancelled and holders of our
capital stock would not be entitled to any payment in respect of
their shares. It is also likely that certain of our obligations
to certain of our creditors would be satisfied by the issuance
of shares of capital stock in satisfaction of their claims. The
value of any capital stock so issued is likely to be less than
the face value of our obligations to those creditors, and the
price of any such capital stock will likely be volatile. In
addition, in the event of a bankruptcy filing, our common stock
will be suspended from trading on and delisted from NASDAQ.
Accordingly, we would expect trading in our common stock to be
limited, and our stockholders will likely not be able to resell
our common stock for their purchase price or at all. In
addition, if we commence a filing under Chapter 11 of the
U.S. Bankruptcy Code, our current equityholders would
receive little or no continuing interest in the Company.
We are
currently not in compliance with the continued listing
requirements of NASDAQ, which is likely to result in the
delisting of our common stock if we cannot regain
compliance.
On December 24, 2009, we were notified by NASDAQ that our
common stock was subject to delisting from the NASDAQ Global
Market because the market value of our publicly held shares was
less than the $5 million minimum required for continued
listing pursuant to Listing Rule 5450(b)(1)(C) and that we
no longer met the $1.00 per share requirement for continued
listing pursuant to Listing Rule 5450(a)(1). We were
granted 180 calendar days to regain compliance with each of
these requirements. As of the date of this report, we have not
regained compliance with such requirements and can provide no
assurance the we will achieve compliance.
Our
future issuance of preferred stock could dilute the voting power
of our common stockholders and adversely affect the market value
of our common stock.
The future issuance of shares of preferred stock with voting
rights may adversely affect the voting power of the holders of
our other classes of voting stock, either by diluting the voting
power of our other classes of voting stock if they vote together
as a single class, or by giving the holders of any such
preferred stock the right to block an action on which they have
a separate class vote even if the action were approved by the
holders of our other classes of voting stock. The future
issuance of shares of preferred stock with dividend or
conversion rights, liquidation preferences or other economic
terms favorable to the holders of preferred stock could
adversely affect the market price for our common stock by making
an investment in the common stock less attractive. For example,
investors in the common stock may not wish to purchase common
stock at a price above the conversion price of a series of
convertible preferred stock because the holders of the preferred
stock would effectively be entitled to purchase common stock at
the lower conversion price causing economic dilution to the
holders of common stock.
The
sale of a substantial number of our shares of common stock in
the public market could adversely affect the market price of our
shares, which in turn could negatively impact our share
price.
Future sales of substantial amounts of our shares of common
stock in the public market (or the perception that such sales
may occur) could adversely affect the market price of our common
stock and could impair our ability to
19
raise capital through future sales of our equity securities. As
of December 31, 2009, 23,416,000 shares of our common
stock were issued and outstanding. We may issue our shares of
common stock from time to time as consideration for future
acquisitions and investments, or to satisfy obligations to our
creditors. If any such acquisition, investment or obligation is
significant, the number of shares that we may issue may in turn
be significant. In addition, we may also grant registration
rights covering those shares in connection with any such
acquisitions and investments.
Because
we have not paid dividends and do not anticipate paying
dividends on our common stock in the foreseeable future, you
should not expect to receive dividends on shares of our common
stock.
We have not paid dividends on our common stock in the past and
do not currently intend to do so in the near future. However,
our board of directors has discretion to determine if and when a
dividend will be payable in the future. Our board will likely
consider a variety of factors, including general economic
conditions, future prospects for the business, the
Companys cash requirements and any other factors that the
board deems relevant. In addition, our current senior secured
credit facilities contain covenants prohibiting the payment of
cash dividends without the consent of our lenders.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
20
We are headquartered in New York City, with offices in Kansas
City, Los Angeles, London and Sydney.
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Location
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Business Use
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Owned/Leased
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New York, NY
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Corporate headquarters
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Leased
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Kansas City, MO
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Corporate office
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Leased
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Los Angeles, CA
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Vault for film library
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Leased
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Los Angeles, CA
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Sales and distribution
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Leased
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London, UK
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Sales and distribution
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Leased
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Sydney, AUS
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Sales and distribution
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Leased
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Item 3.
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Legal
Proceedings
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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 (IPO) that purportedly contained untrue statements of
material facts and omitted other facts necessary to make certain
statements not misleading. The central allegation of the Lawsuit
is that the registration statement and prospectus overstated the
projected number of
made-for-television
(MFT) movies and mini-series the Company expected to develop,
produce and distribute in 2008, while it failed to disclose that
the Company would not be able to complete the expected number of
MFT movies and miniseries in 2008 due to the declining state of
the credit markets and other negative factors then impacting the
Companys business. The Lawsuit seeks unspecified damages
and interest. An Amended Complaint is due to be filed on
March 18, 2010. The Company believes that the Lawsuit has
no merit and intends to defend itself and its officers
vigorously.
Flextech
Litigation
On April 7, 2009, RHI Entertainment Distribution, LLC and
RHI Entertainment, LLC were served with a Complaint filed in the
United States District Court for the Southern District of New
York alleging that they had breached an agreement with Flextech
Rights Limited (Flextech), a British distributor, by
failing to make the second of two installment payments. A
judgment in the amount of approximately $0.9 million was
entered against the defendants on February 17, 2010, for
which we have accrued as of December 31, 2009.
MAT IV
Litigation
On February 22, 2010, RHI Entertainment Distribution, LLC
was served with a Complaint filed in the United States District
Court for the Southern District of New York alleging that the
Company had breached a contract with MAT Movies and Television
Productions GmnH & Co. Project IV KG (MAT
IV), a German investment fund, by failing to pay amounts
due under an agreement dated September 25, 2009. The
Complaint seeks approximately $7.0 million in damages, for
which we have accrued as of December 31, 2009, plus
interest and attorneys fees.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of our security holders
during the fourth quarter of the year ended December 31,
2009.
21
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Price
Range of RHI Entertainments Common Stock, par value
$.01
Our common stock is listed on NASDAQ and is traded under the
symbol RHIE. The initial public offering price was
$14.00 per share. At the close of business on March 24,
2010, there were 23,416,000 shares of our common stock
outstanding and approximately 59 common stockholders of
record. A number of our stockholders have their shares in street
name; therefore, we believe that there are substantially more
beneficial owners of common stock.
The following table sets forth for the periods indicated the
high and low reported sale prices per share for the common stock
since June 25, 2008, the date that our common stock began
trading on NASDAQ, as reported on NASDAQ:
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Sales Price
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High
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Low
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Year Ending December 31, 2010
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First Quarter (Through March 24, 2010)
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$
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0.52
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$
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0.27
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Year Ended December 31, 2009
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Fourth Quarter
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$
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3.30
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$
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0.25
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Third Quarter
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3.59
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2.02
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Second Quarter
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3.69
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1.36
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First Quarter
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10.04
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1.10
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Year Ended December 31, 2008
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Fourth Quarter
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$
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15.03
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$
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2.65
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Third Quarter
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16.00
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10.42
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Second Quarter (Since June 25, 2008)
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13.20
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12.85
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NASDAQ
Delisting Notification
On December 24, 2009, we received a notice from NASDAQ
stating that the we no longer met the $1.00 per share
requirement for continued listing on NASDAQ in accordance with
Listing Rule 5450(a)(1). This notice does not result in an
immediate delisting of our common stock from NASDAQ, as a grace
period of 180 calendar days (June 22, 2010) is
provided under Listing Rule 5810(c)(3)(A). If at anytime
during this grace period the bid price of the Companys
common stock closes at $1.00 per share or more for a minimum of
10 consecutive business days, NASDAQ will provide the us written
confirmation of compliance. If we do not regain compliance under
Listing Rule 5450(b)(1)(C) within the grace period of
180 days, NASDAQ will provide written notification to us
that our common stock may be delisted. At that time, we may
apply for the transfer of our common stock to The NASDAQ Capital
Market prior to the delisting date if we satisfy all of the
requirements, other than minimum bid price, for initial listing
on The NASDAQ Capital Market as set forth in Listing
Rule 5505. If we elect to apply for such transfer, and the
application is approved, we would be eligible for an additional
180 calendar day grace period.
In addition, on December 24, 2009, we also received a
notice from NASDAQ stating that the Companys common stock
failed to maintain a minimum market value of publicly held
shares (MVPHS) of $5,000,000 for the previous 30 consecutive
trading days, as required for continued inclusion on NASDAQ in
accordance with Listing Rule 5450(b)(1)(C). This notice
does not result in an immediate delisting of our common stock
from NASDAQ, as an original grace period of 90 calendar days was
provided under Listing Rule 5810(c)(3)(D). However, on
February 4, 2010, the Securities & Exchange
Commission approved changes to the NASDAQ listing rules, which
now provide us with an additional 90 days to regain
compliance (June 22, 2010) with Listing
Rule 5450(b)(1)(C). We were notified by NASDAQ on
February 9, 2010 about the additional grace period. To
regain compliance, the Companys MVPHS needs to close at
$5,000,000 or more for a minimum of 10 consecutive business
days. Similar to the minimum bid price requirement, we may apply
for transfer of our common stock to The NASDAQ Capital
22
Market prior to the expiration of the
180-day
grace period if it satisfies all of the requirements for initial
listing on The NASDAQ Capital Market as set forth in Listing
Rule 5505. At this time, neither notification has any
effect on the listing of the Companys common stock on
NASDAQ and our common stock will continue to trade on NASDAQ
under the symbol RHIE.
Based upon the recent price levels of our common stock,
stockholders equity and net income from continuing
operations provided in the financial statements included in this
report, we would not be in compliance with the listing
requirements of The NASDAQ Capital Market and can provide no
assurance the we will achieve compliance. If we cannot remedy
our noncompliance during any applicable notice or grace periods,
our common stock will be delisted from NASDAQ and any
application to transfer our stock to The NASDAQ Capital Market
may not be approved. The delisting of our common stock would
likely have a material adverse effect on the trading price,
liquidity, volume and marketability of our common stock. We are
evaluating all of our options following receipt of these
notifications and intend to work diligently to attempt to retain
listing of our common stock on NASDAQ.
Exchange
of Holdings II Membership Units for Shares of Our Common
Stock
On December 22, 2009, we issued 9,900,000 shares of
our common stock to KRH (KRH Shares) in connection with the
exercise of KRHs exchange right under the Holdings II
LLC Agreement. We and KRH entered into the Holdings II LLC
Agreement in connection with our IPO, which provided, among
other things, KRH with the right to exchange its membership
units in Holdings II for, at our option, either
(i) shares of our common stock, (ii) cash or
(iii) a combination of both shares of common stock and cash
(Exchange Right). On December 14, 2009, KRH provided us
notice of its intent to exercise its Exchange Right for
9,900,000 membership units in Holdings II (Exchanged
Units). Prior to consummation of these transactions, we owned,
as our sole material asset, all of the outstanding membership
units in Holdings II other than 9,900,000 membership units
in Holdings II that were owned by KRH (which represented
42.3% of Holdings IIs outstanding membership units). As a
result of the foregoing, we currently own, as our sole material
asset, 100% of the outstanding membership units in Holdings II.
The sale of the KRH Shares was made pursuant to
Section 4(2) of the Securities Act of 1933. In connection
with the our IPO, we entered into a Registration Rights
Agreement with KRH, dated June 23, 2008, which provides KRH
with unlimited registration demand rights that can be exercised
at any time in the future. There were no underwriters involved
or cash proceeds received in connection with the issuance and
sale of the KRH Shares. As result of the foregoing transaction,
KRH no longer owns any membership units in Holdings II and,
thus, it is no longer a member of Holdings II. Instead, KRH owns
9,900,000 shares of the Registrants common stock
(42.3% of its outstanding stock).
RHI Inc. and KRH are parties to a tax receivable agreement that
provides for the payment by us to KRH of 85% of the amount of
cash savings, if any, in U.S. federal, state and local
income tax or franchise tax that RHI Inc. realizes as a result
of any increase in tax basis it receives as a result of any
exchange of KRH membership interest in Holdings II. Although the
tax receivable agreement is still in effect, there should be no
prospective implications with respect to this agreement for RHI
Inc. as KRHs exchange did not result in an increase in RHI
Incs tax basis in its membership interest in Holdings II.
Dividend
Policy
We have not paid dividends on our common stock in the past and
do not currently intend to do so in the near future. However,
our board of directors has discretion to determine if and when a
dividend will be payable in the future. Our board will likely
consider a variety of factors, including general economic
conditions, future prospects for the business, the
Companys cash requirements and any other factors that the
board deems relevant.
23
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table lists information regarding outstanding
options and shares reserved for future issuance under our equity
compensation plans as of December 31, 2009. All equity
compensation plans have been approved by the shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
|
Number of Securities to
|
|
Weighted-Average
|
|
Equity Compensation
|
|
|
|
|
Be Issued upon Exercise
|
|
Exercise Price of
|
|
Plans (Excluding
|
|
|
|
|
of Outstanding Options,
|
|
Outstanding Options,
|
|
Securities Reflected in
|
Plan Category
|
|
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
Column (a))
|
|
Equity compensation
plans approved by
shareholders
|
|
RHI
Entertainment,
Inc. 2008
Equity Incentive
Plan(1)
|
|
|
2,135,795
|
(2)
|
|
|
$
|
3.83
|
(3)
|
|
|
|
1,470,798
|
(4)
|
|
|
|
|
(1) |
|
The Board of Directors originally adopted the RHI Entertainment,
Inc. 2008 Incentive Award Plan on June 17, 2008 (the Plan),
and the Companys stockholders approved the Plan on
June 23, 2008, in connection with the Companys IPO.
The Board of Directors adopted the Amended and Restated RHI
Entertainment, Inc. 2008 Incentive Award Plan on April 8,
2009, which amended and restated the RHI Entertainment, Inc.
2008 Incentive Award Plan in its entirety, effective as of
May 12, 2009, the date the Companys shareholders
approved the plan. |
|
(2) |
|
Includes 1,457,434 options and 678,361 restricted stock units
outstanding on December 31, 2009. |
|
(3) |
|
Represents the weighted-average exercise price of options
outstanding as of December 31, 2009. Restricted stock units
outstanding on December 31, 2009 do not have an exercise
price and are excluded from this calculation. |
|
(4) |
|
Represents the remaining shares of our common stock available
for issuance under the Plan on December 31, 2009. |
24
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Initial Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
Year Ended
|
|
|
June 23 to
|
|
|
January 1 to
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Results of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
$
|
35,793
|
|
|
$
|
72,889
|
|
|
$
|
6,602
|
|
|
$
|
133,149
|
|
|
$
|
108,035
|
|
|
$
|
158,034
|
|
Library
|
|
|
41,979
|
|
|
|
80,302
|
|
|
|
66,643
|
|
|
|
98,862
|
|
|
|
83,732
|
|
|
|
91,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
77,772
|
|
|
|
153,191
|
|
|
|
73,245
|
|
|
|
232,011
|
|
|
|
191,767
|
|
|
|
250,004
|
|
Gross (loss) profit(2)
|
|
|
(335,350
|
)
|
|
|
48,918
|
|
|
|
23,849
|
|
|
|
94,937
|
|
|
|
73,637
|
|
|
|
(199,153
|
)
|
Gross profit percentage
|
|
|
N/M
|
|
|
|
32
|
%
|
|
|
33
|
%
|
|
|
41
|
%
|
|
|
38
|
%
|
|
|
N/M
|
|
(Loss) income from operations
|
|
|
(372,018
|
)
|
|
|
(40,891
|
)
|
|
|
(2,911
|
)
|
|
|
47,326
|
|
|
|
28,616
|
|
|
|
(367,592
|
)
|
Net loss(3)
|
|
|
(251,114
|
)
|
|
|
(36,195
|
)
|
|
|
(22,212
|
)
|
|
|
(22,597
|
)
|
|
|
(9,241
|
)
|
|
|
(389,090
|
)
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(9,816
|
)
|
|
$
|
(22,788
|
)
|
|
$
|
(32,331
|
)
|
|
$
|
(88,778
|
)
|
|
$
|
(99,518
|
)
|
|
$
|
13,742
|
|
Investing activities
|
|
|
(237
|
)
|
|
|
(91
|
)
|
|
|
(81
|
)
|
|
|
(132
|
)
|
|
|
(579,865
|
)
|
|
|
(206
|
)
|
Financing activities
|
|
|
12,800
|
|
|
|
11,737
|
|
|
|
64,520
|
|
|
|
86,566
|
|
|
|
683,134
|
|
|
|
58,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Initial Predecessor
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Consolidated balance sheet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
25,120
|
|
|
$
|
22,373
|
|
|
$
|
1,407
|
|
|
$
|
3,751
|
|
|
$
|
73,401
|
|
Film production costs, net
|
|
|
461,232
|
|
|
|
780,122
|
|
|
|
754,337
|
|
|
|
702,578
|
|
|
|
458,036
|
|
Total assets
|
|
|
587,852
|
|
|
|
1,014,182
|
|
|
|
953,395
|
|
|
|
859,655
|
|
|
|
786,656
|
|
Debt
|
|
|
609,171
|
|
|
|
576,789
|
|
|
|
655,951
|
|
|
|
565,000
|
|
|
|
|
|
Notes and amounts payable to affiliates, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641,938
|
|
Stockholders (deficit) equity /Members equity
|
|
|
(232,685
|
)
|
|
|
102,162
|
|
|
|
100,413
|
|
|
|
132,858
|
|
|
|
(85,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Other operating data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of films delivered during the year ended December 31,
|
|
|
15
|
|
|
|
35
|
|
|
|
43
|
|
|
|
32
|
|
|
|
44
|
|
Average cost per film for the year ended December 31,(4)
|
|
$
|
3,826
|
|
|
$
|
3,425
|
|
|
$
|
3,293
|
|
|
$
|
3,440
|
|
|
$
|
4,460
|
|
Number of titles in our library as of December 31,
|
|
|
1,072
|
|
|
|
1,090
|
|
|
|
1,055
|
|
|
|
1,012
|
|
|
|
421
|
|
Number of hours of programming in our library as of
December 31,
|
|
|
3,586
|
|
|
|
3,949
|
|
|
|
3,864
|
|
|
|
3,746
|
|
|
|
1,297
|
|
25
|
|
|
(1) |
|
The operating results for the year ended December 31, 2006
reflect the period from January 12, 2006 (inception)
through December 31, 2006. The Predecessor Companys
operating results for the period January 1, 2006 to
January 11, 2006 are excluded. From January 1, 2006 to
January 11, 2006, the Predecessor Company generated
$1.2 million of revenue, a $(2.5) million loss from
operations and a $(3.2) million net loss. |
|
(2) |
|
Gross loss for the years ended December 31, 2009 and 2005
include non-cash impairment charges to film production costs of
$338.9 million and $295.2 million, respectively. The
2009 impairment charge was recorded to reduce the net book value
for those films to an amount approximating their fair value as a
result of the reduction in ultimate revenues from our annual
review of ultimate revenues. The 2005 impairment charge was
recorded to reflect the net realizable value of the film library
based on the negotiated purchase price for the Company. There
was no charge for impairment in 2006, 2007 or 2008. |
|
(3) |
|
Net loss for the period from June 23, 2008 to
December 31, 2008 (Successor) includes an impairment charge
of $59.8 million to goodwill attributable to the decline in
our stock price during that period. Net loss for the year ended
December 31, 2005 includes a $141.4 million non-cash
goodwill impairment charge recorded to reflect the fair value of
goodwill based on the negotiated purchase price for the Company. |
|
(4) |
|
Consists of film production costs (including negative cost net
of any incentives or subsidies and excluding residuals,
participations and capitalized overhead and interest) for the
fiscal year indicated divided by the number of films delivered
in such fiscal year. |
26
|
|
Item 7.
|
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-K.
Unless required by law, we do not undertake any obligation to
publicly update or review any forward-looking statement, whether
as a result of new information, future developments or otherwise.
The historical consolidated financial data discussed below
reflect the historical results of operations of RHI
Entertainment, LLC and its subsidiaries as RHI Inc. did not have
any historical operations prior to June 23, 2008. See the
Notes to our consolidated financial statements included herein.
Overview
We develop, produce and distribute new made-for-television (MFT)
movies, mini-series and other television programming worldwide.
We also selectively produce new episodic series programming for
television. In addition to our development, production and
distribution of new content, we own an extensive library of
existing long-form television content, which we license
primarily to broadcast and cable networks worldwide.
Our revenue and operating results are seasonal in nature. A
significant portion of the films that we develop, produce and
distribute are delivered to the broadcast and cable networks in
the second half of each year. Typically, programming for a
particular year is developed either late in the preceding year
or in the early portion of the current year. Generally, planning
and production take place during the spring and summer and
completed film projects are delivered in the third and fourth
quarters of each year. As a result, our first, second and third
quarters of our fiscal year typically have less revenue than the
fourth quarter of such fiscal year. Additionally, the timing of
the film deliveries from year-to-year may vary significantly.
Importantly, the results of one quarter are not necessarily
indicative of results for the next or any future quarter.
Each year, we develop and distribute a new list, or slate, of
film content, consisting primarily of MFT movies and
mini-series. The investment required to develop and distribute
each new slate of films is our largest operating cash
expenditure. A portion of this investment in film each year is
financed through the collection of license fees during the
production process. Each new slate of films is added to our
library in the year subsequent to its initial year of delivery.
Cash expenditures associated with the distribution of the
library film content are not significant.
We refer to the revenue generated from the licensing of rights
in the fiscal year in which a film is first delivered to a
customer as production revenue. Any revenue
generated from the licensing of rights to films in years
subsequent to the 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.
27
Recent
Developments
Market conditions confronting the media and entertainment
industry have continued to be a challenge for us. The business
environment deteriorated substantially beginning in the fourth
quarter of 2008 and remained challenging throughout all of 2009.
Specifically, total revenue in 2009 declined significantly as
compared to prior years. This was primarily due to 2009 fourth
quarter sales activity falling dramatically short of our
expectations as well as fourth quarter revenue from the prior
year. As a result of the significant weakening of our financial
position, results of operations and liquidity in 2009, we are
currently in default of certain covenants of our senior secured
facilities and in discussions with our lenders regarding a
restructuring of our senior secured credit facilities. However,
we can provide no assurance that we will be able to successfully
restructure our debt obligations. If we are unsuccessful in
restructuring our debt obligations or unable to come to a
consensual agreement with our creditors, we will likely be
required to seek protection under Chapter 11 of the
U.S. Bankruptcy Code. We have retained the services of
outside advisors to assist us in instituting and implementing a
restructuring transaction. See Risk Factors
Risks related to our business We expect to pursue a
strategic restructuring, refinancing or other transaction in
order to preserve our long-term financial condition, and current
market conditions could limit our ability to consummate such a
transaction, which would likely have a material adverse effect
on our financial condition.
Even if we are successful in coming to a consensual agreement
with some or all of our creditors, any such restructuring would
likely involve a filing under Chapter 11 of the
U.S. Bankruptcy Code and any such filing would result in
our current equityholders receiving little or no continuing
interest in the Company. See Risk Factors
Risks related to investments in our common stock If
we seek protection under Chapter 11 of the
U.S. Bankruptcy Code, all of our outstanding shares of
capital stock would likely be cancelled and holders of our
capital stock would not be entitled to any payment in respect of
their shares. The accompanying financial statements have
been prepared on a going concern basis, which contemplates
continuity of operations, realization of assets, and liquidation
of liabilities in the ordinary course of business, and do not
reflect adjustments that might result if the Company were unable
to continue as a going concern. In addition, any filing under
Chapter 11 of the U.S. Bankruptcy Code will likely
result in substantial changes to amounts recorded in our
financial statements for periods after the date of the filing.
In connection with the discussion above, certain recent events,
which are summarized below, have occurred over the last several
months.
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We have incurred net losses from operations and net operating
cash outflows in each of the past four years and at
December 31, 2009 have an accumulated deficit of
$287.3 million. Our inability to borrow under our revolving
credit facility, coupled with other factors described above, has
resulted in liquidity constraints and an inability to pay some
of our obligations as they come due. The liquidity constraints
are also preventing us from making certain expenditures to
continue producing and acquiring as many films as we could have
otherwise. As a result, we decreased our production slate for
2009, reduced our selling, general and administrative expenses
through cost-cutting measures that included, among others, job
reductions and we expect to take additional steps to preserve
liquidity. However, despite any additional cost-saving steps we
may implement, unless we successfully restructure our debt
and/or
obtain other sources of liquidity and generate sufficient
revenue and cash flows from operations, we will not have the
resources to continue as a going concern. There can be no
assurance that we will be successful in such endeavors. The
report of our independent registered public accounting firm
included elsewhere in this Annual Report contains an explanatory
paragraph expressing substantial doubt regarding our ability to
continue as a going concern.
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As a result of the foregoing, we engaged Rothschild, Inc. as a
financial advisor in the fourth quarter of 2009, and are in the
midst of in-depth discussions with our first and second lien
lenders with respect to restructuring our indebtedness and
capital structure. We expect these discussions to likely result
in a significant or complete dilution of our existing
equityholders interest through an issuance of preferred
stock or common stock to some or all of our lenders
and/or
creditors. It is also possible that these discussions could
result in a sale of some or all of the Companys assets for
less than their book value. No assurance can be given as to
whether these discussions will be successful. If we are not
successful in restructuring our debt obligations or unable to
come to a consensual agreement with our creditors, we will
likely be required to
28
seek protection under Chapter 11 of the
U.S. Bankruptcy Code. Even if we are successful in coming
to a consensual agreement with some or all of our creditors, any
such restructuring would likely involve a filing under
Chapter 11 of the U.S. Bankruptcy Code and any such
filing would result in our current equityholders receiving
little or no continuing interest in the Company.
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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.
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On December 23, 2009, we entered into a forbearance
agreement with the first lien agent and lenders holding a
majority in principal amount of the loans under our first lien
credit facilities and swap counterparties. That forbearance
agreement was subsequently amended and extended on
January 22, 2010 and again on March 5, 2010. On
February 12, 2010, we entered into a separate forbearance
agreement with the second lien agent and lenders holding a
majority in principal amount of the loans under the second lien
credit facility, which was subsequently amended and extended on
March 5, 2010. Under each of these forbearance agreements,
the agents and lenders (and in the case of the first lien
forbearance, the swap counterparties) have agreed to forbear
from exercising certain of their rights and agreed to waive some
of the existing or prospective defaults until March 31,
2010 unless such forbearance agreement is earlier terminated due
to further unanticipated defaults or other factors. The
forbearance agreements are short term arrangements that allow us
to work with the agents and lenders under our senior secured
credit facilities to develop a longer-term strategy for
restructuring our liabilities. Under the forbearance agreements,
we agreed, among other things, that:
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we cannot borrow additional loans or issue additional letters of
credit under the credit agreement governing our first lien
credit facility;
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default interest of 2% will accrue on all loans under the credit
agreement governing our first and second lien credit facilities
and on the swap settlement amounts, in addition to the rate of
interest otherwise applicable;
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certain covenants under the credit agreement governing our first
lien credit facility (including those relating to investments,
restricted payments, permitted liens, asset sales, subsidiary
guarantors, control agreements, and cash expenditures and
distributions) will become more restrictive;
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we will provide additional information to the lender and their
counsel, including among other things a cash flow schedule that
is updated weekly;
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we will limit the amounts and timing of our cash expenditures to
the amounts itemized in the cash flow schedule, subject to a
variance;
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we will maintain a minimum cash balance; and
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we will provide monthly and year-to-date financial information
and an updated draft valuation report of our film library.
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If we are not able to cure all defaults or enter into a new
forbearance agreement for each of our credit facilities by
March 31, 2010 (or any earlier date that the forbearance
agreements may be terminated), then the agents and lenders under
the respective credit facilities and swap counterparties may
exercise all of their rights and remedies, including the
acceleration of the loans and foreclosure on collateral. Upon
the occurrence of such events, the Company would likely avail
itself of the protection under Chapter 11 of the
U.S. Bankruptcy Code, which would result in our current
equityholders receiving little or no continuing interest in the
Company.
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On December 24, 2009, we received a letter from NASDAQ
notifying us that we are currently not in compliance with
certain NASDAQ listing requirements, specifically the market
value of publicly held shares
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29
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and the minimum bid price. We have a grace period of
180 days to regain compliance, but we currently have not
met the requirements to achieve compliance and can provide no
assurance the we will achieve compliance. See Risk
Factors Risks Related to an investment in our common
stock We are currently not in compliance with the
continued listing requirements of NASDAQ, which is likely to
result in the delisting of our common stock if we cannot regain
compliance.
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We review the ultimate revenues associated with our films. This
analysis considers various data points, including current market
conditions, library sales activity, pricing, the delivery of our
annual film slate and the results of the annual independent
valuation of the unsold rights to our film library. This
assessment, performed as of December 31, 2009, was
completed in February of 2010. As a result of the continued weak
market conditions, sales data, pricing and other factors present
during the fourth quarter of 2009 and into 2010, as well as the
significant decline in the annual independent valuation of the
unsold rights to our film library, this analyses resulted in a
significant reduction of the ultimate revenues for the majority
of films in our library. In addition, based upon a qualitative
analysis and assessment of recent sales activity, we now assume
that there will be no future revenues for certain films. A
reduction in the ultimate revenue associated with a film results
in a higher rate of amortization over that films remaining
accounting life and causes a reduction in that films
prospective profit margin. The reduction in ultimate revenues
resulted in a decrease in the fair value of films to an amount
below their net book value. As a result, impairment charges were
recorded totaling $338.9 million during the year ended
December 31, 2009 to reduce the net book value of those
films to an amount approximating their fair value. In addition,
the reduction in ultimate revenues resulted in a
$1.1 million increase to film cost amortization for the
year ended December 31, 2009 related to films for which
revenue has been recognized during the period. Refer to
Note 6 of our consolidated financial statements included
herein.
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As referenced above, the annual third party valuation report of
our film library required by our lenders under our first lien
credit facility (the Valuation Report) was completed in March of
2010. The Valuation Report indicates a material and substantial
reduction of approximately 50% of the non-contracted value of
the films in our film library at December 31, 2009 as
compared to the third party valuation at December 31, 2008
using similar methodologies. The decrease in the value of our
film library directly and materially reduces the borrowing base
governing the revolving credit facility under the First Lien
Credit Agreement. This result of the Valuation Report is also a
contributing factor in our annual assessment of ultimate
revenues.
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Critical
accounting policies and estimates
We prepare our consolidated financial statements in accordance
with U.S. generally accepted accounting principles (GAAP).
In doing so, we have to make estimates and assumptions that
affect our reported amounts of assets, liabilities, revenue and
expenses, as well as related disclosure of contingent assets and
liabilities including estimates of ultimate revenue and film
production costs, the potential outcome of future tax
consequences of events that have been recognized in our
financial statements and estimates used in the determination of
the fair value of equity awards for the determination of
share-based compensation. In some cases, changes in the
accounting estimates are reasonably likely to occur from period
to period. Accordingly, actual results could differ materially
from our estimates. To the extent that there are material
differences between these estimates and actual results, our
financial condition or results of operations will be affected.
We base our estimates on past experience and other assumptions
that we believe are reasonable under the circumstances, and we
evaluate these estimates on an ongoing basis. We believe that
the application of the following accounting policies, which are
important to our financial position and results of operations,
requires significant judgment and estimation on the part of
management.
Revenue
recognition
We recognize revenue from the distribution of our films in
accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (the Codification or ASC)
926-605-25.
The following are the conditions that must be met in order to
recognize revenue: (i) persuasive evidence of a sale or
licensing arrangement with a customer exists; (ii) the film
is complete and has been delivered or is available for immediate
and unconditional delivery; (iii) the license period of the
arrangement has begun and the customer can begin its
30
exploitation, exhibition or sale; (iv) the arrangement fee
is fixed or determinable; and (v) collection of the
arrangement fee is reasonably assured. Amounts received from
customers prior to the availability date of the product are
included in deferred revenue. Long-term receivables are
reflected at their net present value.
Allowance
for doubtful accounts
We regularly assess the collection of accounts receivable. We
provide an allowance for doubtful accounts when we determine
that the collection of an account receivable is not probable. We
also analyze accounts receivable and historical bad debt
experience, customer creditworthiness and changes in our
customer payment history when evaluating the adequacy of the
allowance for doubtful accounts. If any of these factors change,
our estimates may also change, which could affect the level of
our future provision for doubtful accounts.
Film
production costs and cost of sales
We capitalize film production costs, including costs incurred
for the acquisition and development of story rights, interest
related to film production costs and residuals and
participations. We also capitalize production related overhead
expenses into film production costs. Production related overhead
includes allocable costs, including salaries and benefits
(including share-based compensation) of individuals in
departments with exclusive or significant responsibility for the
production of our films. Our completed film library primarily
consists of films that were made or acquired for initial
exhibition on a broadcast or cable network in the United States.
Film production costs are stated at the lower of cost less
amortization or net realizable value.
Film production costs are amortized and included in cost of
sales in the proportion that current revenue bears to the
estimated remaining ultimate revenue as of the beginning of the
current fiscal period under the
individual-film-forecast-computation method in accordance with
FASB ASC
926-20-35.
The amount of film production costs that are amortized each
period will therefore depend on the ratio of current revenue to
remaining ultimate revenue for each film for such period. We
make certain estimates and judgments of remaining ultimate
revenue to be earned for each film based on our knowledge of the
industry. Estimates of remaining ultimate revenue and residuals
and participations are reviewed annually and are revised, if
necessary. Any change in any given period to the remaining
ultimate revenue for an individual film will result in an
increase or decrease to the percentage of amortization of
capitalized film production costs relative to a previous period.
The film library acquired from Crown Media is treated as an
acquired film library and amortized as a single asset. Film
production costs are evaluated for impairment each reporting
period on a
film-by-film
(or, in the case of the Crown Media library, on a single asset)
basis. If estimated remaining ultimate revenue is not sufficient
to recover the film production costs for that film, the film
production costs will be written down to fair value determined
using a discounted cash flow calculation. See Note 6 of our
consolidated financial statements included herein for discussion
of film production cost impairments recorded during the year
ended December 31, 2009.
Impairment
of long-lived assets
We review long-lived assets, including amortizable intangible
assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
In assessing the recoverability of the Companys long-lived
assets, the Company must make assumptions regarding estimated
future cash flows and other factors to determine the fair value
of the respective assets. These estimates and assumptions could
have a significant impact on whether an impairment charge is
recognized and also the magnitude of any such charge. Estimates
of fair value are primarily determined using discounted cash
flows. These valuations are based on estimates and assumptions
including projected future cash flows, discount rate,
determination of appropriate market comparables and the
determination of whether a premium or discount should be applied
to comparables. If these estimates or related assumptions change
materially in the future, we may be required to record
impairment charges related to our long-lived assets.
31
Share-based
compensation
The Company accounts for share-based compensation in accordance
with the provisions of FASB ASC 718. Share-based compensation
expense is based on fair value at the date of grant and the
pre-vesting forfeiture rate and is recognized over the requisite
service period using the straight-line method. The fair value of
the awards is determined from periodic valuations using key
assumptions for implied asset volatility, expected dividends,
risk free rate and the expected term of the awards. If factors
change and we employ different assumptions in future periods or
if there is a material change in the fair value of the Company,
the compensation expense that we record may differ significantly
from what we have recorded in the current period.
Income
taxes
Our operations are conducted through our indirect subsidiary,
RHI LLC. Holdings II and RHI LLC are organized as limited
liability companies. For U.S. federal income tax purposes,
Holdings II is treated as a partnership and RHI LLC is
disregarded as a separate entity from Holdings II. Partnerships
are generally not subject to income tax, as the income or loss
is included in the tax returns of the individual partners.
The consolidated financial statements of RHI Inc. include a
provision for corporate income taxes associated with RHI
Inc.s membership interest in Holdings II as well as
an income tax provision related to RHI International
Distribution, Inc., a wholly-owned subsidiary of RHI LLC, which
is a taxable U.S. corporation.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to the differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates that we expect
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not
to be realized. In evaluating our ability to recover our
deferred tax assets, we consider all available positive and
negative facts and circumstances and allowances, if any, are
adjusted during each reporting period.
Significant judgment is required in evaluating our tax positions
and determining our provision for income taxes. During the
ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is
uncertain. We establish reserves for tax-related uncertainties
based on estimates of whether, and the extent to which,
additional taxes and interest and penalties will be due. These
reserves are established when, despite our belief that our tax
return positions are supportable, we believe certain positions
are likely to be challenged and such positions may more likely
than not be sustained on review by tax authorities. We adjust
these reserves in light of changing facts and circumstances,
such as the closing of a tax audit. The provision for income
taxes includes the impact of reserve provisions and changes to
the reserves that are considered appropriate, as well as the
associated net interest and penalties.
In addition, we are subject to the examination of our tax
returns by the IRS and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for
income taxes. While we believe that we have adequately provided
for our tax liabilities, including the likely outcome of these
examinations, it is possible that the amount paid upon
resolution of issues raised may differ from the amount provided.
Differences between the reserves for tax contingencies and the
amounts owed by us are recorded in the period they become known.
The ultimate outcome of these tax contingencies could have a
material effect on our financial position, results of operations
and cash flows.
Recent
accounting pronouncements
In June 2009, the FASB issued the FASB ASC as the source of
authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP
for SEC registrants. The Codification is effective for financial
statements issued for interim and annual periods ending after
September 15,
32
2009. The Company adopted the Codification as of July 1,
2009 and all subsequent filings will reference the Codification
as the single source of authoritative literature.
In September 2006, the FASB modified GAAP by establishing
accounting and reporting standards regarding fair value
measurements, which are included in FASB ASC 820. The standards
define fair value, establish a framework for measuring fair
value in generally accepted accounting principles and expand
disclosures about fair value measurements. FASB ASC 820 refers
to fair value as the price that would be received from the sale
of an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which
the reporting entity does business. It also clarifies the
principle that fair value should be based on the assumptions
market participants would use when pricing the asset or
liability. The new standards were effective for financial
statements issued with fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years, however, the effective date was deferred until fiscal
years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities. The Company
adopted the new standards effective January 1, 2009 for
nonfinancial assets and nonfinancial liabilities, which did not
have an impact on its consolidated financial statements.
In November 2007, the FASBs Emerging Issues Task Force
(EITF) reached a consensus on accounting for collaboration
arrangements as discussed in FASB ASC 808. The consensus
provides guidance on how the parties to a collaborative
agreement should account for costs incurred and revenue
generated on sales to third parties, how sharing payments
pursuant to a collaboration agreement should be presented in the
income statement and certain related disclosure questions. The
consensus was adopted by the Company as of January 1, 2009
and had no impact on its consolidated financial statements.
In December 2007, the FASB issued new standards for accounting
and reporting on business combinations as discussed in FASB ASC
805. The new standards require an acquirer to recognize the
assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. The new
standards are effective for the Company for business
combinations for which the acquisition date is on or after
January 1, 2009. The standards were adopted by the Company
as of January 1, 2009 and had no impact on its consolidated
financial statements.
In December 2007, the FASB modified GAAP by establishing
accounting and reporting standards for non-controlling
(minority) interests as discussed in FASB ASC
810-10-65.
The new standards were effective for fiscal years beginning
after December 15, 2008. The new standards were applied
prospectively; however, certain disclosure requirements require
retrospective treatment. The new standards were adopted by the
Company on January 1, 2009. As a result of the adoption,
the Companys non-controlling interest is now classified as
a separate component of equity, not as a liability as it was
previously presented.
In March 2008, the FASB issued new requirements for disclosures
about derivative instruments and hedging activities as discussed
in FASB ASC
815-10. The
new requirements require companies with derivative instruments
to disclose information that should enable financial statement
users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items
are accounted for, and how derivative instruments and related
hedged items affect a companys financial position,
financial performance, and cash flows. Entities shall select the
format and the specifics of disclosures relating to their volume
of derivative activity that are most relevant and practicable
for their individual facts and circumstances. The new
requirements expand the current disclosure framework and are
effective prospectively for all periods beginning on or after
November 15, 2008. The requirements were adopted by the
Company as of January 1, 2009. See Note 11 of our
consolidated financial statements included herein for the
required disclosures.
In May 2009, the FASB issued new standards for accounting and
reporting subsequent events as discussed in FASB ASC
855-10. The
new standards address the accounting for and disclosure of
events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
They also set forth: the period after the balance sheet date
during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances
under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial
statements and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. The new standards also require companies to disclose the
date through which subsequent events have
33
been evaluated and whether that date is the date the financial
statements were issued or the date the financial statements were
available to be issued. The new standards are effective for
interim and annual financial periods ending after June 15,
2009 and are to be applied prospectively. The Company adopted
the standards as of April 1, 2009.
In June 2009, the FASB amended guidance on variable interest
entities (VIEs) in ASC Topic 810. The amendments require
entities to evaluate former qualifies special purpose entities
for consolidation, changes the approach of determining a
VIEs primary beneficiary from a quantitative assessment to
a qualitative assessment designed to identify a controlling
financial interest, and increases the frequency of required
reassessments to determine whether a company is the primary
beneficiary of a VIE. It also clarifies, but does not
significantly change, the characteristics that identify a VIE.
The amendments are effective as of January 1, 2010 and the
Company does not anticipate them to have a material impact to
the Companys consolidated financial statements.
Also, in June 2009, the FASB issued new standards which remove
the concept of a qualifying special-purpose entity. This
standards clarify rules in order to determine whether a
transferor and all of the entities included in the
transferors financial statements being presented have
surrendered control over transferred financial assets. That
determination must consider the transferors continuing
involvements in the transferred financial asset, including all
arrangements or agreements made contemporaneously with, or in
contemplation of, the transfer, even if they were not entered
into at the time of the transfer. This standards modify the
financial-components approach in FASB ASC
860-10 and
limits the circumstances in which a financial asset, or portion
of a financial asset, should be derecognized when the transferor
has not transferred the entire original financial asset to an
entity that is not consolidated with the transferor in the
financial statements being presented
and/or when
the transferor has continuing involvement with the transferred
financial asset. The new standards are effective as of
January 1, 2010 and the Company does not anticipate they
will have a material impact to the Companys consolidated
financial statements.
In August 2009, the FASB issued Accounting Standards Update
2009-05,
Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value or
ASU 2009-05.
ASU 2009-05
allows companies determining the fair value of a liability to
use the perspective of an investor that holds the related
obligation as an asset. The update addresses practice
difficulties caused by the tension between fair-value
measurements based on the price that would be paid to transfer a
liability to a new obligor and contractual or legal requirements
that prevent such transfers from taking place. The update is
effective for interim and annual periods beginning after
August 27, 2009. The Company does not anticipate the
adoption of the update to have a material impact on the
financial statements.
For a description of recent accounting pronouncements adopted,
see Note 3 in our consolidated financial statements
included herein.
34
Results
of Operations
The results of operations for the years ended December 31,
2009, 2008 and 2007 are summarized below. The year ended
December 31, 2008 represents the combined results for the
Predecessor and Successor period presented. The combined results
are non-GAAP financial measures and should not be used in
isolation or substitution of Predecessor and Successor results.
We believe the combined results help to provide a presentation
of our results for comparability purposes to prior periods.
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(a)
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(b)
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Successor
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Successor
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Predecessor
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(a) + (b) Combined
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Predecessor
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Year Ended
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Period from
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Period from
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Year Ended
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Year Ended
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December 31,
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June 23, 2008 to
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January 1, 2008
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December 31,
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December 31,
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2009
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December 31, 2008
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to June 22, 2008
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2008
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2007
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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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35,793
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$
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72,889
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$
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6,602
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$
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79,491
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$
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133,149
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Library revenue
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41,979
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80,302
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66,643
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146,945
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98,862
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Total revenue
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77,772
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153,191
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73,245
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226,436
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232,011
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Cost of sales (including film production cost impairment charges
of $338,901 during the year ended December 31, 2009)
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413,122
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104,273
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49,396
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153,669
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137,074
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Gross (loss) profit
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(335,350
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)
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48,918
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|
|
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23,849
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|
|
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72,767
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|
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94,937
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Other costs and expenses:
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Selling, general and administrative
|
|
|
35,529
|
|
|
|
23,306
|
|
|
|
25,802
|
|
|
|
49,108
|
|
|
|
45,684
|
|
Amortization of intangible assets
|
|
|
1,139
|
|
|
|
665
|
|
|
|
671
|
|
|
|
1,336
|
|
|
|
1,327
|
|
Goodwill Impairment
|
|
|
|
|
|
|
59,838
|
|
|
|
|
|
|
|
59,838
|
|
|
|
|
|
Fees paid to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
287
|
|
|
|
600
|
|
Termination fee
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(372,018
|
)
|
|
|
(40,891
|
)
|
|
|
(2,911
|
)
|
|
|
(43,802
|
)
|
|
|
47,326
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(49,373
|
)
|
|
|
(18,727
|
)
|
|
|
(21,559
|
)
|
|
|
(40,286
|
)
|
|
|
(51,487
|
)
|
Interest income
|
|
|
9
|
|
|
|
23
|
|
|
|
34
|
|
|
|
57
|
|
|
|
215
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,297
|
)
|
Other (expense) income, net
|
|
|
(2,724
|
)
|
|
|
(895
|
)
|
|
|
706
|
|
|
|
(189
|
)
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and non-controlling interest in loss of
consolidated entity
|
|
|
(424,106
|
)
|
|
|
(60,490
|
)
|
|
|
(23,730
|
)
|
|
|
(84,220
|
)
|
|
|
(21,173
|
)
|
Income tax (provision) benefit
|
|
|
(7,294
|
)
|
|
|
(2,239
|
)
|
|
|
1,518
|
|
|
|
(721
|
)
|
|
|
(1,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before non- controlling interest in loss of consolidated
entity
|
|
|
(431,400
|
)
|
|
|
(62,729
|
)
|
|
|
(22,212
|
)
|
|
|
(84,941
|
)
|
|
|
(22,597
|
)
|
Non-controlling interest in loss of consolidated entity
|
|
|
180,286
|
|
|
|
26,534
|
|
|
|
|
|
|
|
26,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(251,114
|
)
|
|
$
|
(36,195
|
)
|
|
$
|
(22,212
|
)
|
|
$
|
(58,407
|
)
|
|
$
|
(22,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
(18.23
|
)
|
|
|
(2.68
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The year
ended December 31, 2009 compared to the year ended
December 31, 2008
The year ended December 31, 2008 represents the combined
results for the Predecessor and Successor period presented. The
combined results are non-GAAP financial measures and should not
be used in isolation or substitution of Predecessor and
Successor results. We believe the combined results help to
provide a presentation of our results for comparability purposes
to prior periods.
Revenue,
cost of sales and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
As a
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Variance $
|
|
|
Variance %
|
|
|
|
(Dollars in thousands)
|
|
|
Production revenue
|
|
$
|
35,793
|
|
|
|
46
|
%
|
|
$
|
79,491
|
|
|
|
35
|
%
|
|
$
|
(43,698
|
)
|
|
|
(55
|
)%
|
Library revenue
|
|
|
41,979
|
|
|
|
54
|
%
|
|
|
146,945
|
|
|
|
65
|
%
|
|
|
(104,966
|
)
|
|
|
(71
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
77,772
|
|
|
|
100
|
%
|
|
|
226,436
|
|
|
|
100
|
%
|
|
|
(148,664
|
)
|
|
|
(66
|
)%
|
Cost of sales
|
|
|
413,122
|
|
|
|
N/M
|
|
|
|
153,669
|
|
|
|
68
|
%
|
|
|
259,453
|
|
|
|
169
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
$
|
(335,350
|
)
|
|
|
N/M
|
|
|
$
|
72,767
|
|
|
|
32
|
%
|
|
$
|
(408,117
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased $148.7 million, or 66%, to
$77.8 million during the year ended December 31, 2009
from $226.4 million during the same period in 2008.
Production revenue decreased $43.7 million to
$35.8 million during the year ended December 31, 2009,
compared to $79.5 million during 2008. The reduction in
production revenue is attributed to the decrease in the size of
the 2009 film slate versus 2008. During the year ended
December 31, 2009, 10 original MFT movies and five original
mini-series were delivered, while 27 original MFT movies and
eight original mini-series were delivered during the year ended
December 31, 2008. The delivery of fewer films during the
year ended December 31, 2009 compared to the prior year was
the result of continuingly weak market conditions and
constraints on the Companys capital resources (See
Managements Discussion and Analysis
Liquidity and capital resources).
Library revenue decreased $105.0 million, or 71%, to
$42.0 million during the year ended December 31, 2009
from $146.9 million during the comparable period in 2008.
Library revenue continues to be negatively impacted by the
slow-down in sales activity resulting from weak market
conditions that began in the fourth quarter of 2008 and
continued throughout 2009. Approximately $74.5 million of
the decrease is attributable to one customer who had significant
licenses with windows opening during the year ended
December 31, 2008 as compared to the same period in 2009.
Also contributing to the decrease was a $9.4 million
reduction in revenue related to the distribution of programming
on ION during the year ended December 31, 2009 compared to
prior year. This decrease is the result of the termination of
our agreement with ION effective as of June 30, 2009 as
well as a weaker advertising market.
Cost of sales increased $259.5 million to
$413.1 million during the year ended December 31, 2009
from $153.7 million during 2008. Cost of sales is comprised
of film cost amortization, film cost impairment charges, certain
distribution expenses and, through June 30, 2009,
amortization of minimum guarantee payments made to ION. The
decrease in gross profit during the year ended December 31,
2009 compared to the prior year is primarily due to film
production cost impairment charges of $338.9 million
recorded during the year ended December 31, 2009 (see
discussion below). No film production cost impairment charges
were recorded during 2008. Additionally, film cost amortization
(excluding film production cost impairment charges and a
one-time charge related to the termination of the ION agreement)
as a percentage of revenue increased to 73% during the year
ended December 31, 2009 compared to 61% during in 2008 as a
result of our annual ultimate revenue assessment (see discussion
below) and its impact on the amortization rates associated with
our films. This is a trend that has continued from the prior
year and is due to the challenging market conditions confronting
the media and entertainment industry previously discussed.
Additionally, the lower revenue recognized during the year ended
December 31, 2009 and the fact that the distribution
expenses and ION minimum guarantee expense do not directly
correlate to the recognized revenue contributed to the decrease
in gross profit.
36
We review the ultimate revenues associated with our films. This
analysis considers various data points, including current market
conditions, library sales activity, pricing, the delivery of our
annual film slate and the results of the annual independent
valuation of the unsold rights to our film library. This
assessment as of December 31, 2009 was completed in
February of 2010. As a result of the continued weak market
conditions, sales data, pricing and other factors present during
the fourth quarter of 2009 and into 2010 as well as the
significant decline in the annual independent valuation of the
unsold rights to our film library, this analyses resulted in a
significant reduction of the ultimate revenues for the majority
of films in our library. In addition, based upon a qualitative
analysis and assessment of recent sales activity, we now assume
that there will be no future revenues for certain films. A
reduction in the ultimate revenue associated with a film results
in a higher rate of amortization over that films remaining
accounting life and causes a reduction in that films
prospective profit margin. The reduction in ultimate revenues
resulted in a decrease in the fair value of films to an amount
below their net book value. As a result, impairment charges were
recorded totaling $338.9 million during the year ended
December 31, 2009 to reduce the net book value of those
films to an amount approximating their fair value. Refer to
Note 6 of our consolidated financial statements included
herein. In addition, the reduction in ultimate revenues resulted
in a $1.1 million increase to film cost amortization for
the year ended December 31, 2009 related to films for which
revenue has been recognized during the period.
Contributing to the increase in Other cost of sales as a
percentage of revenue was an approximately $3.4 million
credit recorded during the year ended December 31, 2008 as
a result of the reduction of certain participation accruals. No
similar credit was recorded in the year ended December 31,
2009.
Other
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance $
|
|
|
Variance %
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
35,529
|
|
|
$
|
49,108
|
|
|
$
|
(13,579
|
)
|
|
|
(28
|
)%
|
Amortization of intangible assets
|
|
|
1,139
|
|
|
|
1,336
|
|
|
|
(197
|
)
|
|
|
(15
|
)%
|
Goodwill Impairment
|
|
|
|
|
|
|
59,838
|
|
|
|
(59,838
|
)
|
|
|
N/M
|
|
Management and termination fees
|
|
|
|
|
|
|
6,287
|
|
|
|
(6,287
|
)
|
|
|
N/M
|
|
Selling, general and administrative expenses decreased
$13.6 million to $35.5 million during the year ended
December 31, 2009, from $49.1 million in 2008. The
decrease of 28% is primarily due to the reversal of
approximately $2.8 million of accounts receivable reserves
in 2009, which were established during the year ended
December 31, 2008. Additionally, during the year ended
December 31, 2008, we incurred approximately
$4.7 million more in costs associated with severance
agreements compared to the year ended December 31, 2009 and
$3.4 million more in costs related to the marketing and
promotion of our programming on ION. These decreases were offset
by additional costs incurred in connection with operating as a
publicly traded company and professional fees (associated with
the ongoing restructuring of our capital structure) which were
not incurred during the year ended December 31, 2008. While
the Company has begun to experience cash savings from our 2008
decision to reduce overhead costs, the savings are not reflected
in our selling, general and administrative expenses because a
significant portion of the savings related to overhead costs
that were capitalized and allocated to our films in the prior
year.
In 2006, we agreed to pay Kelso an annual management fee of
$0.6 million in connection with a financial advisory
agreement for the planning, strategy, oversight and support to
management. A total of $0.3 million of this management fee
was recorded as fees paid to related parties during the year
ended December 31, 2008. Concurrent with the closing of the
IPO, we paid Kelso $6.0 million in exchange for the
termination of its fee obligations under the existing financial
advisory agreement. The $6.0 million was recorded as fees
paid to related parties during the year ended December 31,
2008.
Interest
expense, net
Interest expense, net increased $9.1 million to
$49.4 million for the year ended December 31, 2009
from $40.3 million during 2008. The increase in interest
expense is primarily due to amortization of the fair market
value
37
of the interest rate swaps de-designated as hedges. As discussed
in Note 11 of our audited consolidated financial statements
included herein, on April 21, 2009, the Company amended its
existing interest rate swap agreements and de-designated them as
cash flow hedges. As a result of the de-designation, the fair
market value of the swaps immediately preceding the amendments
was to be amortized as interest expense for the period of
April 21, 2009 through April 27, 2010, which was the
maturity date of the original swaps. On December 23, 2009,
when the Company terminated the interest rate swaps, the
remaining $5.5 million portion of the unamortized value was
immediately recognized as interest expense. For the year ended
December 31, 2009, the amortization of the fair value of
the amended interest rate swaps was $16.1 million. In
addition, interest expense associated with the net settlement of
our interest rate swaps increased $5.8 million and
amortization of deferred debt costs increased $1.1 million
during the year ended December 31, 2009 compared to the
prior year. Partially offsetting the effects of the accounting
for our interest rate swaps and deferred debts costs was a
reduction in weighted average interest rates during the year
ended December 31, 2009 as compared to 2008 resulting from
the reductions in the benchmark interest rates (i.e. LIBOR). The
average interest rate during the year ended December 31,
2009 was 3.6%, compared to 5.9% during 2008. In addition,
weighted average debt balances outstanding during the year ended
December 31, 2009 decreased compared to 2008. During the
year ended December 31, 2009, we had an average debt
balance of $583.6 million compared to $618.4 million
during 2008.
Other
income (expense), net
For the year ended December 31, 2009, Other income
(expense), net represents the change in fair value of our
interest rate swaps subsequent to the amendment and
de-designation of our interest rate swaps as cash flow hedges
and realized foreign currency losses resulting from the
settlement of customer accounts denominated in foreign
currencies. The change in the fair market value of our interest
rate swaps resulted in a loss of $2.4 million and foreign
exchange losses amounted to $0.3 million for the year ended
December 31, 2009. Other income (expense), net for the year
ended December 31, 2008 primarily represents foreign
exchange losses of $0.2 million.
Income
tax (provision) benefit
The income tax provision for the year ended December 31,
2009 is primarily related to the establishment of deferred tax
asset valuation allowances and tax contingency reserves
associated with our corporate subsidiary as well as foreign
taxes related to license fees from customers located outside the
United States. The provision in 2008 is primarily related to
foreign taxes related to license fees from customers located
outside the United States. No tax benefit has been provided for
RHI Inc.s interest in the net loss because insufficient
evidence is available that would support that it is more likely
than not that we will generate sufficient income to utilize the
net operating loss generated by RHI Inc.
Net
loss
The net loss for the year ended December 31, 2009 was
$251.1 million, compared to $(58.4) million for the
year ended December 31, 2008. The net loss for the year
ended December 31, 2009 includes the $338.9 million
film production cost impairment charge discussed above.
Additionally, the net loss for the year ended December 31,
2009 is not comparable to the net loss for the year ended
December 31, 2008, as the pre-IPO period from
January 1, 2008 to June 22, 2008 does not include any
adjustment for non-controlling interest in loss of consolidated
entity.
The year
ended December 31, 2008 compared to the year ended
December 31, 2007
The year ended December 31, 2008 represents the combined
results for the Predecessor and Successor period presented. The
combined results are non-GAAP financial measures and should not
be used in isolation or substitution of Predecessor and
Successor results. We believe the combined results help to
provide a presentation of our results for comparability purposes
to prior periods.
38
Revenue,
cost of sales and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
As a
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Variance $
|
|
|
Variance %
|
|
|
|
(Dollars in thousands)
|
|
|
Production revenue
|
|
$
|
79,491
|
|
|
|
35
|
%
|
|
$
|
133,149
|
|
|
|
57
|
%
|
|
$
|
(53,658
|
)
|
|
|
(40
|
)%
|
Library revenue
|
|
|
146,945
|
|
|
|
65
|
%
|
|
|
98,862
|
|
|
|
43
|
%
|
|
|
48,083
|
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
226,436
|
|
|
|
100
|
%
|
|
|
232,011
|
|
|
|
100
|
%
|
|
|
(5,575
|
)
|
|
|
(2
|
)%
|
Cost of sales
|
|
|
153,669
|
|
|
|
68
|
%
|
|
|
137,074
|
|
|
|
59
|
%
|
|
|
16,595
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
72,767
|
|
|
|
32
|
%
|
|
$
|
94,937
|
|
|
|
41
|
%
|
|
$
|
(22,170
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased $5.6 million, or 2%, to
$226.4 million during the year ended December 31, 2008
from $232.0 million during the same period in 2007.
Production revenue was $79.5 million in 2008 compared to
$133.1 million in 2007. The number of films delivered in
2008 decreased to 35 (eight mini-series and 27 MFT movies) from
43 (five mini-series, 37 MFT movies and one episodic series) in
2007. The decrease of approximately 40% in production revenue
resulted primarily from the decrease in the average revenue per
MFT movie and mini-series as well as a decrease in the number of
MFT movies delivered in 2008. The decrease in average revenue
per film reflects lower sales activity resulting from the
economic slowdown in the fourth quarter of 2008. Additionally,
there were short-term delays in license fee revenue recognition
stemming from our operating decision to provide exploitation
windows for programming on ION
and/or PPV
prior to exploitation windows on broadcast or cable networks. As
previously discussed, our agreement with ION was terminated
effective as of August 10, 2009. Fewer productions were
intentionally delivered during 2008 in an effort to more
efficiently manage the Companys capital resources.
Library revenue totaled $146.9 million in 2008 compared to
$98.9 million in 2007. The increase of approximately 49% is
due primarily to the addition of the 2007 slate to the library,
increased average revenue per library title and additional
revenue related to the distribution of programming on ION.
Revenue related to the distribution of programming on ION
increased $9.0 million in 2008 compared to 2007. Our
arrangement with ION did not commence until late June 2007 and,
consequently, there was less revenue during 2007.
Cost of sales increased $16.6 million to
$153.7 million in 2008 from $137.1 million during
2007. Cost of sales as a percentage of revenue increased to 68%
in 2008 from 59% in 2007. Cost of sales is primarily comprised
of film cost amortization, which as a percentage of revenue was
61% in 2008 compared to 53% in 2007. Consequently, our gross
profit percentage declined to 32% in 2008 from 41% in 2007.
The average amortization rate on library revenue was higher than
in 2007 due to the mix of films for which revenue was recognized
in each period. Amortization is on a
film-by-film
basis and, on average, the films for which revenue was
recognized during 2008 had higher rates of amortization than
those in the same period of 2007. Amortization rates on
production revenue were higher in 2008 than in 2007 reflecting
the lower average revenue per film in 2008 and its impact on the
sales projections for these films over their accounting life
cycles.
Also contributing to the decrease in gross profit as a
percentage of revenue was an additional $6.7 million of
cost arising from the amortization of minimum guarantee payments
made to ION during 2008 resulting from our arrangement with ION,
which commenced in late June 2007.
39
Other
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance $
|
|
|
Variance %
|
|
|
|
(Dollars in thousands)
|
|
|
Selling, general and administrative
|
|
$
|
49,108
|
|
|
$
|
45,684
|
|
|
$
|
3,424
|
|
|
|
7
|
%
|
Amortization of intangible assets
|
|
|
1,336
|
|
|
|
1,327
|
|
|
|
9
|
|
|
|
1
|
%
|
Goodwill Impairment
|
|
|
59,838
|
|
|
|
|
|
|
|
59,838
|
|
|
|
N/M
|
|
Management and termination fees
|
|
|
6,287
|
|
|
|
600
|
|
|
|
5,687
|
|
|
|
N/M
|
|
Selling, general and administrative expenses increased
$3.4 million to $49.1 million during the year ended
December 31, 2008 from $45.7 million during the year
ended December 31, 2007. During 2008, we incurred
$6.5 million of severance related costs and a
$3.0 million provision for bad debt that was established
during the year primarily related to one customer whose payments
owed to us are past due. We also incurred additional costs in
connection with operating as a publicly traded company during
2008 as compared to 2007. The aforementioned increases were
partially offset by $3.7 million of professional fees
incurred in 2007 for the consideration of financing structures
and $3.9 million of legal and accounting fees incurred in
2007 in connection with a prior postponement of our IPO. There
were no comparable costs incurred during 2008.
During the quarter ended December 31, 2008, our stock price
declined significantly to a level indicating a market
capitalization well below the Companys book value. In
analyzing the decline in stock price, we considered the decline
to be primarily attributable to overall stock market volatility
experienced in the fourth quarter. As a result of the
significant reduction in our public market valuation, we
performed a review of our Goodwill as of December 31, 2008
and determined that it was appropriate to write-off our
Goodwill. As a result, a $59.8 million impairment charge
was recorded in the fourth quarter of 2008.
In 2006, we agreed to pay Kelso an annual management fee of
$0.6 million in connection with a financial advisory
agreement for planning, strategy, oversight and support to
management. A total of $0.3 million and $0.6 million
of this management fee was recorded as fees paid to related
parties during the years ended December 31, 2008 and 2007,
respectively. Concurrent with the closing of the IPO, we paid
Kelso $6.0 million in exchange for the termination of its
fee obligations under the existing financial advisory agreement.
The $6.0 million was recorded as fees paid to related
parties during the year ended December 31, 2008.
Interest
expense, net
Interest expense, net decreased $11.2 million to
$40.3 million for the year ended December 31, 2008
from $51.5 million during the comparable period in 2007.
The decrease in interest expense is primarily due to a lower
average interest rate during the year ending December 31,
2008 as compared to the comparable period of 2007 resulting from
the favorable refinancing of our credit facilities in April 2007
as well as reductions in the benchmark interest rates (i.e.
LIBOR). The average interest rate during the year ended
December 31, 2008 was 5.9%, compared to 8.2% during the
comparable period of 2007. Also contributing to the decrease in
interest expense was a lower weighted average debt balance
outstanding during 2008 compared to 2007. During the year ended
December 31, 2008, we had an average debt balance of
$618.4 million compared to $635.7 million during 2007.
Offsetting the decreases in the average rate and weighted
average debt balance was an increase in interest expense
recorded in connection with our interest rate swap contracts
resulting from the aforementioned reduction in LIBOR.
Approximately $7.7 million in interest expense was recorded
in connection with our interest rate swap contracts during the
year ended December 31, 2008, compared to $1.0 million
of income for the year ended December 31, 2007.
Loss
on extinguishment of debt
On April 13, 2007 we amended and restated our credit
agreements that govern our senior credit facilities. These
facilities, as of December 31, 2007, consisted of a
$275.0 million revolving credit facility, a
$175.0 million term loan facility and a $260.0 million
existing senior second lien term loan facility. These facilities
replaced the senior credit facilities secured on
January 12, 2006 (inception), as subsequently amended, in
connection with the acquisition of the Company. As a result of
entering into the amended and restated facilities, the Company
incurred a
40
loss on extinguishment of debt of $17.3 million during the
year ended December 31, 2007. There was no comparable
expense incurred during 2008.
Other
(expense) income, net
Other (expense) income, net primarily represents realized
foreign currency (losses) gains resulting from the settlement of
customer accounts denominated in foreign currencies. For the
year ended December 31, 2008, we realized foreign currency
losses totaling $0.2 million compared to foreign currency
gains of $0.1 million during the year ended
December 31, 2007.
Income
tax provision
Income tax expense was $0.7 million for the year ending
December 31, 2008, a decrease of $0.7 million from the
same period of 2007. The decrease in tax expense in 2008 is
primarily due to a decrease in pre-tax income associated with
our corporate subsidiary, combined with lower foreign taxes
related to license fees from customers located outside the
United States. No tax benefit has been provided for RHI
Inc.s interest in the net loss because insufficient
evidence is available that would support that it is more likely
than not that we will generate sufficient income to utilize the
net operating loss recorded by RHI Inc. in the period from June
23 through December 31, 2008.
Net
loss
The net loss, including the Goodwill impairment charge of
$59.8 million in 2008, for the years ended
December 31, 2008 and 2007 was $(58.4) million and
$(22.6) million, respectively.
Liquidity
and capital resources
Our credit facilities include: (i) first lien senior
secured facilities consisting of a $175.0 million term loan
facility and a $350.0 million revolving credit facility;
and (ii) a $75.0 million second lien senior secured
term loan facility. On December 23, 2009, in conjunction
with the termination of our interest rate swaps, the value owed
to counterparties under the interest rate swaps was immediately
converted into $19.6 million of secured debt under our
first lien facilities. As of December 31, 2009, all of our
debt was variable rate and totaled $609.2 million
outstanding. As of December 31 2009, we had $25.1 million
of cash compared to $22.4 million of cash at
December 31, 2008. As of December 31, 2009, we had no
additional borrowings available. See Risk
factors Risks related to the business
Our substantial indebtedness and failure to comply with the
financial covenants contained in the credit agreements governing
our senior secured credit facilities will likely have a material
adverse affect on our operating results and financial
condition.
Market conditions confronting the media and entertainment
industry have continued to be a challenge for us. The business
environment deteriorated substantially beginning in the fourth
quarter of 2008 and remained challenging throughout all of 2009.
Specifically, total revenue in 2009 declined significantly as
compared to prior years. This was primarily due to 2009 fourth
quarter sales activity falling dramatically short of our
expectations, as well as, fourth quarter revenue from the prior
year. As a result of the significant weakening of our financial
position, results of operations and liquidity in 2009, we are
currently in default of certain covenants of our senior secured
facilities and in discussions with our lenders regarding a
restructuring of our senior secured credit facilities. However,
we can provide no assurance that we will be able to successfully
restructure our debt obligations. If we are unsuccessful in
restructuring our debt obligations or unable to come to a
consensual agreement with our creditors, we will likely be
required to seek protection under Chapter 11 of the
U.S. Bankruptcy Code. We have retained the services of
outside advisors to assist us in instituting and implementing a
restructuring transaction. See Risk Factors
Risks related to our business We expect to pursue a
strategic restructuring, refinancing or other transaction in
order to preserve our long-term financial condition, and current
market conditions could limit our ability to consummate such a
transaction, which would likely have a material adverse effect
on our financial condition.
Even if we are successful in coming to a consensual agreement
with some or all of our creditors, any such restructuring would
likely involve a filing under Chapter 11 of the
U.S. Bankruptcy Code and any such filing would result in
our current equityholders receiving little or no continuing
interest in the Company. See Risk Factors
41
Risks related to investments in our common stock If
we seek protection under Chapter 11 of the
U.S. Bankruptcy Code, all of our outstanding shares of
capital stock would likely be cancelled and holders of our
capital stock would not be entitled to any payment in respect of
their shares. The accompanying financial statements have
been prepared on a going concern basis, which contemplates
continuity of operations, realization of assets, and liquidation
of liabilities in the ordinary course of business, and do not
reflect adjustments that might result if the Company were unable
to continue as a going concern. In addition, any filing under
Chapter 11 of the U.S. Bankruptcy Code will likely
result in substantial changes to amounts recorded in our
financial statements for period after the date of such filing.
In connection with the discussion above, certain recent events,
which are summarized below, have occurred over the last several
months.
|
|
|
|
|
We have incurred net losses from operations and net operating
cash outflows in each of the past four years and at
December 31, 2009 have an accumulated deficit of
$287.3 million. Our inability to borrow under our revolving
credit facility, coupled with other factors described above, has
resulted in liquidity constraints and an inability to pay some
of our obligations as they come due. The liquidity constraints
are also preventing us from making certain expenditures to
continue producing and acquiring as many films as we could have
otherwise. As a result, we decreased our production slate for
2009, reduced our selling, general and administrative expenses
through cost-cutting measures that included, among others, job
reductions and we expect to take additional steps to preserve
liquidity. However, despite any additional cost-saving steps we
may implement, unless we successfully restructure our debt
and/or
obtain other sources of liquidity and generate sufficient
revenue and cash flows from operations, we will not have the
resources to continue as a going concern. There can be no
assurance that we will be successful in such endeavors. The
report of our independent registered public accounting firm
included elsewhere in this Annual Report contains an explanatory
paragraph expressing substantial doubt regarding our ability to
continue as a going concern.
|
As a result of the foregoing, we engaged Rothschild, Inc. as a
financial advisor in the fourth quarter of 2009, and are in the
midst of in-depth discussions with our first and second lien
lenders with respect to restructuring our indebtedness and
capital structure. We expect these discussions to likely result
in a significant or complete dilution of our existing
equityholders interest through an issuance of preferred
stock or common stock to some or all of our lenders
and/or
creditors. It is also possible that these discussions could
result in a sale of some or all of the Companys assets for
less than their book value. No assurance can be given as to
whether these discussions will be successful. If we are not
successful in restructuring our debt obligations or unable to
come to a consensual agreement with our creditors, we will
likely be required to seek protection under Chapter 11 of
the U.S. Bankruptcy Code. Even if we are successful in
coming to a consensual agreement with some or all of our
creditors, any such restructuring would likely involve a filing
under Chapter 11 of the U.S. Bankruptcy Code and any
such filing would result in our current equityholders receiving
little or no continuing interest in the Company.
|
|
|
|
|
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) have agreed to forbear
from exercising certain of their rights and agreed to waive some
of the existing or prospective defaults until March 31,
2010 unless such forbearance agreement is earlier
42
terminated due to further unanticipated defaults or other
factors. The forbearance agreements are short term arrangements
that allow us to work with the agents and lenders under our
senior secured credit facilities to develop a longer-term
strategy for restructuring our liabilities. Under the
forbearance agreements, we agreed, among other things, that:
|
|
|
|
|
we cannot borrow additional loans or issue additional letters of
credit under the credit agreement governing our first lien
credit facility;
|
|
|
|
default interest of 2% will accrue on all loans under the credit
agreement governing our first and second lien credit facilities
and on the swap settlement amounts, in addition to the rate of
interest otherwise applicable;
|
|
|
|
certain covenants under the credit agreement governing our first
lien credit facility (including those relating to investments,
restricted payments, permitted liens, asset sales, subsidiary
guarantors, control agreements, and cash expenditures and
distributions) will become more restrictive;
|
|
|
|
we will provide additional information to the lender and their
counsel, including among other things a cash flow schedule that
is updated weekly;
|
|
|
|
we will limit the amounts and timing of our cash expenditures to
the amounts itemized in the cash flow schedule, subject to a
variance;
|
|
|
|
we will maintain a minimum cash balance; and
|
|
|
|
we will provide monthly and year-to-date financial information
and an updated draft valuation report of our film library.
|
If we are not able to cure all defaults or enter into a new
forbearance agreement for each of our credit facilities by
March 31, 2010 (or any earlier date that the forbearance
agreements may be terminated), then the agents and lenders under
the respective credit facilities and swap counterparties may
exercise all of their rights and remedies, including the
acceleration of the loans and foreclosure on collateral. Upon
the occurrence of such events, the Company would likely avail
itself of the protection under Chapter 11 of the
U.S. Bankruptcy Code, which would result in our current
equityholders receiving little or no continuing interest in the
Company.
As referenced above, the annual third party valuation report of
our film library as required by our lenders under our first lien
credit facility (the Valuation Report) was completed in March of
2010. The Valuation Report indicates a material and substantial
reduction of approximately 50% of the non-contracted value of
the films in our film library at December 31, 2009 as
compared to the third party valuation at December 31, 2008
using similar methodologies. The decrease in the value of our
film library directly and materially reduces the borrowing base
governing the revolving credit facility under the First Lien
Credit Agreement. This result of the Valuation Report is also a
contributing factor for our annual assessment of ultimate
revenues.
The chart below shows our cash flows for the years ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Year Ended December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net cash used in operating activities
|
|
$
|
(9,816
|
)
|
|
$
|
(55,119
|
)
|
|
$
|
(88,778
|
)
|
Net cash used in investing activities
|
|
|
(237
|
)
|
|
|
(172
|
)
|
|
|
(132
|
)
|
Net cash provided by financing activities
|
|
|
12,800
|
|
|
|
76,257
|
|
|
|
86,566
|
|
Cash (end of period)
|
|
|
25,120
|
|
|
|
22,373
|
|
|
|
1,407
|
|
Operating
activities
Cash used in operating activities in the year ended
December 31, 2009 was $9.8 million, as compared to
$55.1 million for 2008. Operating cash flows reflect
spending related to production, distribution, selling, general
and administrative expenses and interest, offset by the
collection of cash associated with the distribution of our MFT
movies, mini-series and other television programming. The
$45.3 million improvement in operating cash flows was
43
primarily the result of a $34.4 million increase in
receipts from the film library, a $14.2 million decrease in
payments related to the distribution of our programming on ION,
$5.7 million decrease in payments related to selling,
general and administrative expense and $5.1 million
reduction in interest paid.
Cash used in operating activities in the year ended
December 31, 2008 was $55.1 million, as compared to
$88.8 million for 2007. Operating cash flows reflect
spending related to production, distribution, selling, general
and administrative expenses and interest, offset by the
collection of cash associated with the distribution of our MFT
movies, mini-series and other television programming. The
$33.7 million improvement in operating cash flows was
primarily the result of a $23.2 million increase in
receipts from the film library and a $5.4 million reduction
in interest paid.
Investing
activities
During the years ended December 31, 2009, 2008 and 2007, we
used $0.2 million, $0.2 million and $0.1 million,
respectively, in investing activities, reflecting the purchase
of property and equipment.
Financing
activities
During the year ended December 31, 2009, there was
$12.8 million of cash provided by financing activities due
to borrowings under our credit facilities (net of repayments of
$1.0 million), principally to fund our operations.
During the year ended December 31, 2008, $76.3 million
of cash was provided by financing activities. We used the
$174.0 million of net proceeds from our IPO in combination
with $55.0 million of proceeds from our new second lien
term loan and $81.2 million of proceeds from our revolving
credit facility to fund the $260.0 million repayment of our
prior second lien term loan, a $35.7 million distribution
to KRH, a $2.6 million second lien term loan pre-payment
penalty and $4.2 million of costs associated with our new
and amended credit facilities. RHI LLC received a
$29.1 million equity contribution from KRH prior to the
IPO. An additional $40.0 million of cash was provided by
financing activities from borrowings under our credit facilities
(net of repayments of $69.6 million), inclusive of
$19.6 million in proceeds from additional loans under our
second lien credit facility.
During 2007, $86.6 million of cash was provided by
financing activities from borrowings under our credit facilities
(net of deferred debt financing costs of $3.9 million and
repayments of $653.9 million), principally to fund our
operating activities.
Contractual
obligations
The following table sets forth our contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Off-balance sheet arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments(1)
|
|
$
|
34,226
|
|
|
$
|
3,766
|
|
|
$
|
7,205
|
|
|
$
|
7,007
|
|
|
$
|
16,248
|
|
Purchase obligations(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,226
|
|
|
|
3,766
|
|
|
|
7,205
|
|
|
|
7,007
|
|
|
|
16,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations reflected on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations(3)
|
|
|
609,171
|
|
|
|
19,582
|
|
|
|
52,500
|
|
|
|
462,089
|
|
|
|
75,000
|
|
Accrued film production costs(4)
|
|
|
68,220
|
|
|
|
68,108
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
Other contractual obligations(5)
|
|
|
8,229
|
|
|
|
5,229
|
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
|
|
Uncertain tax positions(6)
|
|
|
586
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686,206
|
|
|
|
93,505
|
|
|
|
54,612
|
|
|
|
463,089
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
720,432
|
|
|
$
|
97,271
|
|
|
$
|
61,817
|
|
|
$
|
470,096
|
|
|
$
|
91,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
(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 11 in our 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, subject to any forbearance agreements we may
be subject to from time to time, our lenders have the ability to
accelerate those obligations (see Notes 1 and 11 to our
consolidated financial statements included herein). |
|
(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 $2.1 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.
|
|
Item 7A.
|
Quantitative
and qualitative disclosures about market 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 year ended
December 31, 2009, the period from June 23, 2008
through December 31, 2008, the period from January 1,
2008 through June 22, 2008 and the year ended
December 31, 2007 were $(0.3) million,
$(0.9) million, $0.7 million and $0.1 million,
respectively.
Credit
risk
We are exposed to credit risk from our licensees. These parties
may default on their obligations to us, due to bankruptcy, lack
of liquidity, operational failure or other reasons.
|
|
Item 8.
|
Financial
Statements and Supplemental Data
|
See Index to Consolidated Financial Statements beginning on
page F-1.
45
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures pursuant to
Rule 13a-15
under the Exchange Act as of the end of the period covered by
this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this annual report, our
disclosure controls and procedures (as defined in
Rule 13a-15(e)
under the Exchange Act) are effective, in all material respects,
to ensure that information we are required to disclose in
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
(b) Managements Annual Report on Internal Control
Over Financial Reporting and Report of Independent Registered
Public Accounting Firm
This annual report includes a report of managements
assessment regarding internal controls over financial reporting,
but does not include an attestation report of our registered
public accounting firm due to a transition period established by
the rules of the SEC for newly public companies.
(c) Change in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rule 13a-15(f)
under the Exchange Act) occurred during our most recent fiscal
quarter that has materially affected, or is likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
46
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information contained in this section is incorporated herein
by reference to the Proxy Statement and this Annual Report on
Form 10-K
under the caption Part II Item 5. Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item is incorporated herein by
reference to the Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item is incorporated herein by
reference to the Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) (1) and (a) (2) Financial statements and
financial statement schedules
See Index to Consolidated Financial Statements beginning on
page F-1.
(b) Exhibits
See Exhibit Index beginning on
page IV-1.
(c) Financial Statement Schedules
Financial Statement Schedules not included herein have been
omitted because they are neither required, nor applicable, or
the information is otherwise included herein.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 26, 2010.
RHI ENTERTAINMENT, INC.
|
|
|
|
By:
|
/s/ Robert
A. Halmi, Jr.
|
Robert A. Halmi, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, as
amended, this Report has been signed below by the following
persons on behalf of the Registrant in the capacities and as of
the date indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
A. Halmi, Jr.
Robert
A. Halmi, Jr.
|
|
President and Chief Executive
Officer & Director
(Principal Executive Officer)
|
|
March 26, 2010
|
|
|
|
|
|
/s/ William
J. Aliber
William
J. Aliber
|
|
Chief Financial Officer
(Principal Financial
and Accounting Officer)
|
|
March 26, 2010
|
|
|
|
|
|
/s/ Jeffrey
Sagansky
Jeffrey
Sagansky
|
|
Chairman of the Board
|
|
March 26, 2010
|
|
|
|
|
|
/s/ Michael
B. Goldberg
Michael
B. Goldberg
|
|
Director
|
|
March 26, 2010
|
|
|
|
|
|
/s/ Jeffrey
C. Bloomberg
Jeffrey
C. Bloomberg
|
|
Director
|
|
March 26, 2010
|
|
|
|
|
|
/s/ Thomas
M. Hudgins
Thomas
M. Hudgins
|
|
Director
|
|
March 26, 2010
|
|
|
|
|
|
/s/ Russel
H. Givens
Russel
H. Givens
|
|
Director
|
|
March 26, 2010
|
|
|
|
|
|
/s/ J.
Daniel Sullivan
J.
Daniel Sullivan
|
|
Director
|
|
March 26, 2010
|
48
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
RHI
ENTERTAINMENT, INC.
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
RHI Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of
RHI Entertainment, Inc. and subsidiaries (Successor) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders (deficit)
equity / members equity and comprehensive loss,
and cash flows of RHI Entertainment, Inc. and subsidiaries for
the year ended December 31, 2009 and the period from
June 23, 2008 to December 31, 2008 (Successor
periods), and the consolidated statement of operations,
stockholders (deficit) equity / members
equity and comprehensive loss, and cash flows of RHI
Entertainment, LLC and subsidiaries (Predecessor) for the period
from January 1, 2008 to June 22, 2008 and the year
ended December 31, 2007 (Predecessor periods). These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated
financial statements present fairly, in all material respects,
the financial position of RHI Entertainment, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for the
Successor periods, in conformity with U.S. generally
accepted accounting principles. In our opinion, the
aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the results of
operations and cash flows of RHI Entertainment, LLC and
subsidiaries for the Predecessor periods, in conformity with
U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in note 1 to the consolidated
financial statements, the Company has incurred losses from
operations and net operating cash outflows in each of the past
four years, has an accumulated deficit, is in default of
covenants of its debt agreements and is unable to pay some of
its obligations as they come due. These factors raise
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in note 1. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG
LLP
New York, New York
March 26, 2010
F-2
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSETS
|
Cash
|
|
$
|
25,120
|
|
|
$
|
22,373
|
|
Accounts receivable, net of allowance for doubtful accounts and
discount to present value of $5,350 and $11,933, respectively
|
|
|
85,217
|
|
|
|
180,125
|
|
Film production costs, net
|
|
|
461,232
|
|
|
|
780,122
|
|
Property and equipment, net
|
|
|
390
|
|
|
|
370
|
|
Prepaid and other assets, net
|
|
|
14,768
|
|
|
|
28,928
|
|
Intangible assets, net
|
|
|
1,125
|
|
|
|
2,264
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
587,852
|
|
|
$
|
1,014,182
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Accounts payable and accrued liabilities
|
|
|
21,610
|
|
|
|
51,477
|
|
Accrued film production costs
|
|
|
166,895
|
|
|
|
195,328
|
|
Debt
|
|
|
609,171
|
|
|
|
576,789
|
|
Deferred revenue
|
|
|
22,861
|
|
|
|
13,530
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
820,537
|
|
|
|
837,124
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; 125,000 shares
authorized and 23,416 shares issued and outstanding
|
|
|
234
|
|
|
|
135
|
|
Additional paid-in capital
|
|
|
54,390
|
|
|
|
149,609
|
|
Accumulated deficit
|
|
|
(287,309
|
)
|
|
|
(36,195
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(11,387
|
)
|
|
|
|
|
|
|
|
|
|
Total RHI Entertainment Inc. stockholders (deficit) equity
|
|
|
(232,685
|
)
|
|
|
102,162
|
|
Non-controlling interest in consolidated entity
|
|
|
|
|
|
|
74,896
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(232,685
|
)
|
|
|
177,058
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
587,852
|
|
|
$
|
1,014,182
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 23,
|
|
|
January 1,
|
|
|
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue
|
|
$
|
35,793
|
|
|
$
|
72,889
|
|
|
$
|
6,602
|
|
|
$
|
133,149
|
|
Library revenue
|
|
|
41,979
|
|
|
|
80,302
|
|
|
|
66,643
|
|
|
|
98,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
77,772
|
|
|
|
153,191
|
|
|
|
73,245
|
|
|
|
232,011
|
|
Cost of sales (including film production cost impairment charges
of $338,901 during the year ended December 31, 2009)
|
|
|
413,122
|
|
|
|
104,273
|
|
|
|
49,396
|
|
|
|
137,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(335,350
|
)
|
|
|
48,918
|
|
|
|
23,849
|
|
|
|
94,937
|
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
35,529
|
|
|
|
23,306
|
|
|
|
25,802
|
|
|
|
45,684
|
|
Amortization of intangible assets
|
|
|
1,139
|
|
|
|
665
|
|
|
|
671
|
|
|
|
1,327
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
59,838
|
|
|
|
|
|
|
|
|
|
Fees paid to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
600
|
|
Termination fee
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(372,018
|
)
|
|
|
(40,891
|
)
|
|
|
(2,911
|
)
|
|
|
47,326
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(49,373
|
)
|
|
|
(18,727
|
)
|
|
|
(21,559
|
)
|
|
|
(51,487
|
)
|
Interest income
|
|
|
9
|
|
|
|
23
|
|
|
|
34
|
|
|
|
215
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,297
|
)
|
Other (expense) income, net
|
|
|
(2,724
|
)
|
|
|
(895
|
)
|
|
|
706
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and non-controlling interest in loss of
consolidated entity
|
|
|
(424,106
|
)
|
|
|
(60,490
|
)
|
|
|
(23,730
|
)
|
|
|
(21,173
|
)
|
Income tax (provision) benefit
|
|
|
(7,294
|
)
|
|
|
(2,239
|
)
|
|
|
1,518
|
|
|
|
(1,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before non-controlling interest in loss of consolidated
entity
|
|
|
(431,400
|
)
|
|
|
(62,729
|
)
|
|
|
(22,212
|
)
|
|
|
(22,597
|
)
|
Non-controlling interest in loss of consolidated entity
|
|
|
180,286
|
|
|
|
26,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(251,114
|
)
|
|
$
|
(36,195
|
)
|
|
$
|
(22,212
|
)
|
|
$
|
(22,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(18.23
|
)
|
|
$
|
(2.68
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Diluted
|
|
$
|
(18.23
|
)
|
|
$
|
(2.68
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,777
|
|
|
|
13,500
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Diluted
|
|
|
13,777
|
|
|
|
13,500
|
|
|
|
N/A
|
|
|
|
N/A
|
|
See accompanying notes to consolidated financial statements
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Members
|
|
|
Comprehensive
|
|
|
Members
|
|
|
|
Equity
|
|
|
Loss
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
132,907
|
|
|
|
(49
|
)
|
|
|
132,858
|
|
Net loss
|
|
|
(22,597
|
)
|
|
|
|
|
|
|
(22,597
|
)
|
Unrealized loss on interest rate swap contracts (note 11)
|
|
|
|
|
|
|
(11,808
|
)
|
|
|
(11,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(34,405
|
)
|
Capital contribution
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
Contributed capital Share-based compensation
(note 12)
|
|
|
1,940
|
|
|
|
|
|
|
|
1,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
112,270
|
|
|
|
(11,857
|
)
|
|
|
100,413
|
|
Net loss
|
|
|
(22,212
|
)
|
|
|
|
|
|
|
(22,212
|
)
|
Unrealized gain on interest rate swap contracts (note 11)
|
|
|
|
|
|
|
1,232
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(20,980
|
)
|
Capital contribution (note 1)
|
|
|
29,135
|
|
|
|
|
|
|
|
29,135
|
|
Distribution payable to KRH (note 1)
|
|
|
(728
|
)
|
|
|
|
|
|
|
(728
|
)
|
Contributed capital Share-based compensation
(note 12)
|
|
|
926
|
|
|
|
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 22, 2008
|
|
$
|
119,391
|
|
|
$
|
(10,625
|
)
|
|
$
|
108,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
RHI
ENTERTAINMENT, INC.
Consolidated
Statements of Stockholders (Deficit) Equity/Members
Equity and Comprehensive Loss (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Non-Controlling
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Interest in Loss of
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In-
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Unconsolidated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Entity
|
|
|
(Deficit)Equity
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Successor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 22, 2008
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
IPO, net of $15,016 of issuance costs (note 1)
|
|
|
13,500,100
|
|
|
|
135
|
|
|
|
173,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,984
|
|
Contribution of Holdings II Net Assets by KRH (note 1)
|
|
|
|
|
|
|
|
|
|
|
119,391
|
|
|
|
(10,625
|
)
|
|
|
|
|
|
|
|
|
|
|
108,766
|
|
Distribution to KRH (note 1)
|
|
|
|
|
|
|
|
|
|
|
(34,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,972
|
)
|
Initial allocation of non-controlling interest (note 5)
|
|
|
|
|
|
|
|
|
|
|
(109,304
|
)
|
|
|
4,494
|
|
|
|
|
|
|
|
104,810
|
|
|
|
|
|
Contributed capital Share-based compensation
(note 12)
|
|
|
|
|
|
|
|
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
462
|
|
|
|
1,093
|
|
Issuance of common stock to employees
|
|
|
5,000
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
25
|
|
Unrealized loss on interest rate swap contracts (note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,256
|
)
|
|
|
|
|
|
|
(3,853
|
)
|
|
|
(9,109
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,195
|
)
|
|
|
(26,534
|
)
|
|
|
(62,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
13,505,100
|
|
|
$
|
135
|
|
|
$
|
149,609
|
|
|
$
|
(11,387
|
)
|
|
$
|
(36,195
|
)
|
|
$
|
74,896
|
|
|
$
|
177,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed capital Share-based compensation
(note 12)
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
813
|
|
|
|
1,923
|
|
Exercise of restricted stock units (note 12)
|
|
|
10,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swap contracts (note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,118
|
|
|
|
|
|
|
|
1,552
|
|
|
|
3,670
|
|
Amortization of interest rate swap value (note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,605
|
|
|
|
|
|
|
|
4,459
|
|
|
|
16,064
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(251,114
|
)
|
|
|
(180,286
|
)
|
|
|
(431,400
|
)
|
Issuance of shares of common stock in exchange for remaining
interest in Holdings II (note 1)
|
|
|
9,900,000
|
|
|
|
99
|
|
|
|
(96,329
|
)
|
|
|
(2,336
|
)
|
|
|
|
|
|
|
98,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
23,416,000
|
|
|
$
|
234
|
|
|
$
|
54,390
|
|
|
$
|
|
|
|
$
|
(287,309
|
)
|
|
$
|
|
|
|
$
|
(232,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period from
|
|
|
|
Year Ended
|
|
|
June 23, 2008 to
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Comprehensive loss attributed to RHI Entertainment, Inc:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(251,114
|
)
|
|
$
|
(36,195
|
)
|
Unrealized gain on interest rate swap contracts
|
|
|
2,118
|
|
|
|
(5,256
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(248,996
|
)
|
|
$
|
(41,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the period from
|
|
|
For the period from
|
|
|
|
January 1, 2009 to
|
|
|
June 23, 2008 to
|
|
|
|
December 22, 2009
|
|
|
December 31, 2008
|
|
|
Comprehensive loss attributed to non-controlling interest:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(180,286
|
)
|
|
$
|
(26,534
|
)
|
Unrealized gain on interest rate swap contracts
|
|
|
1,552
|
|
|
|
(3,853
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(178,734
|
)
|
|
$
|
(30,387
|
)
|
See accompanying notes to consolidated financial statements
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 23,
|
|
|
January 1,
|
|
|
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(251,114
|
)
|
|
$
|
(36,195
|
)
|
|
$
|
(22,212
|
)
|
|
$
|
(22,597
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film production cost impairment charge
|
|
|
338,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in loss of consolidated entity
|
|
|
(180,286
|
)
|
|
|
(26,534
|
)
|
|
|
|
|
|
|
|
|
Amortization of film production costs
|
|
|
60,611
|
|
|
|
93,481
|
|
|
|
43,579
|
|
|
|
122,493
|
|
Amortization of interest rate swap value
|
|
|
16,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase of accounts receivable reserves
|
|
|
(6,583
|
)
|
|
|
1,252
|
|
|
|
4,370
|
|
|
|
5,496
|
|
Deferred income taxes
|
|
|
3,915
|
|
|
|
(37
|
)
|
|
|
(1,558
|
)
|
|
|
(1,354
|
)
|
Amortization of deferred debt financing costs
|
|
|
3,379
|
|
|
|
1,754
|
|
|
|
549
|
|
|
|
1,844
|
|
Realized gain on interest rate swaps
|
|
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,923
|
|
|
|
1,118
|
|
|
|
926
|
|
|
|
1,940
|
|
Amortization of intangible assets
|
|
|
1,139
|
|
|
|
665
|
|
|
|
671
|
|
|
|
1,327
|
|
Depreciation and amortization of fixed assets
|
|
|
217
|
|
|
|
108
|
|
|
|
93
|
|
|
|
206
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
59,838
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
355
|
|
|
|
526
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,297
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
101,491
|
|
|
|
(67,294
|
)
|
|
|
(4,694
|
)
|
|
|
(55,545
|
)
|
Decrease (increase) in prepaid and other assets
|
|
|
6,865
|
|
|
|
4,521
|
|
|
|
(2,457
|
)
|
|
|
(9,585
|
)
|
Additions to film production costs
|
|
|
(76,722
|
)
|
|
|
(107,936
|
)
|
|
|
(54,909
|
)
|
|
|
(174,252
|
)
|
(Decrease) increase in accounts payable and accrued liabilities
|
|
|
(12,909
|
)
|
|
|
(2,899
|
)
|
|
|
6,327
|
|
|
|
(3,846
|
)
|
(Decrease) increase in accrued film production costs
|
|
|
(28,433
|
)
|
|
|
63,669
|
|
|
|
(997
|
)
|
|
|
28,079
|
|
Increase (decrease) in deferred revenue
|
|
|
9,331
|
|
|
|
(8,299
|
)
|
|
|
(2,374
|
)
|
|
|
(807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(9,816
|
)
|
|
|
(22,788
|
)
|
|
|
(32,331
|
)
|
|
|
(88,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(237
|
)
|
|
|
(91
|
)
|
|
|
(81
|
)
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(237
|
)
|
|
|
(91
|
)
|
|
|
(81
|
)
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
|
|
|
|
189,000
|
|
|
|
|
|
|
|
|
|
Payment of offering costs and fees
|
|
|
|
|
|
|
(15,016
|
)
|
|
|
|
|
|
|
|
|
Borrowings from credit facilities
|
|
|
13,800
|
|
|
|
165,679
|
|
|
|
80,093
|
|
|
|
744,378
|
|
Repayments of credit facilities
|
|
|
(1,000
|
)
|
|
|
(284,900
|
)
|
|
|
(44,708
|
)
|
|
|
(653,953
|
)
|
Deferred debt financing costs
|
|
|
|
|
|
|
(4,726
|
)
|
|
|
|
|
|
|
(3,879
|
)
|
Second lien pre-payment penalty
|
|
|
|
|
|
|
(2,600
|
)
|
|
|
|
|
|
|
|
|
Member capital contributions
|
|
|
|
|
|
|
|
|
|
|
29,135
|
|
|
|
20
|
|
Distribution to KRH
|
|
|
|
|
|
|
(35,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,800
|
|
|
|
11,737
|
|
|
|
64,520
|
|
|
|
86,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,747
|
|
|
|
(11,142
|
)
|
|
|
32,108
|
|
|
|
(2,344
|
)
|
Cash, beginning of period
|
|
|
22,373
|
|
|
|
33,515
|
|
|
|
1,407
|
|
|
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
25,120
|
|
|
$
|
22,373
|
|
|
$
|
33,515
|
|
|
$
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
40,301
|
|
|
$
|
21,526
|
|
|
$
|
23,845
|
|
|
$
|
50,772
|
|
Cash paid for income taxes
|
|
|
2,136
|
|
|
|
865
|
|
|
|
1,968
|
|
|
|
6,247
|
|
Supplemental disclosure of non-cash information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock in exchange for remaining
interest in Holdings II (note 1)
|
|
$
|
98,566
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to consolidated financial statements
F-7
RHI
ENTERTAINMENT, INC.
December 31,
2009 and 2008 (Successor) and 2007 (Predecessor)
|
|
(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
(collectively, Films).
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 held a majority of the economic interests.
KRH was the non-managing member of Holdings II and held a
minority of the economic interests. RHI Inc. held a number of
common membership units in Holdings II equal to the number
of outstanding shares of RHI Inc. common stock.
Pursuant to the IPO, a total of 13,500,000 shares of
Class A Common Stock were sold for aggregate offering
proceeds of $189.0 million. The underwriting discounts were
$13.2 million and the net proceeds from the IPO (before
fees and expenses) totaled $175.8 million. RHI LLC used the
net proceeds of the IPO that were contributed by RHI Inc.,
together with the net proceeds from RHI LLCs new
$55.0 million senior second lien credit facility,
approximately $52.2 million of borrowings under RHI
LLCs revolving credit facility (see Note 11) 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 $500,000, 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 the 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 Incs
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.
F-8
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
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, as well as, fourth quarter revenue from the
prior year. As a result of the significant weakening of the
Companys financial position, results of operations and
liquidity in, the Company is currently in default of certain
covenants of its senior secured facilities and is in discussions
with its lenders under regarding a restructuring of its senior
secured credit facilities. However, management can provide no
assurance that it will be able to successfully restructure the
Companys debt obligations. If it is not successful in
restructuring its debt obligations or unable to come to a
consensual agreement with its creditors, the Company will likely
be required to seek protection under Chapter 11 of the
U.S. Bankruptcy Code. The board of directors has retained
the services of outside advisors to assist it in instituting and
implementing a restructuring transaction. 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 the Companys current
equityholders receiving little or no continuing interest in the
Company.
These 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 might 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 years and at December 31, 2009 has an
accumulated deficit of $287.3 million. The Companys
inability to borrow under its revolving credit facility, coupled
with other factors described above, has resulted in an inability
to pay some of its obligations as they come due. The liquidity
constraints are also preventing the Company from making certain
expenditures to continue producing or acquiring as many films as
we could have otherwise. As a result, the Company decreased its
production slate for 2009, reduced its selling, general and
administrative expenses through cost-cutting measures that
included, among others, job reductions and the Company expects
to take additional steps to preserve liquidity. However, despite
any additional cost-saving steps it may implement, unless the
Company successfully restructures its debt
and/or
obtain other sources of liquidity and its operating results
improve, 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.
As a result of the foregoing, the Companys board of
directors engaged Rothschild, Inc. as a financial advisor in the
fourth quarter of 2009, and is in the midst of in-depth
discussions with the Companys first and second lien
lenders with respect to a 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 to some or all of
its lenders
and/or
creditors. It is also possible that these discussions could
result in a sale of some or all of the Companys assets for
less than their book value. No assurance can be given as to
whether these discussions will be successful. If the Company is
not successful in restructuring its debt obligations or unable
to come to a consensual agreement with its creditors, it will
likely be required to seek protection under Chapter 11 of
the U.S. Bankruptcy Code. 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 the Companys current
equityholders receiving little or no continuing interest in the
Company.
Refer to Note 11 Debt for a further discussion
of defaults under the Companys senior secured credit
facilities.
The annual third party valuation report of the Companys
film library as required by its lenders under its First Lien
Credit Agreement (the Valuation Report) was completed in March
of 2010. The Valuation Report indicates a material and
substantial reduction of approximately 50% of the non-contracted
value of the films in the Companys
F-9
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
film library at December 31, 2009 as compared to the third
party valuation at December 31, 2008 using similar
methodologies. The decrease in the value of the film library
directly and materially reduces the borrowing base governing the
revolving credit facility under the First Lien Credit Agreement.
This result of the Valuation Report is also a contributing
factor for the Companys annual assessment of ultimate
revenues. Refer to Note 6 Film Production Costs,
net for a further discussion of the Companys annual
ultimate revenue analyses and the resulting film production cost
impairment charges recorded during the year ended
December 31, 2009.
|
|
(2)
|
Basis of
Presentation
|
The financial information presented herein has been prepared
according to U.S. generally accepted accounting principles
(GAAP). In managements opinion, the information presented
herein reflects all adjustments necessary to fairly present the
financial position and results of operations of the Successor
Company, the Predecessor Company and the Initial Predecessor
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.
|
|
(3)
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Revenue
Recognition and Customer Concentrations
|
Revenue from television and distribution licensing agreements is
recognized in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Codification (the Codification
or ASC)
926-605-25.
Accordingly, revenue is recognized when a film is available for
exhibition by the licensee, the license fee is fixed and
determinable, collectability is reasonably assured and the cost
of each film is known or reasonably determinable. Advertising
revenue is recorded as the advertising is aired at the gross
contractual amount, net of commissions paid to advertising
agencies and audience deficiency obligations, if any. Payments
received from licensees prior to the availability of a film are
recorded as deferred revenue. Long-term receivables arising from
licensing agreements are reflected at their net present value.
At December 31, 2009 and 2008, $33.1 million and
$60.0 million, respectively, of accounts receivable are due
beyond one year.
The Companys significant customers include networks and
other licensees of programming. Customer concentrations are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
% of Total
|
|
|
Domestic
|
|
|
International
|
|
Period
|
|
Customers
|
|
|
Revenue
|
|
|
Licensees
|
|
|
Licensees
|
|
|
Successor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
|
10
|
|
|
|
73
|
%
|
|
|
42
|
%
|
|
|
31
|
%
|
Period from June 23, 2008 through December 31, 2008
|
|
|
10
|
|
|
|
74
|
%
|
|
|
44
|
%
|
|
|
30
|
%
|
Predecessor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from January 1, 2008 through June 22, 2008
|
|
|
10
|
|
|
|
77
|
%
|
|
|
58
|
%
|
|
|
19
|
%
|
Year ended December 31, 2007
|
|
|
10
|
|
|
|
74
|
%
|
|
|
30
|
%
|
|
|
44
|
%
|
F-10
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
Customers contributing greater than 10% of total revenue are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 23,
|
|
|
January 1,
|
|
|
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
December 31,
|
|
Customer
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Customer A
|
|
$
|
15,225
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Customer B
|
|
|
12,549
|
|
|
$
|
20,867
|
|
|
$
|
11,081
|
|
|
|
(1
|
)
|
Customer C
|
|
|
(1
|
)
|
|
|
45,038
|
|
|
|
33,622
|
|
|
$
|
40,185
|
|
Customer D
|
|
|
(1
|
)
|
|
|
18,161
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
(1) |
|
Revenue from customer is less than 10% of total revenue in
period noted. |
Financial instruments, which potentially subject the Company to
a concentration of credit risk, consist primarily of accounts
receivable. At December 31, 2009 and 2008, approximately
31% and 34%, respectively, of the Companys accounts
receivable were due from foreign customers. At December 31,
2009 and 2008, the Company had $42.4 million and
$77.2 million, respectively, of accounts receivable due
from Crown Media. The Company generally does not require
collateral. Credit losses relating to accounts receivable have
historically been nominal.
In March 2010, Crown Media, the parent company of the Hallmark
Channel, filed its Annual Report on Form 10K with the SEC.
The report of Crown Medias independent registered public
accounting firm on their 2009 financial statements contains an
explanatory paragraph noting the significant short-term debt
obligations of Crown Media which raise substantial doubt
regarding Crown Medias ability to continue as a going
concern and referring to Crown Medias plans in regard to
those matters. Crown Medias financial statements note,
... the Company believes the ability of the Company to
continue its operations depends upon completion of the
Recapitalization. This proposed Recapitalization
(described in detail in Crown Medias Annual Report) has
been approved by Crown Media and by Hallmark Cards, the
substantial shareholder of Crown Media and the lender or
guarantor on Crown Medias short-term debt that would be
refinanced under the proposed recapitalization. Based upon the
Companys discussions with Crown Medias management
and review of Crown Medias Annual Report and other
publicly available documents concerning the financial condition
of Crown Media and the details of the proposed recapitalization
transaction, the Company has concluded that a reserve against
the accounts receivable due from Crown Media is not necessary.
Cost of sales includes the amortization of capitalized film
costs, as well as exploitation costs associated with bringing a
film to market.
Advertising costs are expensed as incurred and amounted to
$398,000, $661,000, $1.8 million and $5.1 million for
the year ended December 31, 2009 (Successor), the period
from June 23, 2008 through December 31, 2008
(Successor), the period from January 1, 2008 through
June 22, 2008 (Predecessor) and the year ended
December 31, 2007 (Predecessor), respectively.
|
|
(d)
|
Film
Production Costs
|
The Company capitalizes costs incurred for the acquisition and
development of story rights, film production costs, film
production-related interest and overhead, residuals and
participations. Film production costs have been reduced by the
amount of production incentives and subsidies received. These
production incentives and subsidies have taken different forms,
including direct government rebates, sale and leaseback
transactions and transferable
F-11
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
tax credits. 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. Story development costs are
stated at the lower of cost or net realizable value.
Capitalized film production costs are amortized in the
proportion of each productions current revenue to
managements estimate of total revenue. Estimates of total
revenue and expense are periodically evaluated by management and
can change significantly due to a variety of factors, including
the level of market acceptance of films. These evaluations may
result in revised amortization rates and, if applicable,
write-downs to net realizable value. Refer to note 6 for
discussion of film production cost impairments recorded during
the year ended December 31, 2009. Amortization of
capitalized film production costs begins when a film is released
and the Company begins to recognize revenue from that film.
Acquired film libraries are amortized as a single film asset
using the same methodology described above over a period not
exceeding 20 years.
The Companys completed film library primarily consists of
films that were made or acquired for initial exhibition on a
broadcast or cable network in the United States. Films initially
produced for domestic networks are licensed for pay television,
free television and home video throughout the world.
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 notes thereto.
Actual results could differ from those estimates.
In estimating the fair value of financial instruments, the
Company has assumed that the carrying amount of cash, current
receivables and payables approximates the fair value because of
the short-term maturity of these instruments. The Companys
debt consists of obligations which carry floating interest
rates. Due to the Companys current financial condition and
its default of senior secured credit agreements (see
Notes 1 and 11), the Company is unable to assess the fair
market value of its debt. Long-term receivables arising from
licensing agreements are reflected at their net present value.
|
|
(g)
|
Prepaid
and Other Assets
|
Prepaid and other assets consist principally of prepaid assets,
deferred debt financing costs, net, other receivables and
deferred income taxes. The deferred debt financing costs are
amortized on a straight-line basis, which approximates the
effective interest method, over the life of the respective
credit facilities and are classified as a component of interest
expense.
|
|
(h)
|
Long-Lived
and Indefinite Lived Assets
|
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment are computed using the
straight-line method over the estimated useful lives of the
respective assets, ranging from three to ten years. The cost of
normal repairs and maintenance is expensed as incurred.
Intangible assets represent the fair value of a non-compete
agreement and beneficial leases. The following criteria are
considered in determining the recognition of intangible assets:
(1) the intangible asset arises from contractual or other
rights, or (2) the intangible asset is separable or
divisible from the acquired entity and capable of being sold,
transferred, licensed, returned or exchanged. Intangible assets
are amortized using the straight-line method over their
respective useful lives.
F-12
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(i)
|
Impairment
of Other Long-Lived Assets
|
The Company reviews its long-lived assets, such as property and
equipment and intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
The Company regularly assesses the adequacy of its valuation
allowance for uncollectible accounts receivable by evaluating
historical bad debt experience, customer creditworthiness and
changes in our customer payment history and records an allowance
for doubtful accounts based on such factors. As of
December 31, 2009 and 2008, the allowance for doubtful
accounts was nil and $3.0 million, respectively.
The Company has historically utilized derivative financial
instruments to reduce interest rate risk. The Company does not
hold or issue derivative financial instruments for trading
purposes. Interest rate swaps held by the Company were initially
designated as cash flow hedges and qualified for hedge
accounting in accordance with the Change in Variable Cash
Flows Method in FASB ASC
815-30-35.
The critical terms of the interest rate swaps and hedged
variable-rate debt coincided and cash flows due to the hedge
exactly offset cash flows resulting from fluctuations in the
variable rates. During 2009, the Company discontinued hedge
accounting and subsequently terminated its interest rate swap
agreements.
Under hedge accounting, changes in the fair value of the
interest rate swaps were 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 were
reflected as assets or liabilities in the Companys
consolidated balance sheet. When interest rate swaps failed to
qualify for hedge accounting, changes to their fair value were
reflected in the consolidated statements of operations.
|
|
(l)
|
Share-based
Compensation
|
Share-based compensation expense is based on fair value at the
date of grant and the pre-vesting forfeiture rate and is
recognized over the requisite service period using the
straight-line method. The fair value of the awards is determined
from valuations using key assumptions for implied asset
volatility, expected dividends, risk free rate and the expected
term of the awards. If factors change and we employ different
assumptions in valuing the awards in future periods, the
compensation expense that we record may differ significantly
from what we have recorded in the current period.
Prior to June 23, 2008 RHI LLC or the Predecessor Company
was a limited liability company that was disregarded as an
entity separate from its sole member, Holdings, which was
treated as a partnership for U.S. income tax purposes. The
Predecessor Company had a subsidiary, RHI International
Distribution, Inc. (RID), which was a taxable corporation.
Because partnerships are generally not subject to income tax,
the income or loss of the Predecessor Company, with the
exception of RID, was included in the tax returns of the
individual members of Holdings. As a result, except for the
effect from RID, and from certain U.S. local and foreign
income taxes of the Predecessor Company, no provision has been
made for any current or deferred U.S. federal or state
income tax.
With respect to the local income taxes of the Predecessor
Company and the activities of RID, deferred tax assets and
liabilities were recognized for the future tax consequences
attributable to the differences between the
F-13
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for operating
loss and tax credit carryforwards.
Commencing June 23, 2008, upon completion of the IPO, RHI
Inc., through its partnership interest in Holdings II,
became subject to U.S. corporate income tax on its
allocable share of the results of operations of RHI LLC.
RHI LLC is a limited liability company that is disregarded as an
entity separate from its sole member, Holdings II, which is
treated as a partnership for U.S. income tax purposes. The
Successor Company has a subsidiary, RID, which is a taxable
corporation. A provision has been recorded for current and
deferred U.S. federal, state and local income taxes, for
the Successor Company and for RID, for the year ended
December 31, 2009 and the period June 23, 2008 through
December 31, 2008.
Deferred tax assets and liabilities are measured using enacted
tax rates that the Company expects 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. A valuation
allowance to reduce deferred tax assets to the amount that is
more likely than not to be realized is recognized based on
existing facts and circumstances. Valuation allowances, if any,
are assessed and adjusted during each reporting period.
Uncertain tax positions are recorded based on a cumulative
probability assessment if it is more likely than not that the
tax position will be sustained upon examination by the
appropriate tax authorities. Amounts recorded for uncertain tax
positions are periodically assessed, including the evaluation of
new facts and circumstances, to ensure sustainability of the
position.
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/members equity that, under
U.S. generally accepted accounting principles, are excluded
from net loss.
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 44%,
44%, 28% and 59% of total revenue for the year ended
December 31, 2009 (Successor), the period from
June 23, 2008 through December 31, 2008 (Successor),
the period from January 1, 2008 through June 22, 2008
(Predecessor) and the year ended December 31, 2007
(Predecessor), respectively. These revenues, generally
denominated in U.S. dollars, were primarily from sales to
customers in Europe.
|
|
(p)
|
New
Accounting Pronouncements Adopted
|
In June 2009, the FASB issued the FASB ASC as the source of
authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants.
The Codification is effective for financial statements issued
for interim and annual periods ending after September 15,
2009. The Company adopted the Codification as of July 1,
2009 and this and all subsequent filings will reference the
Codification as the single source of authoritative literature.
In September 2006, the FASB modified GAAP by establishing
accounting and reporting standards regarding fair value
measurements, which are included in FASB ASC 820. The standards
define fair value, establish a framework for measuring fair
value in generally accepted accounting principles and expand
disclosures about fair value measurements. FASB ASC 820 refers
to fair value as the price that would be received from the sale
of an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which
the reporting entity does business. It also clarifies the
principle that fair value should be based on the assumptions
F-14
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
market participants would use when pricing the asset or
liability. The new standards were effective for financial
statements issued with fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years, however, the effective date was deferred until fiscal
years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities. The Company
adopted the new standards effective January 1, 2009 for
nonfinancial assets and nonfinancial liabilities, which did not
have an impact on its consolidated financial statements.
In November 2007, the FASBs Emerging Issues Task Force
(EITF) reached a consensus on accounting for collaboration
arrangements as discussed in FASB ASC 808. The consensus
provides guidance on how the parties to a collaborative
agreement should account for costs incurred and revenue
generated on sales to third parties, how sharing payments
pursuant to a collaboration agreement should be presented in the
income statement and certain related disclosure questions. The
consensus was adopted by the Company as of January 1, 2009
and had no impact on its consolidated financial statements.
In December 2007, the FASB issued new standards for accounting
and reporting on business combinations as discussed in FASB ASC
805. The new standards require an acquirer to recognize the
assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. The new
standards are effective for the Company for business
combinations for which the acquisition date is on or after
January 1, 2009. The standards were adopted by the Company
as of January 1, 2009 and had no impact on its consolidated
financial statements.
In December 2007, the FASB modified GAAP by establishing
accounting and reporting standards for non-controlling
(minority) interests as discussed in FASB ASC
810-10-65.
The new standards were effective for fiscal years beginning
after December 15, 2008. The new standards were applied
prospectively; however, certain disclosure requirements require
retrospective treatment. The new standards were adopted by the
Company on January 1, 2009. As a result of the adoption,
the Companys non-controlling interest as of
December 31, 2008 is now classified as a separate component
of equity, not as a liability as it was previously presented.
Under the new standard, losses would continue to be attributed
to a non-controlling interest even if that attribution results
in a deficit non-controlling interest balance. Under prior
accounting standards, losses would no longer be attributed to a
minority interest when such losses would exceed the minority
interests equity capital. During 2009, if the net loss was
attributed to the non- controlling interests only up to the
amount of their positive capital balance, an additional
$98.6 million in losses or $7.15 per share, would have been
attributed to shareholders of the Company.
In March 2008, the FASB issued new requirements for disclosures
about derivative instruments and hedging activities as discussed
in FASB ASC
815-10. The
new requirements require companies with derivative instruments
to disclose information that should enable financial statement
users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items
are accounted for, and how derivative instruments and related
hedged items affect a companys financial position,
financial performance, and cash flows. Entities shall select the
format and the specifics of disclosures relating to their volume
of derivative activity that are most relevant and practicable
for their individual facts and circumstances. The new
requirements expand the current disclosure framework and are
effective prospectively for all periods beginning on or after
November 15, 2008. The requirements were adopted by the
Company as of January 1, 2009. See Note 11 for the
required disclosures.
In May 2009, the FASB issued new standards for accounting and
reporting subsequent events as discussed in FASB ASC
855-10. The
new standards address the accounting for and disclosure of
events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
They also set forth: the period after the balance sheet date
during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances
under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial
statements and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. The new standards are effective for interim and annual
financial periods ending after June 15, 2009 and are to be
applied prospectively. The Company adopted the standards as of
April 1, 2009.
F-15
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(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
December 31, 2009, the Company has no potentially dilutive
securities outstanding. See Note 12 for the amount of
potentially dilutive common stock options and restricted stock
units which could dilute earnings in future periods. The
weighted average number of basic and diluted shares outstanding
for the year ended December 31, 2009 (Successor) and the
period from June 23, 2008 through December 31, 2008
(Successor) are 13,776,990 and 13,505,100, respectively.
|
|
(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) previously held by
KRH was recorded as non-controlling interest in the consolidated
entity, which resulted in an associated reduction in additional
paid-in capital of RHI Inc. The non-controlling interest in the
consolidated entity on the consolidated balance sheet was
established in accordance with FASB ASC
974-810-30,
Treatment of Minority Interests in Certain Real Estate
Investment Trusts by multiplying the net equity of
Holdings II (after reflecting the contributions of KRH and
RHI Inc. and costs related to the offering and reorganization)
by KRHs percentage ownership in Holdings II. The
non-controlling interest in loss of consolidated entity on the
consolidated statement of operations represents the portion of
Holdings IIs net loss attributable to KRH.
As discussed in Note 1, Business and Organization, on
December 22, 2009, KRH exchanged its 9,900,000 membership
units in Holdings II and were issued 9,900,000 shares
of RHI Inc. common stock As result of the exchange, KRH no
longer owns any membership units in Holdings II and, thus,
it is no longer a member of Holdings II. Instead, KRH owns
9,900,000 shares (42.3% as of December 22,
2009) of RHIs common stock. RHI Inc. now owns,
directly and indirectly, 100% of the outstanding membership
units in Holdings II. As of December 22, 2009, the
non-controlling interest in consolidated entity was reclassified
to Additional paid-in capital in the Companys consolidated
balance sheet and, beginning on December 23, 2009, 100% of
Holdings IIs losses were attributed to RHI Inc.
F-16
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
The non-controlling interest associated with the initial
investment by RHI Inc. in Holdings II and subsequent
transactions were 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 30, 2008
|
|
|
(26,534
|
)
|
|
|
|
|
|
Non-controlling interest in consolidated entity as of
December 31, 2008
|
|
$
|
74,896
|
|
|
|
|
|
|
Non-controlling interest in share-based compensation
|
|
|
813
|
|
Non-controlling interest in unrealized gain on interest rate
swaps
|
|
|
1,552
|
|
Non-controlling interest in amortization of the fair market
value of interest rate swaps de-designated as hedges
|
|
|
4,459
|
|
|
|
|
|
|
Non-controlling interest allocation for the period from
January 1, 2009 to December 22, 2009
|
|
|
6,824
|
|
Non-controlling interest in loss of consolidated entity for the
period from January 1, 2009 to December 22, 2009
|
|
|
(180,286
|
)
|
Issuance of shares of common stock in exchange for remaining
interest in Holdings II (note 1)
|
|
|
98,566
|
|
|
|
|
|
|
Non-controlling interest in consolidated entity as of
December 31, 2009
|
|
$
|
|
|
|
|
|
|
|
|
|
(6)
|
Film
Production Costs, Net
|
Film production costs are comprised of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Completed films
|
|
$
|
782,339
|
|
|
$
|
984,805
|
|
Crown Film Library
|
|
|
90,590
|
|
|
|
145,290
|
|
Films in process and development
|
|
|
7,966
|
|
|
|
18,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
880,895
|
|
|
|
1,148,107
|
|
Accumulated amortization
|
|
|
(419,663
|
)
|
|
|
(367,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
461,232
|
|
|
$
|
780,122
|
|
|
|
|
|
|
|
|
|
|
F-17
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
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)
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 23,
|
|
|
January 1,
|
|
|
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Overhead costs capitalized
|
|
$
|
8,882
|
|
|
$
|
6,100
|
|
|
$
|
6,775
|
|
|
$
|
14,269
|
|
Interest capitalized
|
|
|
569
|
|
|
|
679
|
|
|
|
313
|
|
|
|
2,001
|
|
Amortization of completed films
|
|
|
50,056
|
|
|
|
90,655
|
|
|
|
40,595
|
|
|
|
115,143
|
|
Amortization of Crown Film Library
|
|
|
1,622
|
|
|
|
1,949
|
|
|
|
2,608
|
|
|
|
6,350
|
|
Abandoned development projects
|
|
|
5,033
|
|
|
|
877
|
|
|
|
375
|
|
|
|
1,000
|
|
Film production cost impairment charges completed
films
|
|
|
284,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film production cost impairment charges Crown Film
Library
|
|
|
54,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviews the ultimate revenues associated with its
films. This analysis considers various data points, including
current market conditions, library sales activity, pricing, the
delivery of the Companys annual film slate and the results
of the annual independent valuation of the unsold rights to the
Companys film library. This assessment as of
December 31, 2009 was completed in February of 2010. As a
result of the continued weak market conditions, sales data,
pricing and other factors present during the fourth quarter of
2009 and into 2010 as well as the significant decline in the
annual independent valuation of the unsold rights to the
Companys film library, this analysis resulted in a
significant reduction of the ultimate revenues for the majority
of films in its library. In addition, based upon a qualitative
analysis and assessment of recent sales activity, the Company
now assumes that there will be no future revenues for certain
films. A reduction in the ultimate revenue associated with a
film results in a higher rate of amortization over that
films remaining accounting life and causes a reduction in
that films prospective profit margin. The reduction in
ultimate revenues resulted in a decrease in the fair value of
films to an amount below their net book value. As a result,
impairment charges were recorded totaling $338.9 million
during the year ended December 31, 2009 to reduce the net
book value of those films to an amount approximating their fair
value. Additionally, the reduction in ultimate revenues resulted
in a $1.1 million increase to the Companys film cost
amortization for the year ended December 31, 2009.
Approximately 65% of completed film production costs have been
amortized and/or impaired through December 31, 2009. The
Company further anticipates that approximately 6% of completed
film production costs will be amortized through
December 31, 2010. The Company anticipates that
approximately 43% of unamortized film production costs as of
December 31, 2009 will be amortized over the next three
years and that 80% of unamortized film production costs will be
amortized within five years. The Crown Film Library has a
remaining amortization period of 17 years as of
December 31, 2009.
F-18
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(7)
|
Prepaid
and Other Assets, Net
|
Prepaid and other assets are comprised of the following (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred debt financing costs, net of accumulated amortization
|
|
$
|
12,071
|
|
|
$
|
15,450
|
|
Other receivables
|
|
|
1,948
|
|
|
|
3,929
|
|
Deferred tax assets, net
|
|
|
133
|
|
|
|
5,046
|
|
Prepaid assets
|
|
|
616
|
|
|
|
4,503
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,768
|
|
|
$
|
28,928
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
Property
and Equipment, Net
|
Property and equipment are comprised of the following (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Average Useful Life
|
|
2009
|
|
|
2008
|
|
|
|
|
Shorter of useful
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
life or lease term
|
|
$
|
309
|
|
|
$
|
297
|
|
Furniture and fixtures
|
|
10 years
|
|
|
348
|
|
|
|
217
|
|
Computers and other equipment
|
|
3 years
|
|
|
514
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,171
|
|
|
|
935
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(781
|
)
|
|
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
390
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the original cost of assets
disposed, the loss recorded on the disposals (loss on disposal
of assets is recorded in other income) and depreciation expense
for the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 23,
|
|
|
January 1,
|
|
|
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Original cost of assets retired
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
3
|
|
Loss on disposal of assets
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
Depreciation and amortization expense
|
|
|
216
|
|
|
|
107
|
|
|
|
93
|
|
|
|
204
|
|
|
|
(9)
|
Goodwill
and Other Intangibles
|
In connection with the Acquisition on January 12, 2006 and
resulting purchase price allocation, the remaining cost in
excess of tangible net assets was approximately
$66.2 million. A valuation resulted in the identification
of two separately identifiable intangible assets consisting of a
noncompete agreement with the Companys chief executive
officer and three beneficial lease agreements. The noncompete
agreement has been ascribed a value of $5.4 million and is
being amortized on a straight-line basis over its 5 year
life. The beneficial lease agreements were ascribed an aggregate
value of $1.0 million and are being amortized individually
on a straight-line basis over their respective lives, which
range from 11 to 47 months.
F-19
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
The remaining purchase price of approximately $59.8 million
was classified in the Companys consolidated balance sheet
as goodwill. During the quarter ended December 31, 2008,
the Companys stock price declined significantly to a level
indicating a market capitalization well below book value. In
analyzing the decline in stock price, the Companys
management considered the decline to be primarily attributable
to overall stock market volatility experienced in the fourth
quarter. As a result of the significant reduction in the
Companys public market valuation, management performed a
review of its Goodwill as of December 31, 2008. As a result
of completing the first step of the goodwill impairment test the
Company determined that the carrying value of its single
reporting unit exceeded its fair value. The Company used the
market approach to determine the fair value of its single
reporting which is based on quoted market prices and the number
of shares outstanding. The second step of the goodwill
impairment test indicated that goodwill was impaired and, as a
result, a $59.8 million impairment charge was recorded in
the fourth quarter of 2008.
With respect to other intangible assets, accumulated
amortization was $5.3 million and $4.1 million at
December 31, 2009 and 2008, respectively. The estimated
aggregate amortization expense for the next five years from
December 31, 2009 is as follows: $1.1 million in 2010
and nil thereafter.
|
|
(10)
|
Accrued
Film Production Costs
|
Accrued film production costs are comprised of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Residuals
|
|
$
|
63,322
|
|
|
$
|
63,105
|
|
Production
|
|
|
60,732
|
|
|
|
88,312
|
|
Participations
|
|
|
42,841
|
|
|
|
43,911
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,895
|
|
|
$
|
195,328
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company estimates that
approximately $8.4 million of accrued participation and
residual liabilities will be paid during the next twelve months.
Production represents amounts payable for costs incurred for the
production of Films.
Debt consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
First Lien Term Loan
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Revolver
|
|
|
339,589
|
|
|
|
326,789
|
|
Second Lien Term Loan
|
|
|
75,000
|
|
|
|
75,000
|
|
Interest rate swap termination obligation
|
|
|
19,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
609,171
|
|
|
$
|
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).
F-20
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
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 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 December 31, 2009, the interest rates
associated with the First Lien Term Loan, Revolver and Second
Lien Term Loan were 6.25%, 6.25%, and 7.77%, respectively.
Pursuant to the Companys default under its First Lien
Credit Agreement (see discussion below), all of its outstanding
First Lien Term Loan and Revolver balances were converted to
three month ABR as of December 23, 2009 and is 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 Lien Credit Agreement (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
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.
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.
As of December 31, 2009, scheduled annual maturities of
debt obligations, subject to the outcome of the restructuring
discussed below, are set forth as follows (dollars in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2009
|
|
$
|
19,582
|
|
2010
|
|
|
|
|
2011
|
|
|
17,500
|
|
2012
|
|
|
35,000
|
|
2013
|
|
|
462,089
|
|
2014
|
|
|
|
|
2015
|
|
|
75,000
|
|
|
|
|
|
|
|
|
$
|
609,171
|
|
|
|
|
|
|
F-21
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
Defaults
and Forbearance
The Company is currently in default under both its First Lien
and Second Lien Credit Agreements. On December 23, 2009,
the Company acknowledged defaults on the First Lien Lien Credit
Agreement resulting from (x) an over-advance on its
Revolver due to a reduction in its borrowing base and consequent
failure to make mandatory prepayment to cure, and (y) a
failure to pay settlement amounts payable and due upon the
termination of its interest rate swaps on December 22, 2009
(see further discussion below). On February 12, 2010, the
Company acknowledged a default on the Second Lien Credit
Agreement resulting from its failure to make a scheduled
interest payment.
On December 23, 2009, the Company entered into a
forbearance agreement with the first lien agent and lenders
holding a majority in principal amount of the loans under its
first lien credit facilities and swap counterparties. That
forbearance agreement was subsequently amended on
January 22, 2010 and again on March 5, 2010. On
February 12, 2010, the Company entered into a separate
forbearance agreement with the second lien agent and lenders
holding a majority in principal amount of the loans under the
second lien credit facility, which was subsequently amended on
March 5, 2010. Under each of these forbearance agreements,
the agents and lenders (and in the case of the first lien
forbearance, the swap counterparties) have agreed to forbear
from exercising certain of their rights and agreed to waive some
of the existing or prospective defaults until March 31,
2010 unless the forbearance agreement is earlier terminated due
to further unanticipated defaults or other factors. The
forbearance agreements are short term arrangements that allow
the Company to work with the agents and lenders under its senior
secured credit facilities to develop a longer-term strategy for
restructuring its liabilities. Under the forbearance agreements,
the Company agreed, among other things, that:
|
|
|
|
|
it cannot borrow additional loans or issue additional letters of
credit under the credit agreement governing its first lien
credit facility;
|
|
|
|
default interest of 2% will accrue on all loans under the credit
agreement governing its first and second lien credit facilities
and on the swap settlement amounts, in addition to the rate of
interest otherwise applicable;
|
|
|
|
certain covenants under the credit agreement governing its first
lien credit facility (including those relating to investments,
restricted payments, permitted liens, asset sales, subsidiary
guarantors, control agreements, and cash expenditures and
distributions) will become more restrictive;
|
|
|
|
it will provide additional information to the lenders and their
counsel, including among other things a cash flow schedule that
is updated weekly;
|
|
|
|
it will limit the amounts and timing of its cash expenditures to
the amounts itemized in the cash flow schedule, subject to a
variance;
|
|
|
|
it will maintain a minimum cash balance; and
|
|
|
|
it will provide monthly and
year-to-date
financial information and an updated draft valuation report of
its film library.
|
If the Company is not able to cure all defaults or enter into a
new forbearance agreement for each of its credit facilities by
March 31, 2010 (or any earlier date that the forbearance
agreements may be terminated), then the agents and lenders under
the respective credit facilities and swap counterparties may
exercise all of their rights and remedies, including the
acceleration of the loans and foreclosure on collateral. 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.
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
F-22
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
obligation was deferred in connection with the forbearance
agreement entered into between the Company and its First Lien
Credit Facility lenders.
Interest
Rate Swaps
As noted above, on December 23, 2009, the Company
terminated its existing interest rate swaps. The Company
utilized derivative financial instruments to reduce interest
rate risk. The Company did not hold or issue derivative
financial instruments for trading purposes. The interest rate
swaps held by the Company were initially designated as cash flow
hedges and qualified for hedge accounting in accordance with the
Change in Variable Cash Flows Method in FASB ASC
815-30-35.
The critical terms of the interest rate swaps and hedged
variable-rate debt coincided and cash flows due to the hedge
exactly offset cash flows resulting from fluctuations in the
variable rates.
Under hedge accounting, changes in the fair value of the
interest rate swaps are reported as a component of accumulated
other comprehensive loss in the Companys consolidated
balance sheet. The fair value of the swap contracts and any
amounts payable to or receivable from counterparties are
reflected as assets or liabilities in the Companys
consolidated balance sheet.
As of December 31, 2008, the Company had two identical
interest rate swap agreements to manage its exposure to interest
rate movements associated with $435.0 million of its credit
facilities by effectively converting its variable rate to a
fixed rate. These interest rate swaps provided for the exchange
of variable rate payments for fixed rate payments. The variable
rate was based on three month LIBOR and the fixed rate was
4.98%. The interest rate swaps were scheduled to terminate on
April 27, 2010. The aggregate fair market value of the
interest rate swaps was approximately $(19.7) million as of
December 31, 2008.
On April 21, 2009 (date of amendment), the Company amended
its existing interest rate swap agreements and de-designated
them as cash flow hedges. As a result of the de-designation, the
fair market value of the swaps immediately preceding the
amendments was scheduled to be amortized as interest expense in
the consolidated statement of operations during the period from
April 21, 2009 through April 27, 2010, the maturity
date of the original swaps. As of April 21, 2009, the fair
value of the interest rate swaps recorded in accumulated other
comprehensive loss was $(16.1) million. The difference in
fair value of $(4.0) million between the original swaps and
the amended swaps on the date of the amendment was immediately
recognized as Other income (expense), net in the consolidated
statement of operations.
The amended interest rate swap agreements were with three
counterparties and continued to cover $435.0 million of the
Companys credit facilities and provided for the exchange
of variable rate payments for fixed rate payments. The variable
rates were based on one month LIBOR and the weighted average
fixed rate was 3.81%. The amended interest rate swaps were set
to terminate on April 27, 2010 ($90.3 million),
June 27, 2011 ($39.6 million) and April 27, 2012
($305.1 million). The amended interest rate swaps were not
designated as cash flow hedges and, therefore, changes to their
fair value were recorded as Other income (expense), net in the
consolidated statement of operations.
As noted above, the Company terminated the amended interest rate
swaps on December 23, 2009 (date of termination). Through
the date of termination, amortization of the interest rate swap
value de-designated as a hedge was $10.6 million. Upon the
termination, the remaining amount of unamortized interest rate
swap value de-designated as a hedge of $5.5 million was
immediately recognized as interest expense in the consolidated
statement of operations for the year ended December 31,
2009. The $1.5 million change in fair value of the interest
rate swaps between the date of amendment and date of termination
was recorded to Other income (expense), net.
|
|
(12)
|
Share-based
Compensation
|
The Companys RHI Entertainment, Inc 2008 Incentive Award
Plan (the Plan) allows for discretionary grants of
stock options, restricted stock, stock appreciation rights,
performance shares, performance stock units, dividend
equivalents, stock payments, deferred stock, restricted stock
units (RSUs), performance bonus awards and performance-based
awards to employees and consultants of the Company and its
qualifying subsidiaries, and to
F-23
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
non-employee members of the Board of Directors of the Company.
The Company may grant awards for up to 3.7 million shares
under the Plan. Any shares distributed pursuant to an award
under the Plan may consist, in whole or part, of authorized and
unissued shares, treasury shares or shares purchased on the open
market.
Stock
Options
The Company granted non-qualified stock options in November
2008, June 2009 and December 2009 to certain employees and
independent members of its Board of Directors. There were no
stock option grants prior to November 2008. The stock options
granted have an exercise price of $3.54, $3.16 and $0.73 per
share, respectively, and expire 10 years from the date of
grant. Stock options granted to employees vest in one-third
increments on the anniversary of the grant date in each of the
three years following the grant. Stock options granted to
members of the Board of Directors vest on the first anniversary
of the grant date. The stock options provide for accelerated
vesting if there is a change in control (as defined in the
Plan). The stock options granted have a grant date fair value of
$1.58, $1.37 and $0.71 per share, respectively.
The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model that
uses the assumptions noted in the following table. The Company
estimates the expected term of options granted by taking the
average of the vesting term and the contractual term of the
option. Due to the lack of history for our common stock, the
Company estimated the expected volatility of our common stock by
using historical volatility of peer companies for the November
2008 and June 2009 grants. For the December 2009, grants, the
Company used the volatility of the stock over the previous
twelve months. The risk-free interest rate used in the option
valuation model is based on U.S. Treasury zero-coupon
issues with remaining terms similar to the expected term on the
stock options. The Company does not anticipate paying any cash
dividends in the foreseeable future and therefore has used an
expected dividend yield of zero in the option valuation model.
The fair value of stock options is being amortized on a
straight-line basis over the requisite service periods of the
awards, which is equal to the vesting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Nov. 2008
|
|
|
Jun. 2009
|
|
|
Dec. 2009
|
|
|
Expected volatility
|
|
|
42.04
|
%
|
|
|
43.95
|
%
|
|
|
183.58
|
%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Term (in years)
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
6.00
|
|
Risk-free rate
|
|
|
2.92
|
%
|
|
|
1.33
|
%
|
|
|
1.32
|
%
|
On February 9, 2009, the Company granted stock options to
its chief executive officer and its newly appointed Chairman of
the Board of Directors (Chairman). The Companys chief
executive officer and Chairman were granted 550,000 and 350,000
non-qualified stock options, respectively. 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,
331/3%
of the stock options will generally vest on each of the first
three anniversaries of the date of grant. With respect to each
of the stock options, (i) 1/3 of the shares that become
vested on each anniversary date will become exercisable
immediately upon vesting, (ii) 1/3 of the shares that
become vested on each anniversary will become exercisable 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 upon the attainment of a
$14.00 stock price performance hurdle. The stock options provide
for accelerated vesting if there is a change in control (as
defined in the stock option agreements). The stock options
granted were valued using a Monte Carlo simulation model and
have grant date fair values associated with each vesting tranche
ranging from $2.05 $2.45 per share.
The Company recorded $815,000 and $35,000 of compensation
expense related to non-qualified stock options for the year
ended December 31, 2009 and 2008, respectively in its
consolidated statements of operations as a
F-24
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
component of selling, general and administrative expense.
Approximately $312,000 and nil of the expense was capitalized as
film production costs during the years ended December 31,
2009 and 2008, respectively.
As of December 31, 2009, there was unrecognized
compensation cost of $2.4 million, adjusted for estimated
forfeitures, related to non-vested stock options granted. This
compensation cost is expected to be recognized over the next
three years. Total unrecognized compensation cost will be
adjusted for future changes in estimated forfeitures.
No stock options were exercised during the year ended
December 31, 2009. The vested and non-vested balance of
stock options are as follows as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Stock Options
|
|
Units
|
|
|
Price
|
|
|
Term
|
|
|
(000s)
|
|
|
Non-vested Balance, December 31, 2008
|
|
|
529,154
|
|
|
$
|
3.54
|
|
|
|
10 yrs
|
|
|
|
|
|
Options granted
|
|
|
933,925
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
Options vested
|
|
|
(206,502
|
)
|
|
$
|
3.54
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(5,645
|
)
|
|
$
|
3.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Balance, December 31, 2009
|
|
|
1,250,932
|
|
|
|
|
|
|
|
9.1 yrs
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable balance, December 31, 2009
|
|
|
206,502
|
|
|
$
|
3.54
|
|
|
|
8.9 yrs
|
|
|
$
|
|
|
Expected to vest
|
|
|
1,237,036
|
|
|
|
|
|
|
|
9.1 yrs
|
|
|
$
|
|
|
The weighted average grant date fair value for stock options
granted during the year ended December 31, 2009 and 2008
was $2.29, and $1.58, respectively. The weighted average grant
date fair value for non-vested stock options as of
December 31, 2009 was $2.12.
Restricted
Stock Units
The Company issued RSUs in December 2008, June 2009 and December
2009 to certain employees and independent members of its Board
of Directors. Each RSU represents the right to receive upon
vesting of such RSU, at the Companys election, one share
of RHI Inc. common stock or cash payment equal to the then fair
value of one share of RHI Inc. common stock. The RSUs granted to
employees vest in one-third increments on the anniversary of the
grant date in each of the three years following the grant. RSUs
granted to members of the Board of Directors vest on the first
anniversary of the grant date. The RSUs provide for accelerated
vesting if there is a change in control (as defined in the
Plan). The RSUs were valued at $4.93, $3.16 and $0.73 per share,
respectively, based on the closing price of the Companys
stock on the date of grant. The fair value of the RSUs is being
amortized on a straight-line basis over the requisite service
periods of the awards, which is equal to the vesting periods.
The RSUs are expected to be settled in common stock and, as
such, have been classified as equity.
On February 9, 2009, the Company granted 150,000 and
350,000 RSUs, respectively to its chief executive officer and
its Chairman. All RSUs granted to both the Chairman and
chief executive officer have a grant date fair value equal to
$4.04 per share, the closing price per share of the
Companys common stock on 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,
331/3%
of the RSUs will generally vest on each of the first three
anniversaries of the date of grant. With respect to each of the
restricted stock units, (i) 1/3 of the shares that become
vested on each anniversary date will become transferable
immediately upon vesting, (ii) 1/3 of the shares that
become vested on each anniversary will become transferable 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 transferable upon the attainment of a
$14.00 stock
F-25
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
price performance hurdle. The RSUs provide for accelerated
vesting if there is a change in control (as defined in the RSU
agreements).
On December 9, 2009, certain employees of the Company
entered into surrender agreements whereby each such employee
irrevocably surrendered, cancelled and forfeited any and all of
their respective RSUs that were due to vest on December 10,
2009. A total of 100,925 RSUs were forfeited. Subject to
the employees continued employment with the Company, the
remaining RSUs of each employee will vest on December 10,
2010 (50% of the remaining RSUs) and December 10, 2011 (50%
of the remaining RSUs). The RSUs that vest on these future dates
have not been surrendered, cancelled nor forfeited and are not
subject to the surrender agreements.
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 individuals continued employment
with the Company, the remaining RSUs of each individual will
vest on February 9, 2011 and February 9, 2012. The
RSUs that vest on these future dates have not been surrendered,
cancelled nor forfeited and are not subject to the surrender
agreements.
The Company recorded $1.0 million and $32,000 of
compensation expense related to RSUs for the year ended
December 31, 2009 and 2008, respectively, in its
consolidated statements of operations as a component of selling,
general and administrative expense. Approximately $327,000 and
nil of the expense was capitalized as film production costs
during the years ended December 31, 2009 and 2008,
respectively.
As of December 31, 2009, there was unrecognized
compensation cost of $2.6 million related to RSUs granted.
This compensation cost is expected to be recognized over the
next three years. Total unrecognized compensation cost will be
adjusted for future changes in estimated forfeitures.
The vested and non-vested balance of RSUs are as follows
as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
Value
|
|
RSUs
|
|
Units
|
|
|
(000s)
|
|
|
Units issued, December 31, 2008
|
|
|
267,198
|
|
|
|
|
|
Units issued
|
|
|
533,925
|
|
|
|
|
|
Units vested
|
|
|
(16,495
|
)
|
|
|
|
|
Units surrendered or forfeited
|
|
|
(111,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Balance, December 31, 2009
|
|
|
672,766
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
Vested Balance, December 31, 2009
|
|
|
16,495
|
|
|
$
|
12
|
|
Expected to vest
|
|
|
497,543
|
|
|
$
|
154
|
|
The weighted average grant date fair value for RSUs
granted during the years ended December 31, 2009 and 2008
were $1.69 and $4.93, respectively. Of the 16,495 RSUs
that vested in 2009, shares were not issued for 5,595 pending
the completion of certain legal paperwork in 2010.
Other
Share-Based Compensation
Concurrent with the Acquisition and the signing of an employment
agreement between the Company and its chief executive officer,
KRH (then named Holdings) issued to the Companys chief
executive officer 2,800,000 Class B Units of KRH for no
consideration. The Class B Units have no voting rights. The
2,800,000 Class B Units were independently valued at
$2.4 million as of January 12, 2006. The valuation of
the Class B Units was determined by first estimating the
business enterprise value as of January 12, 2006 utilizing
the income approach (discounted cash flow) and allocating that
business enterprise value to the individual equity classes using
option pricing theory and the Black-Scholes model. The key
assumptions utilized include a business enterprise value of
F-26
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
$493.0 million, a $1.00 price per Class B Unit, an
estimated time to liquidity of 3.5 years, a risk-free rate
of 4.4% and estimated volatility of 28.5%. The $2.4 million
fair value was recorded as contributed capital from KRH to the
Company. This amount was then immediately expensed as the units
were vested upon issuance.
KRH also authorized 1,000 Value Units allocable at the
KRHs Board of Directors discretion to members of the
Companys management who hold KRHs Preferred Units.
During the period from January 12, 2006 (inception) through
December 31, 2006, 875 Value Units were granted. During
2007, an additional 75 Value Units were granted. During 2008, 75
Value Units were forfeited. The Value Units represent profit
interests in KRH that entitle such members to receive a
percentage of KRHs member distributions after the holders
of KRHs Preferred Units and Class B Units have
received pre-determined internal rates of return on their
investments. The Value Units do not have voting rights and must
be forfeited upon termination of a holders employment with
the Company. The only exception to the aforementioned forfeiture
clause is with respect to 250 Value Units granted to the
Companys chief executive officer. In accordance with the
chief executive officers employment agreement, he may
retain up to 250 of his Value Units upon termination if his
employment extends through January 12, 2009 and he is not
terminated for cause. The independent valuation of the Value
Units was determined by first estimating the business enterprise
value as of January 12, 2006 utilizing the income approach
(discounted cash flow) and allocating that business enterprise
value to the individual equity classes using option pricing
theory and the Black-Scholes model. The key assumptions utilized
include a business enterprise value of $493.0 million, an
estimated time to liquidity of 3.5 years, a risk-free rate
of 4.4% and estimated volatility of 28.5%. The price per unit
assumption is not applicable to Value Units because no capital
contributions are required upon grant or exercise. The
$5.8 million grant date fair value of the 250 Value Units
will be recorded as contributed capital from KRHs to the
Company over the three year vesting period. Approximately
$58,000, $1.0 million, $926,000 and $1.9 million was
amortized during the year ended December 31, 2009
(Successor), the period from June 23, 2008 to
December 31, 2008 (Successor), the period from
January 1, 2008 to June 22, 2008 (Predecessor) and the
year ended December 31, 2007 (Predecessor), respectively,
of which approximately 50% was classified as selling, general
and administrative expense on the Companys consolidated
statement of operations and 50% was capitalized as film
production cost overhead. Accounting for the remaining 625 Value
Units granted will occur when such future distributions to the
Value Unit holders occur, if any, because they have no vesting
provisions and are forfeitable upon termination.
The Company has a savings and investment plan (401(k) plan),
which allows eligible employees to allocate up to 50% of their
salary through payroll deductions. The Company matches 50% of
employees pre-tax contributions, up to plan limits. During
the year ended December 31, 2009 (Successor), the period
from June 23, 2008 through December 31, 2008
(Successor), the period from January 1, 2008 through
June 22, 2008 (Predecessor) and the year ended
December 31, 2007 (Predecessor), the Company matched 50% of
employees pre-tax contributions totaling approximately
$304,000, $128,000, $267,000 and $390,000, respectively. The
Company may make additional matching contributions of up to 50%
at the discretion of its Board of Directors. The Company made
additional matching contributions of $390,000 for the year ended
December 31, 2007. There is no accrual for additional
matching contributions for either of the years ended
December 31, 2008 or 2009 as the Board of Directors elected
not to make the match.
|
|
(14)
|
Related
Party Transactions
|
In 2006, the Company agreed to pay Kelso an annual management
fee of $600,000 in connection with planning, strategy, oversight
and support to management (financial advisory agreement). This
management fee was paid on a quarterly basis. A total of
$287,000 and $600,000 of this management fee was recorded as
management fees paid to related parties in the consolidated
statements of operations for the period from January 1,
2008 through June 22, 2008 (Predecessor) and the year ended
December 31, 2007 (Predecessor), respectively.
F-27
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
Concurrent with the closing of the Acquisition, the Company paid
Kelso $6.0 million for financial advisory services provided
to the Company. Of this $6.0 million, $3.6 million was
related to the Acquisition and included in the purchase price,
$1.8 million was related to the Companys new credit
facility and recorded as deferred debt financing costs and
$600,000 was related to the negotiation of the Companys
executive employment contracts and expensed.
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. The
$6.0 million was recorded as fees paid to related parties
in the consolidated statements of operations for the period from
June 23, 2008 through December 31, 2008 (Successor).
As discussed in Note 1, KRH provided notice to RHI Inc. on
December 14, 2009, 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. RHI Inc. and KRH are parties to a
tax receivable agreement that provides for the payment by RHI
Inc. to KRH of 85% of the amount of cash savings, if any, in
U.S. federal, state and local income tax or franchise tax
that RHI Inc. realizes as a result of any increase in tax basis
it receives as a result of any exchange of KRH membership
interest in Holdings II. Although the tax receivable agreement
is still in effect, there should be no prospective implications
with respect to this agreement for RHI Inc. as KRHs
exchange did not result in an increase in RHIs tax basis
in its membership interest in Holdings II.
The provision for income taxes for the period for the year ended
December 31, 2009 (Successor), June 23, 2008 to
December 31, 2008 (Successor), the period from
January 1, 2008 to June 22, 2008 (Predecessor), and
the year ended December 31, 2007 are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
June 23,
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
Period from
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
January 1,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008 to June 22,2008
|
|
|
2007
|
|
|
Current tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1
|
|
|
$
|
952
|
|
|
$
|
(974
|
)
|
|
$
|
(320
|
)
|
State and local
|
|
|
1,798
|
|
|
|
479
|
|
|
|
125
|
|
|
|
1,168
|
|
Foreign
|
|
|
1,580
|
|
|
|
845
|
|
|
|
889
|
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
3,379
|
|
|
|
2,276
|
|
|
|
40
|
|
|
|
2,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,439
|
|
|
|
(45
|
)
|
|
|
(1,440
|
)
|
|
|
(1,241
|
)
|
State and local
|
|
|
476
|
|
|
|
8
|
|
|
|
(118
|
)
|
|
|
(113
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
3,915
|
|
|
|
(37
|
)
|
|
|
(1,558
|
)
|
|
|
(1,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision (benefit)
|
|
$
|
7,294
|
|
|
$
|
2,239
|
|
|
$
|
(1,518
|
)
|
|
$
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax provisions for the period for the year ended
December 31, 2009 (Successor), June 23, 2008 to
December 31, 2008 (Successor), the period from
January 1, 2008 to June 22, 2008 (Predecessor), and
the year ended December 31, 2007 (Predecessor) include
foreign withholding taxes of approximately $1.4 million,
$765,000,
F-28
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
$811,000, and $1.8 million, respectively. These taxes
represent withholding taxes deducted from license fees received
from
non-U.S. customers.
The following is a reconciliation of the provision for income
taxes to the statutory federal income tax rate for the period
for the year ended December 31, 2009 (Successor),
June 23, 2008 to December 31, 2008 (Successor), the
period from January 1, 2008 to June 22, 2008
(Predecessor), and the year ended December 31, 2007
(Predecessor), are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
Successor
|
|
|
June 23,
|
|
|
January 1,
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008 to
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 22,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Benefit on loss before income taxes at statutory federal income
tax rate
|
|
$
|
(144,196
|
)
|
|
$
|
(20,567
|
)
|
|
$
|
(8,068
|
)
|
|
$
|
(7,199
|
)
|
Earnings not subject to tax at partnership level prior to
June 23, 2008, the date of to IPO
|
|
|
|
|
|
|
|
|
|
|
6,493
|
|
|
|
7,699
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
9,735
|
|
|
|
|
|
|
|
|
|
Loss of non-controlling interest
|
|
|
61,569
|
|
|
|
9,476
|
|
|
|
|
|
|
|
|
|
State and local income taxes, (net of federal benefit)
|
|
|
1,197
|
|
|
|
321
|
|
|
|
5
|
|
|
|
703
|
|
Foreign income and withholding taxes net of U.S. foreign tax
credits
|
|
|
960
|
|
|
|
|
|
|
|
58
|
|
|
|
144
|
|
Change in valuation allowance
|
|
|
87,571
|
|
|
|
2,985
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
193
|
|
|
|
289
|
|
|
|
(6
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tax Provision
|
|
$
|
7,294
|
|
|
$
|
2,239
|
|
|
$
|
(1,518
|
)
|
|
$
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net operating losses
|
|
$
|
29,175
|
|
|
$
|
3,011
|
|
Excess of tax over book basis investment in Holdings
II
|
|
|
124,933
|
|
|
|
23,950
|
|
Film production costs
|
|
|
4,421
|
|
|
|
667
|
|
Deferred revenue
|
|
|
2,997
|
|
|
|
3,120
|
|
Accrued liabilities and reserves
|
|
|
1,196
|
|
|
|
2,166
|
|
Other
|
|
|
1,092
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,814
|
|
|
|
33,367
|
|
Less: Valuation allowance
|
|
|
(163,681
|
)
|
|
|
(28,321
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
133
|
|
|
$
|
5,046
|
|
|
|
|
|
|
|
|
|
|
In accordance with FASB ASC 740 Accounting for Income
Taxes, the Company evaluates its deferred income taxes
quarterly to determine if valuation allowances are required or
should be adjusted. FASB ASC 740 requires that companies assess
whether valuation allowances should be established against their
deferred tax assets based on consideration of all available
evidence, both positive and negative, using a more likely
than not standard. This assessment considers, among other
matters, the nature, frequency and severity of recent losses,
forecasts of
F-29
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
future profitability and the duration of statutory carryforward
periods. In making such judgments, significant weight is given
to evidence that can be objectively verified.
Valuation allowances have been established for deferred tax
assets based on a more likely than not threshold.
The Companys ability to realize its deferred tax assets
depends on its ability to generate sufficient taxable income
within the carryback or carryforward periods. The Company has
considered the following possible sources of taxable income when
assessing realization of its deferred tax assets: future
reversals of existing taxable temporary differences, future
taxable income exclusive of reversing temporary differences and
carryforwards and taxable income in prior carryback years.
The $130.4 million increase in gross deferred tax assets
during the year ended December 31, 2009 (Successor) was
primarily attributable to the tax effects of a
$26.2 million increase in net operating loss carryforwards
plus a $101.0 million increase in temporary book versus tax
basis differences in the investment in Holdings II, which is
predominately comprised of the impairment of the film library
and the increase in ownership as a result of the KRH Exchange.
The deferred tax assets are offset by a valuation allowance of
$163.7 million and $28.3 million at December 31,
2009 and December 31, 2008, respectively. The valuation
allowance at December 31, 2009 (Successor) reflects an
increase of $135.4 million from the year ended
December 31, 2008 (Successor) due to the uncertainty of
realizing the tax benefits associated with certain book versus
tax basis temporary differences and net operating loss
carryforwards attributable in light of the cumulative losses in
recent years and the Companys ability to continue as a
going concern. A deferred tax asset of $133,000 is recorded
related to foreign tax credits which can be carried back against
prior year taxes. If and when the Companys operating
performance improves on a sustained basis, its conclusion
regarding the need for this valuation allowance could change,
resulting in the reversal of some or all of the valuation
allowances in the future. The utilization of a portion or all of
the net operating loss carryforwards and other temporary
differences may be subject to limitation under U.S. federal
income tax laws.
At December 31, 2009 Holdings II had a New York City
UBT net operating loss carry forward of $63.1 million. This
loss will be carried forward and will expire beginning in 2028.
The net operating loss was primarily related to the exclusion of
intercompany royalty income. Management expects this loss
carryforward to expire unused. In addition, at December 31,
2009, the Company had corporate federal, state and local net
operating losses of $109.0 million. These losses will be
carried forward and will begin to expire in 2028. The New York
State and New York City net operating loss was primarily related
to the exclusion of intercompany royalty income. Management
expects the entire $109.0 million of these corporate
federal, state and local loss carryforwards to expire unused.
Effective January 1, 2007, the Company adopted new
standards which prescribe a comprehensive model for the
financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be
taken in income tax returns, which are included in FASB ASC
740-10-25.
For each tax position, an enterprise must determine whether it
is more likely than not that the position will be sustained upon
examination based on the technical merits of the position,
including resolution of any related appeals or litigation. A tax
position that meets the more likely than not recognition
threshold is then measured to determine the amount of benefit to
recognize within the financial statements. No benefits may be
recognized for tax positions that do not meet the more likely
than not threshold. The adoption of the new standards had no
impact on the consolidated financial statements of the Company.
F-30
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
A reconciliation of the beginning and ending amount of
unrecognized tax benefit is as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
Successor
|
|
|
June 23,
|
|
|
January 1,
|
|
|
|
Year Ended
|
|
|
2008 to
|
|
|
2008
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to June 22,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
$
|
1,579
|
|
|
$
|
1,579
|
|
|
$
|
1,579
|
|
Increases/decreases in unrecognized tax benefit related to
current period
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases/decreases in unrecognized tax benefit of prior periods
|
|
$
|
1,140
|
|
|
|
|
|
|
|
|
|
Decreases related to settlements and due to a lapse of the
applicable statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,719
|
|
|
$
|
1,579
|
|
|
$
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized tax benefits of $2.7 million, if
recognized, would have a favorable effect on the Companys
effective tax rate.
The Companys practice is to recognize interest and
penalties associated with income taxes as a component of income
tax expense. At December 31, 2009 and December 31,
2008, approximately $1.0 million and $740,000,
respectively, was accrued in the Companys consolidated
balance sheet for the payment of interest and penalties
associated with income taxes.
The Company anticipates $586,000 will reverse within twelve
months as a result of the expected completion of a state income
tax examination.
The Company files federal income tax returns in the
U.S. and various state, local and foreign income tax
returns. Successor Company and Holdings IIs 2009 and 2008
taxable years remain subject to examination by the
U.S. Internal Revenue Service and the state and local tax
authorities until the expiration of the relevant statute of
limitations. RIDs 2008 taxable year remains subject to
examination by the U.S. Internal Revenue Service and
RIDs 2008, 2007 and 2006 taxable years remain subject to
examination by the state and local tax authorities until the
expiration of the relevant statute of limitations.
|
|
(16)
|
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.
|
|
(a)
|
Putative
Shareholder Class Action Lawsuit
|
On October 9, 2009, RHI Entertainment, Inc. and two of its
officers were named as defendants in a putative shareholder
class action filed in the United States District Court for the
Southern District of New York (the Lawsuit), alleging violations
of federal securities laws by issuing a registration statement
in connection with the Companys June 2008 initial public
offering that contained untrue statements of material facts and
omitted other facts necessary to make certain statements not
misleading. The central allegation of the Lawsuit is that the
registration statement overstated the number of
made-for-television
(MFT) movies and mini-series the Company expected to develop,
produce and distribute in 2008, while it failed to disclose that
the Company would not be able to complete the expected number of
MFT movies and miniseries in 2008 due to the declining state of
the credit markets and other negative factors then impacting the
Companys business. The Lawsuit seeks unspecified damages
and interest. The Company believes that the Lawsuit has no merit
and intends to defend itself and its officers vigorously.
F-31
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
On July 15, 2009, RHI Entertainment Distribution, LLC
entered into a settlement agreement and release (the Settlement
Agreement) to resolve a dispute with one of the Companys
distribution partners, ION Media Networks, Inc. (ION), in
connection with a lawsuit filed against the Company on
June 8, 2009. The lawsuit was filed in the United States
Bankruptcy Court for the Southern District of New York (the
Court) and alleged that the Company breached the license
agreement dated June 29, 2007, as amended on
December 1, 2007 (the License Agreement), pursuant to which
the Company licensed to ION certain programming for broadcast on
IONs television network, and ION provided to RHI
Entertainment Distribution the exclusive right to air such
programming during certain time periods and to receive the
revenue from the sale of all but two minutes of advertising
inventory per broadcast hour during which the Companys
programming aired.
The Settlement Agreement became effective on August 10,
2009 (the Effective Date), which was two business days after it
was approved by the Court. In connection with the Settlement
Agreement, the Company made a one-time payment of
$2.5 million to ION on August 10, 2009 (the Settlement
Payment). Under the Settlement Agreement, once the Settlement
Payment was made to ION, the License Agreement terminated and
neither party has any further obligations to the other under
such License Agreement. Under the Settlement Agreement the
parties released each other from any claims under the License
Agreement and ION dismissed its lawsuit against the Company.
The Settlement Payment represents the net amounts owed to ION by
the Company associated with the Companys final
$3.5 million minimum guarantee payment and
$3.3 million of minimum advertising spending commitments
net of $4.3 million owed by ION to the Company related to
the Companys June 30, 2009 accounts receivable
balance associated with advertising sales of the Companys
programming on ION. A net gain of approximately
$1.0 million was recorded for the year ended
December 31, 2009, resulting from the settlement of any
assets and liabilities related to the License.
(c) Flextech
Litigation
On April 7, 2009, RHI Entertainment Distribution, LLC and
RHI Entertainment, LLC were served with a Complaint filed in the
United States District Court for the Southern District of New
York alleging that they had breached an agreement with Flextech
Rights Limited (Flextech), a British distributor, by
failing to make the second of two installment payments. A
judgment in the amount of approximately $0.9 million was
entered against the defendants on February 17, 2010, for
which the Company has accrued as of December 31, 2009.
(d) MAT
IV Litigation
On February 22, 2010, RHI Entertainment Distribution, LLC
was served with a Complaint filed in the United States District
Court for the Southern District of New York alleging that the
Company had breached a contract with MAT Movies and Television
Productions GmnH & Co. Project IV KG (MAT
IV), a German investment fund, by failing to pay amounts
due under an agreement dated September 25, 2009. The
Complaint seeks approximately $7.0 million in damages, for
which the Company has accrued as of December 31, 2009, plus
interest and attorneys fees.
(e) Restructuring
The Company has been actively engaged in discussions with our
lenders and others regarding an anticipated restructuring. As
part of this restructuring effort, we have sought to defer
certain payment deadlines and may fail to make certain payments
when due. As a result, we could face litigation from creditors,
including but not limited to production partners, lenders and
labor unions.
The Company leases office facilities and various types of office
equipment under noncancelable operating leases. The leases
expire at various dates through 2019, and some contain
escalation clauses and renewal options.
F-32
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
Rent expense amounted to approximately $2.9 million
$1.4 million, $1.4 million and $3.0 million for
the year ended December 31, 2009 (Successor), the period
from June 23, 2008 through December 31, 2008
(Successor), the period from January 1, 2008 through
June 22, 2008 (Predecessor) and the year ended
December 31, 2007 (Predecessor), respectively. The Company
has historically subleased office space. Sublease income
amounted to approximately $267,000, $418,000, $439,000 and
$1.0 million for the year ended December 31, 2009
(Successor), the period from June 23, 2008 through
December 31, 2008 (Successor), the period from
January 1, 2008 through June 22, 2008 (Predecessor)
and the year ended December 31, 2007 (Predecessor),
respectively. As of December 31, 2009, the Company did not
sublease any office space. At December 31, 2009, the
minimum annual rental commitments under the leases are as
follows (dollars in thousands):
|
|
|
|
|
2009
|
|
$
|
3,766
|
|
2010
|
|
|
3,664
|
|
2011
|
|
|
3,541
|
|
2012
|
|
|
3,479
|
|
2013
|
|
|
3,528
|
|
Beyond 2013
|
|
|
16,248
|
|
|
|
|
|
|
Total
|
|
$
|
34,226
|
|
|
|
|
|
|
(17) Quarterly
Financial Data (Unaudited)
Certain quarterly information is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue
|
|
$
|
|
|
|
$
|
11,832
|
|
|
$
|
2,576
|
|
|
$
|
21,385
|
|
Library revenue
|
|
|
13,003
|
|
|
|
10,851
|
|
|
|
6,932
|
|
|
|
11,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,003
|
|
|
|
22,683
|
|
|
|
9,508
|
|
|
|
32,578
|
|
Gross (loss) profit
|
|
|
(435
|
)
|
|
|
4,196
|
|
|
|
(8,172
|
)
|
|
|
(330,939
|
)
|
Loss from operations
|
|
|
(11,715
|
)
|
|
|
(3,011
|
)
|
|
|
(17,007
|
)
|
|
|
(340,285
|
)
|
Net loss
|
|
$
|
(12,702
|
)
|
|
$
|
(8,621
|
)
|
|
$
|
(16,746
|
)
|
|
$
|
(213,045
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.94
|
)
|
|
|
(0.64
|
)
|
|
|
(1.24
|
)
|
|
|
(14.61
|
)
|
Diluted
|
|
|
(0.94
|
)
|
|
|
(0.64
|
)
|
|
|
(1.24
|
)
|
|
|
(14.61
|
)
|
F-33
RHI
ENTERTAINMENT, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Period from
|
|
|
Period from
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
4/1/2008 to
|
|
|
6/23/2008 to
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
6/22/2008
|
|
|
6/30/2008
|
|
|
2008
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue
|
|
$
|
4,941
|
|
|
$
|
1,661
|
|
|
$
|
932
|
|
|
$
|
21,833
|
|
|
$
|
50,124
|
|
Library revenue
|
|
|
17,280
|
|
|
|
49,363
|
|
|
|
1,489
|
|
|
|
31,693
|
|
|
|
47,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,221
|
|
|
|
51,024
|
|
|
|
2,421
|
|
|
|
53,526
|
|
|
|
97,244
|
|
Gross profit
|
|
|
4,643
|
|
|
|
19,206
|
|
|
|
1,118
|
|
|
|
15,279
|
|
|
|
32,521
|
|
(Loss) income from operations
|
|
|
(8,753
|
)
|
|
|
5,842
|
|
|
|
(5,650
|
)
|
|
|
5,151
|
|
|
|
(40,392
|
)
|
Net loss
|
|
$
|
(20,194
|
)
|
|
$
|
(2,018
|
)
|
|
$
|
(3,740
|
)
|
|
$
|
(3,507
|
)
|
|
$
|
(28,948
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(0.28
|
)
|
|
|
(0.26
|
)
|
|
|
(2.14
|
)
|
Diluted
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(0.28
|
)
|
|
|
(0.26
|
)
|
|
|
(2.14
|
)
|
F-34
RHI Entertainment,
INC.
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
RHI Entertainment, Inc. (incorporated by reference to
Exhibit 3.1 to the Registrants Form 10-Q for the
period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
3
|
.2
|
|
Amended and Restated By-Laws of RHI Entertainment, Inc.
(incorporated by reference to Exhibit 3.2 to the
Registrants Form 10-Q for the period ending
June 30, 2008 filed with the SEC on August 7, 2008).
|
|
10
|
.1
|
|
Amended and Restated Limited Liability Company Operating
Agreement of RHI Entertainment Holdings II, LLC by and
between RHI Entertainment, Inc. and KRH Investments
LLC, dated as of June 23, 2008 (incorporated by reference to
Exhibit 10.1 to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.2
|
|
Tax Receivable Agreement by and among RHI Entertainment,
Inc., RHI Entertainment Holdings II, LLC and
KRH Investments LLC, dated as of June 23, 2008
(incorporated by reference to Exhibit 10.2 to the
Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.3
|
|
Registration Rights Agreement by and between
RHI Entertainment, Inc. and KRH Investments LLC, dated
as of June 23, 2008 (incorporated by reference to
Exhibit 10.3 to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.4
|
|
Director Designation Agreement by and between
RHI Entertainment, Inc. and KRH Investments LLC, dated
as of June 23, 2008 (incorporated by reference to
Exhibit 10.4 to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.5
|
|
Membership Subscription Agreement by and among
RHI Entertainment, Inc., KRH Investments LLC and
RHI Entertainment Holdings II, LLC, dated as of
June 23, 2008 (incorporated by reference to
Exhibit 10.5 to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.6
|
|
RHI Entertainment Senior Executive Bonus Plan, dated as of
June 23, 2008 (incorporated by reference to
Exhibit 10.6 to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.7
|
|
Amended and Restated RHI Entertainment, Inc. 2008 Equity
Incentive Award Plan, dated as of May 12, 2009
(incorporated by reference to Appendix A to the Companys
Definitive Proxy Statement, filed with the SEC on April 15,
2009).
|
|
10
|
.8
|
|
Amended and Restated First Lien Credit, Security, Guaranty and
Pledge Agreement, dated as of January 12, 2006, as Amended
and Restated as of April 13, 2007, by and among
RHI Entertainment, LLC, as Borrower, JP Morgan Chase
Bank, N.A., as Administrative Agent and as Issuing Bank,
J.P. Morgan Securities Inc, as Sole Bookrunner and Sole
Lead Arranger, The Royal Bank of Scotland PLC, as
Syndication Agent, and Bank of America, N.A., as Documentation
Agent (incorporated by reference to Exhibit 10.11 to the
Registrants Registration Statement on
Form S-1
filed with the SEC on September 14, 2007).
|
|
10
|
.8(a)
|
|
Amendment No. 1 dated October 12, 2007 to the Amended
and Restated First Lien Credit, Security, Guaranty and Pledge
Agreement, dated as of January 12, 2006, as amended and
restated as of April 13, 2007, among
RHI Entertainment, LLC, the Guarantors referred to therein,
the Lenders referred to therein and JPMorgan Chase Bank, N.A.,
as Issuing Bank and as Administrative Agent for the Lenders
(incorporated by reference to Exhibit 10.14 to Amendment
No. 2 to the Registrants Registration Statement on
Form S-1
filed with the SEC on November 11, 2007).
|
|
10
|
.8(b)
|
|
Amendment No. 2 dated May 29, 2008 to the Amended and
Restated First Lien Credit, Security, Guaranty and Pledge
Agreement, dated as of January 12, 2006, as amended and
restated as of April 13, 2007 and amended thereto, among
RHI Entertainment, LLC, the Guarantors referred to therein,
the Lenders referred to therein and JPMorgan Chase Bank, N.A.,
as Issuing Bank and as Administrative Agent for the Lenders
(incorporated by reference to Exhibit 10.13(b) to Amendment
No. 4 to the Registrants Registration Statement on
Form S-1
filed with the SEC on May 30, 2008).
|
IV-1
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.8(c)
|
|
Amendment No. 3 dated November 11, 2008 to the Amended
and Restated First Lien Credit, Security, Guaranty and Pledge
Agreement, dated as of January 12, 2006, as amended and
restated as of April 13, 2007 and amended thereto, among
RHI Entertainment, LLC, the Guarantors referred to therein,
the Lenders referred to therein and JPMorgan Chase Bank, N.A.,
as Issuing Bank and as Administrative Agent for the Lenders.
|
|
10
|
.8(d)
|
|
Amendment No. 4 dated March 2, 2009 to the Amended and
Restated First Lien Credit, Security, Guaranty and Pledge
Agreement, dated as of January 12, 2006, as amended and
restated as of April 13, 2007 and amended thereto, among
RHI Entertainment, LLC, the Guarantors referred to therein,
the Lenders referred to therein and JPMorgan Chase Bank, N.A.,
as Issuing Bank and as Administrative Agent for the Lenders.
|
|
10
|
.9
|
|
Credit, Security, Guaranty and Pledge Agreement (Second Lien
Credit Agreement), among RHI Entertainment, LLC, the
Guarantors referred to therein, the Lenders referred to therein,
JPMorgan Chase Bank, N.A. as Administrative Agent for the
Lenders and J.P. Morgan Securities Inc, dated June 23,
2008 (incorporated by reference to Exhibit 10.9 to the
Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.9(a)
|
|
Amendment No. 1 dated August 7, 2008 to the Credit,
Security, Guaranty and Pledge Agreement (Second Lien Credit
Agreement) dated as of June 23, 2008 among
RHI Entertainment, LLC, the Guarantors referred to therein,
the Lenders referred to therein and JPMorgan Chase Bank, N.A. as
Administrative Agent for Lenders (incorporated by reference to
Exhibit 10.9(a) to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.9(b)
|
|
Successor Agent Agreement and Second Amendment to Credit,
Security, Guaranty and Pledge Agreement (Second Lien Credit
Agreement), dated February 12, 2010, among
RHI Entertainment, LLC, its subsidiaries party to the
Second Lien Credit Agreement, RHI Entertainment
Holdings II, LLC, the Lenders party thereto, JPMorgan Chase
Bank, N.A., as administrative agent, and Wilmington Trust FSB,
as successor administrative agent (incorporated by reference to
Exhibit 10.1 to the Registrants Current
Form 8-K
filed with the SEC on February 16, 2010).
|
|
10
|
.10
|
|
Amended and Restated Intercreditor Agreement dated as of
April 13, 2007 by and among JP Morgan Chase Bank,
N.A., as administrative agent and collateral agent for the First
Priority Secured Parties, JP Morgan Chase Bank, N.A., as
administrative and collateral agent for the Second Priority
Secured Parties, and RHI Entertainment, LLC, as the
Borrower (incorporated by reference to Exhibit 10.12 to the
Registrants Registration Statement on
Form S-1
filed with the SEC on September 14, 2007).
|
|
10
|
.11
|
|
Replacement Amended and Restated Intercreditor Agreement, among
JPMorgan Chase Bank, N.A. as administrative agent and collateral
agent for the First Priority Secured Parties (as defined
therein), JPMorgan Chase Bank, N.A., as administrative and
collateral agent for the Second Priority Secured Parties (as
defined therein), RHI Entertainment, LLC, as the Borrower,
the Guarantors referred to therein, the Credit Parties (as
defined therein), KRH Investments LLC (f/k/a
RHI Entertainment Holdings, LLC) and RHI Entertainment
Holdings II, LLC, dated as of June 23, 2008 (incorporated
by reference to Exhibit 10.2 to the Registrants
Form 10-Q
for the period ending June 30, 2008 filed with the SEC on
August 7, 2008).
|
|
10
|
.11(a)
|
|
Assignment of Intercreditor Agreements, dated February 12,
2010, among JPMorgan Chase Bank, N.A., as administrative agent
for the lenders under the Second Lien Credit Agreement, and
Wilmington Trust FSB, as successor administrative agent
(incorporated by reference to Exhibit 10.1 to the
Registrants Current
Form 8-K
filed with the SEC on February 16, 2010).
|
|
10
|
.12
|
|
Forbearance Agreement, dated December 23, 2009, among
RHI Entertainment, LLC, its subsidiaries party to the
Credit Agreement, RHI Entertainment Holdings II, LLC,
the Lenders party to the Credit Agreement and JPMorgan Chase
Bank, N.A., as Administrative Agent and as Issuing Bank.
(incorporated by reference to Exhibit 10.1 to the
Registrants Current
Form 8-K
filed with the SEC on December 24, 2010).
|
|
10
|
.12(a)
|
|
Amendment No. 1 to the Forbearance Agreement, dated
January 22, 2010, among RHI Entertainment, LLC, its
subsidiaries party to the Credit Agreement,
RHI Entertainment Holdings II, LLC, the Lenders party
to the Credit Agreement and JPMorgan Chase Bank, N.A., as
Administrative Agent and as Issuing Bank (incorporated by
reference to Exhibit 10.1 to the Registrants Current
Form 8-K
filed with the SEC on January 28, 2010).
|
IV-2
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.12(b)
|
|
Amendment No. 2 to the Forbearance Agreement, dated as of
February 26, 2010 (executed March 5, 2010), among
RHI Entertainment, LLC, its subsidiaries party to the
Credit Agreement, RHI Entertainment Holdings II, LLC,
the Lenders party to the Credit Agreement and JPMorgan Chase
Bank, N.A., as Administrative Agent and as Issuing Bank.
(incorporated by reference to Exhibit 10.1 to the
Registrants Current
Form 8-K
filed with the SEC on March 11, 2010).
|
|
10
|
.13
|
|
Forbearance Agreement, dated February 12, 2010, among
RHI Entertainment, LLC, its subsidiaries party to the
Second Lien Credit Agreement, RHI Entertainment
Holdings II, LLC, the Lenders party thereto and Wilmington
Trust FSB, as Administrative Agent (incorporated by reference to
Exhibit 10.1 to the Registrants Current
Form 8-K
filed with the SEC on February 16, 2010).
|
|
10
|
.13(a)
|
|
Amendment No. 1 to the Forbearance Agreement, dated as of
February 26, 2010 (executed March 5, 2010), among
RHI Entertainment, LLC, its subsidiaries party to the
Second Lien Credit Agreement, RHI Entertainment
Holdings II, LLC, the Lenders party thereto and Wilmington
Trust FSB, as Administrative Agent (incorporated by reference to
Exhibit 10.2 to the Registrants Current
Form 8-K
filed with the SEC on March 11, 2010).
|
|
10
|
.14
|
|
Amended and Restated Employment Agreement between Robert A.
Halmi, Jr. and RHI Entertainment, LLC (incorporated by
reference to Exhibit 10.6 to Amendment No. 2 to the
Registrants Registration Statement on
Form S-1
filed with the SEC on November 19, 2007).
|
|
10
|
.14(a)
|
|
Amendment to the Amended and Restated Employment Agreement of
Robert A. Halmi, Jr. (incorporated by reference to
Exhibit 10.1 to the Registrants Current
Form 8-K
filed with the SEC on December 12, 2008).
|
|
10
|
.15
|
|
Amended and Restated Employment Agreement between Peter N. von
Gal and RHI Entertainment, LLC (incorporated by reference
to Exhibit 10.7 to Amendment No. 2 to the
Registrants Registration Statement on
Form S-1
filed with the SEC on November 19, 2007).
|
|
10
|
.15(a)
|
|
Amendment to the Amended and Restated Employment Agreement
between Peter N. von Gal and RHI Entertainment, LLC
(incorporated by reference to Exhibit 10.2 to the
Registrants Current
Form 8-K
filed with the SEC on December 12, 2008).
|
|
10
|
.16
|
|
Employment Agreement, dated November 2, 2009, between
William J. Aliber and RHI Entertainment, LLC (incorporated
by reference to Exhibit 10.1 to the Registrants
Current
Form 8-K
filed with the SEC on November 6, 2009).
|
|
10
|
.17
|
|
Employment Agreement between Joel E. Denton and
RHI Entertainment, LLC (incorporated by reference to
Exhibit 10.9 to the Registrants Registration
Statement on
Form S-1
filed with the SEC on September 14, 2007).
|
|
10
|
.18
|
|
Employment Agreement between Henry S. Hoberman and
RHI Entertainment, LLC (incorporated by reference to
Exhibit 10.10 to Amendment No. 3 to the
Registrants Registration Statement on
Form S-1
filed with the SEC on May 2, 2008).
|
|
10
|
.19
|
|
Agreement and General Release between Anthony Guido and
RHI Entertainment, LLC (incorporated by reference to
Exhibit 10.11 to Amendment No. 3 to the
Registrants Registration Statement on
Form S-1
filed with the SEC on May 2, 2008).
|
|
10
|
.20
|
|
Letter Agreement between Jeffrey Sagansky and
RHI Entertainment, LLC (incorporated by reference to
Exhibit 10.1 to the Registrants Current
Form 8-K
filed with the SEC on February 9, 2009).
|
|
10
|
.21
|
|
Settlement Agreement & Release between
RHI Entertainment Distribution, LLC and ION Media Networks,
Inc., dated July 15, 2009 (incorporated by reference to
Exhibit 10.1 to the Registrants Current
Form 8-K
filed with the SEC on August 12, 2009.
|
|
14
|
.1
|
|
Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14.1 to the Registrants Registration
Statement on
Form S-1
filed with the SEC on September 14, 2007).
|
|
21
|
.1*
|
|
List of Subsidiaries.
|
|
23
|
.1*
|
|
Consent of KPMG LLP.
|
IV-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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.
|
|
|
|
* |
|
Each document marked with an asterisk is filed herewith. |
IV-4