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| RHIE > SEC Filings for RHIE > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
Discussion of consolidated financial information
Revenue
We derive our revenue from the distribution of our film content.
Historically, most of our revenue has been generated from the licensing of
rights to our film content to broadcast and cable networks for specified terms,
in specified media and territories.
The timing of film deliveries during the year can have a significant impact
on revenue. Each year, we develop and distribute a new slate of film content,
consisting primarily of MFT movies and mini-series. We refer to the revenue
generated from the licensing of rights in the fiscal year in which a film is
first delivered to a customer as "production revenue." Any revenue generated
from the licensing of rights to films in years subsequent to the film's initial
year of delivery is referred to as "library revenue."
Cost of sales
We capitalize costs incurred for the acquisition and development of story
rights, film production costs, film production-related interest and overhead,
residuals and participations. Residuals and participations represent contingent
compensation payable to parties associated with the film including producers,
writers, directors or actors. Residuals represent amounts payable to members of
unions or "guilds" such as the Screen Actors Guild, Directors Guild of America
and Writers Guild of America based on the performance of the film in certain
media and/or the guild member's salary level.
Cost of sales includes the amortization of capitalized film costs, as well as
exploitation costs associated with bringing a film to market.
Selling, general and administrative expense
Selling, general and administrative expense includes salaries, rent and other
expenses net of amounts included in capitalized overhead. We expect increases in
general and administrative expense as we incur additional expenses in connection
with operating as a publicly traded company.
Interest expense, net
Interest expense, net represents interest incurred on the Company's credit
facilities (inclusive of amortization of deferred debt issuance costs and
original issue discount). Interest expense is reflected net of interest
capitalized to film production costs.
Income taxes
Our operations are conducted through our indirect subsidiary, RHI LLC.
Holdings II and RHI LLC are organized as limited liability companies. For U.S.
federal income tax purposes, Holdings II is treated as a partnership and RHI LLC
is disregarded as a separate entity from Holdings II. Partnerships are generally
not subject to income tax, as the income or loss is included in the tax returns
of the individual partners.
The consolidated financial statements of RHI Inc. include a provision for
corporate income taxes associated with RHI Inc.'s membership interest in
Holdings II as well as an income tax provision related to RHI International
Distribution, Inc., a wholly-owned subsidiary of RHI LLC, which is a taxable
U.S. corporation.
KRH is entitled to exchange its common membership units in Holdings II for,
at our option, cash or shares of RHI Inc. common stock on a one-for-one basis
(as adjusted to account for stock splits, recapitalizations or similar events)
or a combination of both stock and cash. These exchanges may result in increases
in the tax basis of the assets of Holdings II that otherwise would not have been
available. These increases in our proportionate share of tax basis may increase
depreciation and amortization deductions for tax purposes and therefore reduce
the amount of tax that RHI Inc. would otherwise be required to pay in the
future, although the IRS may challenge all or part of that tax basis increase,
and a court could sustain such a challenge.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates that we expect to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. In evaluating
our ability to recover our deferred tax assets, we consider all available
positive and negative facts and circumstances and allowances, if any, are
adjusted during each reporting period.
Results of operations
Three months ended March 31, 2009 compared to the three months ended March 31,
2008
The results of operations for the three months ended March 31, 2009 and 2008
are summarized as follows (in thousands, except for per share data):
Successor Predecessor
Three Months Three Months
Ended Ended
March 31, March 31, Increase/
2009 2008 (Decrease)
Revenue
Production revenue $ - $ 4,941 $ (4,941 )
Library revenue 13,003 17,280 (4,277 )
Total revenue 13,003 22,221 (9,218 )
Cost of sales 13,438 17,578 (4,140 )
Gross (loss) profit (435 ) 4,643 (5,078 )
Other costs and expenses:
Selling, general and administrative 10,966 12,889 (1,923 )
Amortization of intangible assets 314 357 (43 )
Management fees paid to related parties - 150 (150 )
Loss from operations (11,715 ) (8,753 ) (2,962 )
Other (expense) income:
Interest expense, net (9,632 ) (11,754 ) 2,122
Interest income 3 19 (16 )
Other (expense) income, net (694 ) 887 (1,581 )
Loss before income taxes and non-controlling
interest in loss of consolidated entity (22,038 ) (19,601 ) (2,437 )
Income tax benefit (provision) 25 (593 ) 618
Loss before non-controlling interest in loss of
consolidated entity (22,013 ) (20,194 ) (1,819 )
Non-controlling interest in loss of consolidated
entity 9,311 - 9,311
Net loss $ (12,702 ) $ (20,194 ) $ 7,492
Basic and diluted loss per share $ (0.94 ) N/A N/A
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Revenue, cost of sales and gross (loss) profit
Three Months Ended March 31,
2009 2008
(Successor) (Predecessor)
As a As a
Percentage Percentage $ Increase/ % Increase/
Amount of Revenue Amount of Revenue (Decrease) (Decrease)
(Dollars in thousands)
Production revenue $ - 0 % $ 4,941 22 % $ (4,941 ) (100 )%
Library revenue 13,003 100 % 17,280 78 % (4,277 ) (25 )%
Total revenue 13,003 100 % 22,221 100 % (9,218 ) (41 )%
Cost of sales 13,438 103 % 17,578 79 % (4,140 ) (24 )%
Gross (loss) profit $ (435 ) (3 )% $ 4,643 21 % $ (5,078 ) (109 )%
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Total revenue decreased $9.2 million, or 41%, to $13.0 million during the
three months ended March 31, 2009 from $22.2 million during the same period in
2008.
There was no production revenue during the three months ended March 31, 2009,
a decrease of $4.9 million compared to the same period in 2008. In the three
months ended March 31, 2009, there were no original MFT movies or original
mini-series delivered, while five MFT movies were delivered during the three
months ended March 31, 2008. We significantly slowed down our production
activity in the fourth quarter of 2008 due to the difficult economic environment
and did not begin any films for the 2009 slate. Film production activity did
increase during the first quarter and we are on track to deliver approximately
35 films in 2009, with the majority of these films to be delivered in the third
and fourth quarters.
Library revenue decreased $4.3 million to $13.0 million in the three months
ended March 31, 2009 from $17.3 million during the comparable period in 2008.
The decrease of approximately 25% primarily resulted from slow down in sales
activity during the fourth quarter of 2008. Library revenue is recognized based
upon when the window for a particular film becomes open and available for a
network to air. Sales made in one quarter often are not recognized as revenue
until subsequent quarters due to this issue. Also contributing to the decrease
was a $1.5 million reduction in revenue related to the distribution of
programming on ION during the three months ended March 31, 2009 compared to the
same period in the prior year as a result of a weaker advertising market.
Cost of sales decreased $4.1 million to $13.4 million during the three months
ended March 31, 2009 from $17.6 million during the same period of 2008. Cost of
sales as a percentage of revenue increased to 103% during the three months ended
March 31, 2009 from 79% during the same period of 2008. Cost of sales is
comprised of film cost amortization, certain distribution expenses and
amortization of minimum guarantee payments made to ION. While film cost
amortization as a percentage of revenue was slightly higher in 2009 than in 2008
(see discussion below), the gross loss during the three months ended March 31,
2009 was primarily a result of the reduction in revenue recognized in the three
months ended March 31, 2009 and the fact that the distribution expenses and ION
minimum guarantee expense are not driven by revenue recognition.
Film cost amortization as a percentage of revenue was 63% during the three
months ended March 31, 2009 compared to 59% during the same period of 2008. The
average amortization rate on library revenue was higher than in 2008 due to the
mix of films for which revenue was recognized in each period. Amortization is on
a film-by-film basis and, on average, the films for which revenue was recognized
during the three months ended March 31, 2009 had higher rates of amortization
than those in the same period of 2008. It should be noted that while the rate of
margin on library revenue recognized in the quarter slipped slightly, due to the
mix of films, the Company has no reason to believe that the full year margin on
the 2009 slate and library product will not be consistent with prior years.
Other cost of goods sold were slightly higher during the three months ended
March 31, 2009 as compared to the same period of 2008 due to an increase in
costs associated with our ION agreement, including the amortization of minimum
guarantee payments made to ION. The increase in amortization of the minimum
guarantee payments is due to an increase in required payments during the second
year of the agreement with ION.
Other costs and expenses
Three Months Ended
March 31,
2009 2008 $ Increase/ %Increase/
(Successor) (Predecessor) (Decrease) (Decrease)
(Dollars in thousands)
Selling, general and administrative $ 10,966 $ 12,889 $ (1,923 ) (15 )%
Amortization of intangible assets 314 357 (43 ) (12 )%
Fees to related parties - 150 (150 ) (100 )%
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Selling, general and administrative expenses decreased $1.9 million to
$11.0 million in the three months ended March 31, 2009, from $12.9 million in
the same period in 2008. During the three months ended March 31, 2008, we
incurred approximately $2.8 million of costs associated with severance
agreements. Similar costs were not incurred during the three months ended
March 31, 2009. Although we've begun to see benefits from our fourth quarter
2008 decision to reduce our overhead costs, we also incurred certain expenses
during the three months ending March 31, 2009 related to operating as public
company which were not incurred in the first quarter of 2008.
Interest expense, net
Interest expense, net decreased $2.1 million to $9.6 million for the three
months ended March 31, 2009 from $11.8 million during the comparable period in
2008. The decrease in interest expense is largely due to lower average interest
rates during the three months ended March 31, 2009 as compared to the comparable
period of 2008 resulting from the reductions in the benchmark interest rates
(i.e. LIBOR). The average interest rate during the three months ended March 31,
2009 was 4.5%, compared to 6.4% during the comparable period of 2008. Also
contributing to the decrease in interest expense, net were lower weighted
average debt balances outstanding during the three months ended March 31, 2009
compared to 2008. During the three months ended March 31, 2009, we had an
average debt balance of $576.8 million compared to $673.2 million during the
comparable period of 2008. Partially offsetting the reduction in interest rates
and weighted average debt outstanding was an increase in interest expense
recorded in connection with our interest rate swap contracts resulting from the
aforementioned reduction in LIBOR. Approximately $3.4 million in interest
expense was recorded in connection with our interest rate swap contracts during
the three months ended March 31, 2009, compared to $1.3 million in the three
months ended March 31, 2008.
Other (expense) income, net
Other (expense) income, net primarily represents realized foreign currency
(losses) gains resulting from the settlement of customer accounts denominated in
foreign currencies. For the three months ended March 31, 2009, we realized a
foreign currency loss of $695,000 as compared to a foreign currency gain of
$887,000 during the three months ended March 31, 2008.
Income tax benefit (provision)
The income tax benefit (provision) for the three month periods ended March 31
is related to the pre-tax loss/income of our corporate subsidiary and to foreign
taxes related to license fees from customers located outside the United States.
No tax benefit has been provided for RHI Inc.'s interest in the net loss because
insufficient evidence is available that would support that it is more likely
than not that we will generate sufficient income during the year to utilize the
net operating loss generated by RHI Inc. in the three months ended March 31,
2009.
Net loss
The net loss for the three months ended March 31, 2009 was $(12.7) million,
compared to $(20.2) million for the three months ended March 31, 2008. The
reduction is the result of the non-controlling interest in loss of consolidated
entity recorded in the three months ended March 31, 2009.
Liquidity and capital resources
Our credit facilities currently include: (i) two first lien facilities, a
$175.0 million term loan and a $350.0 million revolving credit facility; and
(ii) a $75.0 million senior second lien term loan. As of March 31, 2009, all of
our debt was variable rate and totaled $576.8 million outstanding. To manage the
related interest rate risk, we have entered into interest rate swap agreements.
As of March 31, 2009, we had floating to fixed interest rate swaps outstanding
in the notional amount of $435.0 million, effectively converting that amount of
debt from variable rate to fixed rate. The interest rate swaps were amended in
April 2009 (refer to footnote
7 of our unaudited condensed consolidated financial statements) which will
result in significant cash interest savings over the next twelve months. As of
March 31, 2009, we had $9.1 million of cash compared to $22.4 million of cash at
December 31, 2008. As of March 31, 2009, we had $19.8 million available under
our revolving credit facility, net of an outstanding letter of credit, subject
to the terms and conditions of that facility. The decrease in cash reflects our
production spending during the three months ended March 31, 2009. Historically,
we have financed our operations with funds from operations, capital
contributions from our owners and the use of credit facilities. Additionally,
from time-to-time, we may seek additional capital through the incurrence of
debt, the issuance of equity or other financing alternatives.
Our ability to meet our debt and other obligations and to reduce our total
debt depends on our future operating performance and on economic, financial,
competitive and other factors. High levels of interest expense could have
negative effects on our future operations. Interest expense, which is net of
capitalized interest and includes amortization of debt issuance costs, totaled
$9.6 million for the three months ended March 31, 2009. A substantial portion of
our cash flow from operations must be used to pay our interest expense and will
not be available for other business purposes.
Management is continually reviewing its operations for opportunities to
adjust the timing of expenditures to ensure that sufficient resources are
maintained. The majority of our films are in production in the summer months so
that they can be delivered late in the third quarter and during the fourth
quarter. As such, the second half of the year is typically the period during the
year when our revolving credit facility is most fully drawn. We have the ability
to manage the timing and related expenditures of certain of these productions.
The timing surrounding the commencement of production of movies and mini-series
is the most significant item we can alter in terms of managing our resources.
For example, we have asked our production partners to finance a significant
portion of the cost of each new production without short-term financial support
from us. If our production partners cannot finance a substantial portion of a
film's cost through the use of new or existing credit facilities of their own,
we may not develop or produce that film. See "Risk Factors - Risks related to
our business - Our focus on managing our resources in the most efficient manner
may result in a reduction in our production slate" in our Annual Report on Form
10-K for the year ended December 31, 2008, which was filed with the SEC on
March 5, 2009.
We believe our cash on hand, available borrowings under our revolving credit
facility and projected cash flows from operations will be sufficient to satisfy
our financial obligations through at least the next twelve months. However, a
development that significantly decreases our revenue or significantly increases
our expenses or cash needs may result in the need for additional financing.
Given current credit and equity market conditions, our ability to attract
additional capital may be significantly more difficult than it has been in the
past. See "Risk Factors - Risks related to our business - Our substantial
indebtedness could adversely affect our financial health and prevent us from
fulfilling our obligations under our existing senior secured credit facilities"
in our Annual Report on Form 10-K for the year ended December 31, 2008, which
was filed with the SEC on March 5, 2009.
The chart below shows our cash flows for the three months ended March 31,
2009 and 2008.
Three Months Ended
March 31,
2009 2008
(Successor) (Predecessor)
(Dollars in thousands)
Net cash used in operating activities $ (13,254 ) $ (10,140 )
Net cash used in investing activities (26 ) (39 )
Net cash provided by financing activities - 19,320
Cash (end of period) 9,093 10,548
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Operating activities
Cash used in operating activities in the three months ended March 31, 2009
was $13.3 million, and reflects spending related to production, distribution,
selling, general and administrative expenses and interest, offset by the
collection of cash associated with the distribution of our MFT movies,
. . .
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