10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

001-34102
(Commission File Number)

RHI ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)


Delaware		36-4614616
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

1325 Avenue of Americas, 21^st Floor
New York, NY 10019
(Address of principal executive offices)
Registrant’s telephone number: (212) 977-9001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of November 6, 2008 was 13,500,100.

Part 1. Financial Information

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Balance Sheets


	(Successor)			(Predecessor)
	September 30,			December 31,
	2008			2007
	(In thousands, except per share data)
ASSETS
Cash	$	6,701		$	1,407
Accounts receivable, net of allowance for doubtful accounts and discount to present value of $12,179 and $6,311, respectively		136,161			113,759
Film production costs, net		793,196			754,337
Property and equipment, net		407			399
Prepaid and other assets, net		31,379			20,055
Intangible assets, net		2,579			3,600
Goodwill		59,838			59,838

Total assets	$	1,030,261		$	953,395


LIABILITIES AND STOCKHOLDERS’/MEMBER’S EQUITY
Accounts payable and accrued liabilities	$	43,868		$	40,172
Accrued film production costs		157,548			132,656
Debt		568,789			655,951
Deferred revenue		25,245			24,203
Non-controlling interest in consolidated entity		99,325			—

Total liabilities		894,775			852,982

Member’s equity		—			112,270
Stockholders’ equity		135			—
Common stock, par value $0.01 per share;125,000 shares authorized and 13,500 shares issued and outstanding
Additional paid-in capital		149,269			—
Retained deficit		(7,247	)		—
Accumulated other comprehensive loss		(6,671	)		(11,857	)

Total stockholders’ / member’s equity		135,486			100,413

Total liabilities and stockholders’ / member’s equity	$	1,030,261		$	953,395

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Operations


	(Successor)						(Predecessor)
	Three Months			Period from			Three Months			Period from			Nine Months
	Ended			June 23, 2008 to			Ended			January 1, 2008 to			Ended
	September 30, 2008			September 30, 2008			September 30, 2007			June 22, 2008			September 30, 2007
	(In thousands, except per share data)
Revenue
Production revenue	$	21,833		$	22,765		$	14,398		$	6,602		$	23,080
Library revenue		31,693			33,182			14,349			66,643			35,644

Total revenue		53,526			55,947			28,747			73,245			58,724
Cost of sales		38,247			39,550			18,014			49,396			36,895

Gross profit		15,279			16,397			10,733			23,849			21,829
Other costs and expenses:
Selling, general and administrative		9,814			10,546			9,125			25,802			29,746
Amortization of intangible assets		314			350			332			671			996
Fees paid to related parties:
Management fees		—			—			150			287			450
Termination fee		—			6,000			—			—			—

Income (loss) from operations		5,151			(499	)		1,126			(2,911	)		(9,363	)
Other (expense) income:
Interest expense, net		(9,855	)		(10,674	)		(13,361	)		(21,559	)		(39,100	)
Interest income		17			20			51			34			154
Loss on extinguishment of debt		—			—			—			—			(17,297	)
Other income (expense), net		(1,001	)		(934	)		262			706			645

Loss before income taxes and non-controlling interest in loss of consolidated entity		(5,688	)		(12,087	)		(11,922	)		(23,730	)		(64,961	)
Income tax (provision) benefit		(389	)		(472	)		(475	)		1,518			2,325

Loss before non-controlling interest in loss of consolidated entity		(6,077	)		(12,559	)		(12,397	)		(22,212	)		(62,636	)
Non-controlling interest in loss of consolidated entity		2,570			5,312			—			—			—

Net loss	$	(3,507	)	$	(7,247	)	$	(12,397	)	$	(22,212	)	$	(62,636	)

Loss per Share:
Basic	$	(0.26	)	$	(0.54	)		N/A			N/A			N/A
Diluted	$	(0.26	)	$	(0.54	)		N/A			N/A			N/A
Weighted Average Shares Outstanding:
Basic		13,500			13,500			N/A			N/A			N/A
Diluted		13,500			13,500			N/A			N/A			N/A

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Cash Flows


	(Successor)			(Predecessor)
	Period from			Period from			Nine Months
	June 23, 2008 to			January 1, 2008 to			Ended
	September 30, 2008			June 22, 2008			September 30, 2007
	(In thousands)
Cash flows from operating activities
Net loss	$	(7,247	)	$	(22,212	)	$	(62,636	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of film production costs		34,308			43,579			29,094
Non-controlling interest in loss of consolidated entity		(5,312	)		—			—
Increase of accounts receivable reserves		1,498			4,370			421
Amortization of deferred debt financing cost		909			549			1,583
Share-based compensation		528			926			1,455
Amortization of intangible assets		350			671			996
Deferred income taxes		(277	)		(1,558	)		841
Depreciation and amortization of fixed assets		56			93			155
Loss on disposal of fixed assets		1			—			2
Loss on extinguishment of debt		—			—			17,297
Amortization of debt discount		—			355			340
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable		(23,576	)		(4,694	)		24,875
Decrease (increase) in prepaid and other assets		3,056			(2,457	)		(12,720	)
Additions to film production costs		(61,837	)		(54,909	)		(108,128	)
(Decrease) increase in accounts payable and accrued liabilities		(2,336	)		6,327			(5,572	)
Increase (decrease) in accrued film production costs		25,889			(997	)		(9,984	)
Increase (decrease) in deferred Revenue		3,416			(2,374	)		18,628

Net cash used in operating activities		(30,574	)		(32,331	)		(103,353	)

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Unaudited Condensed Consolidated Statements of Cash Flows (continued)


	(Successor)			(Predecessor)
	Period from			Period from			Nine Months
	June 23, 2008 to			January 1, 2008 to			Ended
	September 30, 2008			June 22, 2008			September 30, 2007
	(In thousands)
Cash flows from investing activities
Purchase of property and equipment		(77	)		(81	)		(125	)

Net cash used in investing activities		(77	)		(81	)		(125	)

Cash flows from financing activities
Sale of common stock		189,000			—			—
Payment of offering costs and fees		(15,016	)		—			—
Borrowings from credit facilities		157,679			80,093			702,597
Repayments of credit facilities		(284,900	)		(44,708	)		(595,500	)
Deferred debt financing costs		(4,626	)		—			(3,316	)
Second lien pre-payment penalty		(2,600	)		—			—
Member capital contributions		—			29,135			20
Distribution to KRH		(35,700	)		—			—

Net cash provided by financing activities		3,837			64,520			103,801

Net (decrease) increase in cash		(26,814	)		32,108			323
Cash, beginning of period		33,515			1,407			3,751

Cash, end of period	$	6,701		$	33,515		$	4,074

Supplemental disclosure of cash flow information:
Cash paid for interest	$	12,418		$	23,845		$	37,001
Cash paid for income taxes		424			1,968			3,473

See accompanying notes to unaudited condensed consolidated financial statements.

RHI ENTERTAINMENT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements

(1) Business and Organization

On January 12, 2006, Hallmark Entertainment Holdings, LLC (Hallmark) sold its 100% interest in Hallmark Entertainment, LLC (Hallmark Entertainment) 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 LLC’s 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 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 II’s assumption of all of KRH’s obligations under its financial advisory agreement with Kelso. Upon completion of the IPO, the net proceeds received were contributed by RHI Inc. to Holdings II in exchange for 57.7% (13,500,100) of the common membership units in Holdings II. Upon completion of the IPO, RHI Inc. became the sole managing member of Holdings II and holds a majority of the economic interests. KRH is the non-managing member of Holdings II and holds a minority of the economic interests. To the extent that distributions are made, they will be in accordance with the relative economic interests of RHI Inc. and KRH in Holdings II. RHI Inc. holds a number of common membership units in Holdings II equal to the number of outstanding shares of RHI Inc. common stock.

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 LLC’s new $55.0 million senior second lien credit facility, approximately $52.2 million of borrowings under RHI LLC’s revolving credit facility (see Note 7) and $29.0 million of cash on hand as follows: (i) approximately $260.0 million was used to repay RHI LLC’s 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 which KRH used to repay its unsecured term loan facility; (iii) approximately $0.5 million, net of reimbursements was used to pay fees and expenses in connection with the IPO; (iv) approximately $9.8 million was used to pay fees and expenses in connection with the amendments to the RHI LLC’s 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 LLC’s 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.

(2) Basis of Presentation

The financial information presented herein has been prepared according to U.S. generally accepted accounting principles. In management’s opinion, the information presented herein reflects all adjustments necessary to fairly present the financial position and results of operations of the Predecessor Company and Successor Company (collectively, the Company).

The consolidated financial statements of the Predecessor Company include the accounts of RHI LLC and its consolidated subsidiaries. The consolidated financial statements of the Successor Company include the accounts of RHI Inc. and its consolidated subsidiary, Holdings II (which consolidates RHI LLC). All intercompany accounts and transactions have been eliminated.

The unaudited financial statements as of September 30, 2008 (Successor) and for the three months ended September 30, 2008 (Successor), the period from June 23, 2008 to September 30, 2008 (Successor), the three months ended September 30, 2007 (Predecessor), the period from January 1, 2008 to June 22, 2008 (Predecessor) and the nine month period ended September 30, 2007 (Predecessor) include, in the opinion of management, all adjustments consisting only of normal recurring adjustments, which the

company considers necessary for a fair presentation of the financial position and results of operations of the company for these periods. Results for the aforementioned periods are not necessarily indicative of the results to be expected for the full year.

(3) Summary of Significant Accounting Policies

For a complete discussion of the Company’s accounting policies, refer to the consolidated financial statements and related notes contained in the Company’s prospectus filed with the Securities and Exchange Commission (SEC) dated June 17, 2008.

(a) Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes thereto. Actual results could differ from those estimates.

(b) Comprehensive Loss

Comprehensive loss consists of net loss and other losses affecting stockholders’/member’s equity that, under U.S. generally accepted accounting principles, are excluded from net loss. Comprehensive loss for the three months ended September 30, 2008 (Successor), the period from June 23, 2008 to September 30, 2008 (Successor), the three months ended September 30, 2007 (Predecessor), the period from January 1, 2008 to June 22, 2008 (Predecessor) and the nine month period ended September 30, 2007 (Predecessor) totaled approximately $(3.2) million, $(7.8) million, $(20.2) million, $(21.0) million and $(66.9) million, respectively.

(c) Segment Information

The Company operates in a single segment: the development, production and distribution of made-for-television movies, mini-series and other television programming. Long-lived assets located in foreign countries are not material. Revenue earned from foreign licensees represented approximately 46%, 46%, 42%, 24% and 43% of total revenue for the three months ended September 30, 2008 (Successor), the period from June 23, 2008 to September 30, 2008 (Successor), the three months ended September 30, 2007 (Predecessor), the period from January 1, 2008 to June 22, 2008 (Predecessor) and the nine month period ended September 30, 2007 (Predecessor), respectively. These revenues, generally denominated in U.S. dollars, were primarily from sales to customers in Europe.

(d) New Accounting Pronouncements Adopted

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, or SFAS 159. SFAS 159 permits entities to elect, at specified election dates, to measure eligible financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred. SFAS 159 was effective as of January 1, 2008 for the Company and the adoption was optional. The Company chose not to adopt SFAS 159 and will continue to account for its debt at amortized cost.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Under SFAS 157, fair value refers to the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity does business. It also clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of SFAS 157 could change current practices. SFAS 157 was effective for financial statements issued with fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, however, the effective date for SFAS 157 was deferred until fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities. The Company adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities, which did not have a material impact on its consolidated financial statements. The Company will

adopt for non-financial assets and liabilities effective January 1, 2009. The Company currently anticipates that the adoption of the remainder of SFAS 157 will not have a material impact on its consolidated financial statements in future periods.

(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. As of September 30, 2008, the Company has no potentially dilutive securities outstanding. The weighted average basic and diluted shares outstanding for the three months ended September 30, 2008 and the period from June 23, 2008 to September 30, 2008 was 13,500,100 each. The basic and diluted loss per share for the three months ended September 30, 2008 and the period from June 23, 2008 to September 30, 2008 was $(0.26) and $(0.54), 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) held by KRH is recorded as non-controlling interest in the consolidated entity, which results in an associated reduction in additional paid-in capital of RHI Inc. The non-controlling interest in the consolidated entity on the consolidated balance sheet was established in accordance with Emerging Issues Task Force (EITF) 94-2, “Treatment of Minority Interests in Certain Real Estate Investment Trusts” by multiplying the net equity of Holdings II (after reflecting the contributions of KRH and RHI Inc. and costs related to the offering and reorganization) by KRH’s 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 II’s net loss attributable to KRH.

The non-controlling interest associated with the initial investment by RHI Inc. in Holdings II and subsequent transactions are calculated as follows (in thousands):


Total Holdings II member’s 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		223
Non-controlling interest in unrealized loss on interest rate swaps		(396	)

Non-controlling interest allocation for the period from June 23, 2008 to September 30, 2008		(173	)
Non-controlling interest in loss of consolidated entity for the period from June 23, 2008 to September 30, 2008		(5,312	)

Non-controlling interest in consolidated entity as of September 30, 2008	$	99,325

(6) Film Production Costs, Net

Film production costs are comprised of the following (in thousands):


	(Successor)			(Predecessor)
	September 30,			December 31,
	2008			2007
Completed films	$	914,838		$	830,220
Crown Film Library		145,193			144,084
Films in process and development		41,819			12,211

		1,101,850			986,515
Accumulated amortization		(308,654	)		(232,178	)

	$	793,196		$	754,337

The following table illustrates the amount of overhead and interest costs capitalized to film production costs as well as amortization expense associated with completed films and the Crown Film Library (in thousands):


	(Successor)				(Predecessor)
	Three Months		Period from		Three Months		Period from		Nine Months
	Ended		June 23, 2008 to		Ended		January 1, 2008 to		Ended
	September 30, 2008		September 30, 2008		September 30, 2007		June 22, 2008		September 30, 2007
	(In thousands)
Overhead costs capitalized	$	3,434	$	3,714	$	3,574	$	6,775	$	10,403
Interest capitalized		165		191		702		313		1,461
Amortization of completed films		31,258		32,200		12,300		40,595		27,974
Amortization of Crown Film Library		981		1,072		759		2,608		759

Approximately 33% of completed film production costs have been amortized through September 30, 2008. The Company further anticipates that approximately 10% of completed film production costs will be amortized through September 30, 2009. The Company anticipates that approximately 50% of completed film production costs as of September 30, 2008 will be amortized over the next three years and that approximately 80% of film production costs will be amortized within five years. The Crown Film Library has a remaining amortization period of 18 years and 3 months as of September 30, 2008.

(7) Debt

Debt consists of the following (in thousands):


	(Successor)		(Predecessor)
	September 30,		December 31,
	2008		2007
First Lien Term Loan	$	175,000	$	175,000
Revolver		318,789		225,625
New Second Lien Term Loan		75,000		—
Second Lien Term Loan (net of $4,674 of unamortized discount)		—		255,326

	$	568,789	$	655,951

On April 13, 2007, the Company amended its First Lien Credit Agreement and Second Lien Credit Agreement to effect a refinancing of its existing credit facilities. The amended First Lien Credit Agreement was comprised of two facilities: (i) a six-year $175.0 million term loan (First Lien Term Loan) and (ii) a six year $275.0 million revolving credit facility, including a letter of credit sub-facility (Revolver). The amended Second Lien Credit Agreement was comprised of a seven-year $260.0 million term loan (Second Lien Term Loan). The aggregate $606.4 million of proceeds of the First Lien Term Loan, Second Lien Term Loan (net of $5.2 million 2% original issue discount) and initial Revolver drawdown was used to repay the existing $599.0 million of debt outstanding and accrued interest as of April 13, 2007, $650,000 of prepayment fees and approximately $7.3 million of bank and professional fees associated with the amendments. The $5.2 million original issue discount was to be amortized as interest expense over the seven-year term of the Second Lien Term Loan.

On October 12, 2007, the Company amended its First Lien Credit Agreement to effect a change in the definition of Minimum Consolidated Net Worth (as defined therein) and Borrowing Base (as defined therein) as used in calculating the financial performance covenants described below.

The First Lien Term Loan amortizes in three installments of 10%, 20% and 70% on April 13, 2011, 2012 and 2013, respectively and bore interest at either the Alternate Base Rate (ABR) or LIBOR plus an applicable margin of 0.50% or 1.50% per annum, respectively. The maturity date of the Revolver is April 13, 2013 and the Revolver bore interest at either the ABR or LIBOR plus an applicable margin of 0.50% or 1.50% per annum, respectively. The Second Lien Term Loan was to mature on April 13, 2014 and bore interest at either the ABR or LIBOR plus an applicable margin of 3.00% or 4.00% per annum, respectively. Any prepayment of principal of the Second Lien Term Loan made prior to April 13, 2009 required a 1% premium on the loans repaid.

In connection with the IPO, the Company amended its First Lien Credit Agreement and Second Lien Credit Agreement to effect an increase in the capacity of the Revolver from $275.0 million to $350.0 million, permit the repayment of its Second Lien Term Loan and increase of the applicable interest rate margins. The amended First Lien Credit Agreement is now comprised of two facilities: (i) a six-year $175.0 million term loan (First Lien Term Loan) and (ii) a six year $350.0 million revolving credit facility, including a letter of credit sub-facility (Revolver). The new Second Lien Credit Agreement is comprised of a seven-year $75.0 million term loan (New Second Lien Term Loan). Proceeds from the New Second Lien Term Loan (initial $55.0 million drawn) and the increased Revolver were used, in addition to the net proceeds from the IPO and cash on hand, to repay the existing $260.0 million Second Lien Term Loan in its entirety and the pre-payment premium of $2.6 million. The pre-payment premium was capitalized as deferred debt issuance costs and is being amortized as interest expense over the term of the Company’s credit facilities.

Upon the repayment of the Second Lien Term Loan, unamortized original issue discount of $4.3 million was reclassified as deferred debt issuance costs and is being amortized as interest expense over the term of the Company’s credit facilities. Approximately $4.2 million of bank and professional fees associated with the amendments were capitalized as deferred debt issuance costs and will be amortized as interest expense over the term of the Company’s credit facilities.

The amortization and maturity dates of the First Lien Term Loan and Revolver were not changed. As amended, the First Lien Term Loan and Revolver bear interest at ABR or LIBOR plus an applicable margin of 1.00% or 2.00% per annum, respectively. The New Second Lien Term Loan matures on June 23, 2015 and bears interest at ABR or LIBOR plus an applicable margin of 6.50% or 7.50% per annum, respectively. Any prepayment of principal of the New Second Lien Term Loan made prior to June 23, 2009 requires a 1% premium on the loans repaid.

On August 7, 2008, the Company received $19.6 million in proceeds (net of $0.4 million of debt costs) from $20.0 million of additional loans from an affiliate of JPMorgan Chase Bank, N.A. (JPM) under its existing second lien credit facility, which was used to repay a portion of outstanding borrowings under its revolving credit facility and to optimize its liquidity in connection with the production of its planned film slate. In addition, certain affiliates of Kelso guaranteed the entire amount of the incremental loans to JPM (but not any subsequent assignee) and also agreed to purchase the loans from JPM on December 7, 2008 if JPM has not sold such loans to third parties or if the loans have not otherwise been repaid by that date. In September 2008, $5.0 million of these loans were syndicated to a third party, which reduced the amount guaranteed by affiliates of Kelso to $15.0 million.

Interest payments for all loans are due, at the Company’s 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 September 30, 2008, the interest rates associated with the First Lien Term Loan, Revolver and New Second Lien Term Loan were 4.80%, 4.97%, and 10.97%, respectively. At September 30, 2008, the Company had availability of $27.8 million under its revolver, net of $3.4 million of stand-by letters of credit outstanding.

The First Lien Credit Agreement and Second Lien Credit Agreement, as amended, include customary affirmative and negative covenants, including: (i) limitations on indebtedness, (ii) limitations on liens, (iii) limitations on investments, (iv) limitations on contingent obligations, (v) limitations on restricted junior payments and certain other payment restrictions, (vi) limitations on merger, consolidation or sale of assets, (vii) limitations on transactions with affiliates, (viii) limitations on the sale or discount of receivables, (ix) limitations on the disposal of capital stock of subsidiaries, (x) limitations on lines of business, (xi) limitations on capital expenditures and (xii) certain reporting requirements. Additionally, the First Lien Credit Agreement and Second Lien Credit

Agreement include a Minimum Consolidated Net Worth financial performance covenant (as defined therein) and a Coverage Ratio covenant (as defined therein).

The Company was in compliance with all required financial covenants as of September 30, 2008.

Interest Rate Swaps

On April 10, 2007, the Company entered into two identical interest rate swap agreements to manage its exposure to interest rate movements associated with $435.0 million of its amended credit facilities by effectively converting its variable rate to a fixed rate. These interest rate swaps provide for the exchange of variable rate payments for fixed rate payments. The variable rate is based on three month LIBOR and the fixed rate is 4.9784%. The interest rate swaps commenced on April 27, 2007 and terminate on April 27, 2010. The aggregate fair market value of the interest rate swaps was approximately $(11.6) million and $(11.9) million as of September 30, 2008 and December 31, 2007, respectively.

The Company is exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counterparties.

(8) Related Party Transactions

In 2006, the Company agreed to pay Kelso an annual management fee of $600,000 in connection with planning, strategy, oversight and support to management (financial advisory agreement). This management fee was paid on a quarterly basis. A total of $150,000, $287,000 and $450,000 of this management fee was recorded as management fees paid to related parties in the unaudited consolidated statements of operations for the three months ended September 30, 2007 (Predecessor), the period from January 1, 2008 to June 22, 2008 (Predecessor) and the nine month period ended September 30, 2007 (Predecessor), respectively.

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 to September 30, 2008 (Successor).

(9) 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.

On November 28, 2007, the Company received a complaint from Flextech Rights Limited (Flextech) asserting claims for breach of contract arising from a Distribution Agreement dated November 22, 1996 between Flextech and the Company. Flextech formally served the Company on December 19, 2007. Flextech alleged damages in the amount of $5.2 million for unpaid fees under the Distribution Agreement in connection with minimum guarantees made by the Company for its original programming. On May 12, 2008, the Company reached a settlement agreement with Flextech that resulted in the dismissal of this lawsuit with prejudice. The Company had sufficient accruals as of December 31, 2007 and September 30, 2008 to cover the settlement amount, which is due to be paid in two equal installments in the fourth quarter of 2008 and in 2009.

Item 2. Management’s Discussion and analysis of Financial Condition and Results of Operations

This discussion may contain forward-looking statements that reflect RHI Entertainment Inc.’s (RHI Inc) current views with respect to, among other things, future events and financial performance. RHI Inc. generally identifies forward-looking statements by terminology such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “could,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this discussion are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us, or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q. Unless required by law, RHI Inc. does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

The historical consolidated financial data discussed below reflect the historical results of operations of RHI Entertainment, LLC and its subsidiaries as RHI Inc. did not have any historical operations prior to June 23, 2008. See Notes to RHI Inc.’s Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.

In this discussion, unless the context otherwise requires, the terms “RHI Inc.,” “the Company,” “we,” “us” and “our” refer to RHI Entertainment, Inc. and its subsidiaries including RHI Entertainment Holdings II, LLC and RHI Entertainment, LLC.

Overview

We develop, produce and distribute new made-for-television (MFT) movies, mini-series and other television programming worldwide. We also selectively produce new episodic series programming for television. In addition to our development, production and distribution of new content, we own an extensive library of existing long-form television content, which we license primarily to broadcast and cable networks worldwide.

Our revenue and operating results are seasonal in nature. A significant portion of the films that we develop, produce and distribute are delivered to the broadcast and cable networks in the second half of each year. Typically, programming for a particular year is ordered 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 and second quarters typically have less revenue than the other quarters of a given year. Additionally, the timing of the film deliveries from year-to-year may vary significantly. Importantly, the results of one quarter are not necessarily indicative of results for the next or any future quarter.

Each year, we develop and distribute a new list, or slate, of film content, consisting primarily of MFT movies and mini-series. The investment required to develop and distribute each new slate of films is our largest operating cash expenditure. A portion of this investment in film each year is financed through the collection of license fees during the production process. Each new slate of films is added to our library in the year subsequent to its initial year of delivery. Cash expenditures associated with the distribution of the library film content are not significant.

We refer to the revenue generated from the licensing of rights in the fiscal year in which a film is first delivered to a customer as “production revenue.” Any revenue generated from the licensing of rights to films in years subsequent to the film’s initial year of delivery is referred to as “library revenue.” The growth and interaction of these two revenue streams is an important metric we monitor as it indicates the current market demand for both our new content (production revenue) and the content in our film library (library revenue). We also monitor our gross profit, which allows us to determine the overall profitability of our film content. We focus on the profitability of our new film slates rather than volume. As such, we strive to manage the scale of our individual production budgets to meet market demand and enhance profitability. While smaller scale films generate lower revenue, the production cost savings have more than offset any reduction in revenue per film resulting in greater profitability.

Current economic conditions have presented challenges for all companies, RHI included. As a result, the number of productions we deliver in 2008 will be reduced to between 30 and 35 films. We are closely monitoring factors such as reduced television advertising spending in the fourth quarter of 2008 and the first half of 2009 and the potential impact that this could have on the demand for and pricing of our film content and the distribution of our programming. At the same time, we are closely managing our operations and carefully reviewing costs to ensure we have the appropriate resources and sufficient liquidity.

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.

Beginning December 23, 2008, KRH will be entitled to exchange its common membership units in Holdings II for, at our option, shares of RHI Inc. common stock on a one-for-one basis (as adjusted to account for stock splits, recapitalizations or similar events) or

cash, or a combination of both stock and cash. These exchanges are expected to 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 September 30, 2008 compared to the three months ended September 30, 2007

The results of operations for the three months ended September 30, 2008 and 2007 are summarized as follows:


	Successor			Predecessor
	Three Months			Three Months
	Ended			Ended
	September 30,			September 30,			Increase/
	2008			2007			(Decrease)
Revenue
Production revenue	$	21,833		$	14,398		$	7,435
Library revenue		31,693			14,349			17,344

Total revenue		53,526			28,747			24,779
Cost of sales		38,247			18,014			20,233

Gross profit		15,279			10,733			4,546
Other costs and expenses:
Selling, general and administrative		9,814			9,125			689
Amortization of intangible assets		314			332			(18	)
Fees paid to related parties:
Management fees		—			150			(150	)

Income (loss) from operations		5,151			1,126			4,025
Other (expense) income:
Interest expense, net		(9,855	)		(13,361	)		(3,506	)
Interest income		17			51			(34	)
Other (expense) income, net		(1,001	)		262			(1,263	)

Loss before income taxes and non-controlling interest in loss of consolidated entity		(5,688	)		(11,922	)		(6,234	)
Income tax provision		(389	)		(475	)		(86	)

Loss before non-controlling interest in loss of consolidated entity		(6,077	)		(12,397	)		(6,320	)
Non-controlling interest in loss of consolidated entity		2,570			—			2,570

Net loss	$	(3,507	)	$	(12,397	)	$	(8,890	)

Basic and diluted loss per share.	$	(0.26	)		N/A			N/A

Revenue, cost of sales and gross profit


	Three Months Ended September 30,
	2008					2007
			As a					As a
			Percentage					Percentage			$ Increase/		% Increase/
	Amount		of Revenue			Amount		of Revenue			(Decrease)		(Decrease)
	(Dollars in thousands)
Production revenue	$	21,833		41	%	$	14,398		50	%	$	7,435		52	%
Library revenue		31,693		59	%		14,349		50	%		17,344		121	%

Total revenue		53,526		100	%		28,747		100	%		24,779		86	%
Cost of sales		38,247		71	%		18,014		63	%		20,233		112	%

Gross profit	$	15,279		29	%	$	10,733		37	%	$	4,546		42	%

Total revenue increased $24.8 million, or 86%, to $53.5 million during the three months ended September 30, 2008 from $28.7 million during the same period in 2007.

Production revenue increased $7.4 million to $21.8 million in the three months ended September 30, 2008 compared to $14.4 million during the same period in 2007. In the three months ended September 30, 2008, there were five original MFT movies and two original mini-series delivered, while eight MFT movies and one mini-series were delivered during the three months ended September 30, 2007. The increase in production revenue was primarily the result of the delivery of an additional mini-series during the three months ended September 30, 2008 as compared to the same period in 2007.

Library revenue increased $17.3 million to $31.7 million in the three months ended September 30, 2008 from $14.3 million during the comparable period in 2007. The increase of approximately 121% primarily resulted from increased demand for our library product. During 2008, we’ve recorded a higher percentage of our annual revenue in each of the first three quarters as compared to prior years.

Cost of sales increased $20.2 million to $38.2 million for the three months ended September 30, 2008 from $18.0 million during the same period in 2007. Cost of sales is principally comprised of film cost amortization and, as a result, the increase in cost of sales was primarily attributable to the increase in revenue from 2007 to 2008. Film cost amortization as a percentage of revenue was higher in the three months ended September 30, 2008 as compared to the comparable period of 2007 due to the mix of films for which revenue was recognized in each period. Amortization is on a film-by-film basis and some of the films for which revenue is recognized during the three months ended September 30, 2008 have had higher rates of amortization than those in the same period of 2007. Cost of sales as a percentage of revenue increased to 71% for the three months ended September 30, 2008 from 63% in the comparable three months of the prior year. Consequently, the gross profit percentage declined to 29% for the three months ended September 30, 2008 from 37% in the comparable three months of the prior year.

Other costs and expenses


	Three Months Ended
	September 30,				$ Increase/			%Increase/
	2008		2007		(Decrease)			(Decrease)
	(Dollars in thousands)
Selling, general and administrative	$	9,814	$	9,125	$	689			8	%
Amortization of intangible assets		314		332		(18	)		(5	)%
Fees to related parties		—		150		(150	)		(100	)%

Selling, general and administrative expenses increased $0.7 million to $9.8 million in the three months ended September 30, 2008, from $9.1 million in the same period in 2007. During the three months ended September 30, 2008, we incurred additional costs in connection with operating as a publicly traded company as well as slightly higher head-count related costs.

Interest expense, net

Interest expense, net decreased $3.5 million to $9.9 million for the three months ended September 30, 2008 from $13.4 million during the comparable period in 2007. The decrease in interest expense is largely due to lower weighted average debt balances outstanding during the three months ended September 30, 2008 compared to 2007, contributing to the reduced interest expense. During the three months ended September 30, 2008, we had an average debt balance of $560.6 million compared to $663.0 million during the comparable period of 2007. In addition, interest expense was reduced due to lower average interest rates during the three months ended September 30, 2008 as compared to the comparable period of 2007 resulting from the reductions in the benchmark interest rates (i.e. LIBOR). The average interest rate during the three months ended September 30, 2008 was 5.4%, compared to 7.9% during the comparable period of 2007. Partially offsetting the weighted average debt outstanding and reduction in interest rates was an increase in interest expense recorded in connection with our interest rate swap contracts resulting from the aforementioned reduction in LIBOR. Approximately $2.4 million in interest expense was recorded in connection with our interest rate swap contracts during the three months ended September 30, 2008, compared to $0.4 million in the three months ended September 30, 2007.

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 September 30, 2008, we realized a foreign currency loss of $1.0 million as compared to a foreign currency gain of $0.3 million during the three months ended September 30, 2007.

Income tax provision

For the three months ended September 30, 2008 and 2007, income tax provisions of approximately $0.4 million and $0.5 million, respectively, were generated. These provisions resulted primarily from foreign taxes related to license fees from customers located outside the United States. Our corporate subsidiary did not generate any significant taxable income or losses during either period. 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 final quarter of the year to utilize the net operating loss generated by RHI Inc. in the three months ended September 30, 2008.

Net loss

The net loss for the three months ended September 30, 2008 was $(3.5) million, compared to $(12.4) million for the three months ended September 30, 2007.

Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007

The results of operations for the nine months ended September 30, 2008 and 2007 are summarized as follows:



	(a)			(b)			(a) + (b)
	Successor			Predecessor			Combined (1)			Predecessor
	Period			Period
	From			from
	June 23,			January 1,			Nine Months			Nine Months
	2008 to			2008 to			Ended			Ended
	September 30,			June 22,			September 30,			September 30,			Increase/
	2008			2008			2008			2007			(Decrease)
	(In thousands, except per share data)
Revenue
Production revenue	$	22,765		$	6,602		$	29,367		$	23,080		$	6,287
Library revenue		33,182			66,643			99,825			35,644			64,181

Total revenue		55,947			73,245			129,192			58,724			70,468
Cost of sales		39,550			49,396			88,946			36,895			52,051

Gross profit		16,397			23,849			40,246			21,829			18,417
Other costs and expenses:
Selling, general and administrative		10,546			25,802			36,348			29,746			6,602
Amortization of intangible assets		350			671			1,021			996			25
Fees paid to related parties:
Management fees		—			287			287			450			(163	)
Termination fee		6,000			—			6,000			—			6,000

Loss from operations		(499	)		(2,911	)		(3,410	)		(9,363	)		(5,953	)
Other (expense) income:
Interest expense, net		(10,674	)		(21,559	)		(32,233	)		(39,100	)		(6,867	)
Interest income		20			34			54			154			(100	)
Loss on extinguishment of debt		—			—			—			(17,297	)		(17,297	)
Other income, net		(934	)		706			(228	)		645			(873	)

Loss before income taxes and non-controlling interest in loss of consolidated entity		(12,087	)		(23,730	)		(35,817	)		(64,961	)		(29,144	)
Income tax (provision) benefit		(472	)		1,518			1,046			2,325			(1,279	)

Loss before non-controlling interest in loss of consolidated entity		(12,559	)		(22,212	)		(34,771	)		(62,636	)		(27,865	)
Non-controlling interest in loss of consolidated entity		5,312			—			5,312			—			5,312

Net loss	$	(7,247	)	$	(22,212	)	$	(29,459	)	$	(62,636	)		(33,177	)

Basic and diluted loss per share	$	(0.54	)		N/A			N/A			N/A			N/A


(1)		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


	Nine Months Ended September 30,
	2008					2007
			As a					As a
			Percentage					Percentage			$ Increase/		% Increase/
	Amount		of Revenue			Amount		of Revenue			(Decrease)		(Decrease)
	(Dollars in thousands)
Production revenue	$	29,367		23	%	$	23,080		39	%	$	6,287		27	%
Library revenue		99,825		77	%		35,644		61	%		64,181		180	%

Total revenue		129,192		100	%		58,724		100	%		70,468		120	%
Cost of sales		88,946		69	%		36,895		63	%		52,051		141	%

Gross profit	$	40,246		31	%	$	21,829		37	%	$	18,417		84	%

Total revenue increased $70.5 million, or 120%, to $129.2 million during the combined nine months ended September 30, 2008 from $58.7 million during the same period in 2007.

Production revenue increased $6.3 million to $29.4 million in the nine months ended September 30, 2008 compared to $23.1 million during the same period in 2007. In the nine months ended September 30, 2008, there were 14 original MFT movies and two original mini-series delivered, while 14 MFT movies and one mini-series were delivered during the nine months ended September 30, 2007. The increase in production revenue was primarily the result of the delivery of an additional mini-series during the nine months ended September 30, 2008 as compared to the same period in 2007.

Library revenue increased $64.2 million to $99.8 million in the nine months ended September 30, 2008 from $35.6 million during the comparable period in 2007. The increase of approximately 180% primarily resulted from increased demand for our library product and additional revenue related to the distribution of programming on ION Media Networks (ION). Revenue related to the distribution of programming on ION increased $9.6 million during the nine months ended September 30, 2008 compared to the same period in 2007. The arrangement with ION did not commence until late June 2007 and, consequently, there was less revenue during the comparable period of 2007. As noted above, we’ve recorded a higher percentage of our annual revenue in each of the first three quarters of 2008 as compared to prior years.

Cost of sales increased $52.1 million to $88.9 million for the nine months ended September 30, 2008 from $36.9 million during the same period in 2007. Cost of sales is principally comprised of film cost amortization and, as a result, the increase in cost of sales was primarily attributable to the increase in revenue from 2007 to 2008. Cost of sales as a percentage of revenue increased to 69% for the nine months ended September 30, 2008 from 63% in the comparable nine months of the prior year. Consequently, the gross profit percentage declined to 31% for the nine months ended September 30, 2008 from 37% in the comparable nine months of the prior year. The decrease in gross profit is primarily the result of an additional $6.4 million arising from the amortization of minimum guarantee payments made to ION during the nine months ended September 30, 2008 resulting from our arrangement with ION, which commenced in late June 2007. Also contributing to the decrease in gross profit as a percentage of revenue was film cost amortization, which as a percentage of revenue was slightly higher in the nine months ended September 30, 2008 as compared to the comparable period of 2007 due to the mix of films for which revenue was recognized in each period. Amortization is on a film-by-film basis and some of the films for which revenue is recognized during the nine months ended September 30, 2008 have had higher rates of amortization than those in the same period of 2007.

Other costs and expenses


	Nine Months Ended September 30,				$ Increase/		% Increase/
	2008		2007		(Decrease)		(Decrease)
	(Dollars in thousands)
Selling, general and administrative	$	36,348	$	29,746	$	6,602		22	%
Amortization of intangible assets		1,021		996		25		3	%
Fees to related parties		6,287		450		5,837		1,297	%

Selling, general and administrative expenses increased $6.6 million to $36.3 million in the nine months ended September 30, 2008 from $29.7 million during the same period in 2007. During the nine months ended September 30, 2008, we incurred a $3.1 million provision for bad debt that was established during the nine months related to one customer whose payments owed to us are past due, an additional $2.7 million of severance related costs and $1.8 million of marketing and promotional costs related to the distribution of programming on ION. We also incurred additional costs in connection with operating as a publicly traded company and higher headcount-related costs during the nine months ended September 30, 2008 versus the comparable period of 2007. The aforementioned increases were partially offset by $3.0 million of professional fees incurred for the consideration of financing structures during the nine months ended September 30, 2007. There were no comparable costs incurred during the nine months ended September 30, 2008.

In 2006, we agreed to pay Kelso an annual management fee of $600,000 in connection with a financial advisory agreement for planning, strategy, oversight and support to management. A total of $287,000 and $450,000 of this management fee was recorded as fees paid to related parties during the nine months ended September 30, 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 nine months ended September 30, 2008.

Interest expense, net

Interest expense, net decreased $6.9 million to $32.2 million for the nine months ended September 30, 2008 from $39.1 million during the comparable period in 2007. The decrease in interest expense is primarily due to a lower average interest rate during the nine months ended September 30, 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 nine months ended September 30, 2008 was 5.8%, compared to 8.3% during the comparable period of 2007. Partially offsetting the decrease from the average interest rates was a higher weighted average debt balance outstanding during the nine months ended September 30, 2008 compared to 2007 and an increase in interest expense recorded in connection with our interest rate swap contracts resulting from the aforementioned reduction in LIBOR. During the nine months ended September 30, 2008, we had an average debt balance of $633.1 million compared to $620.3 million during the first nine months of 2007. Approximately $5.9 million in interest expense was recorded in connection with our interest rate swap contracts during the nine months ended September 30, 2008, compared to $0.9 million in the nine months ended September 30, 2007.

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 nine months ended September 30, 2008, we realized foreign currency losses totaling $0.2 million compared to a foreign currency gain of $0.6 million during the nine months ended September 30, 2007.

Income tax benefit

For the nine months ended September 30, 2008 and 2007, income tax benefits of approximately $1.0 million and $2.3 million, respectively, were generated. These benefits resulted primarily from taxable losses for the periods associated with our corporate subsidiary, partially offset by provisions for 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 final quarter of the year to utilize the net operating loss generated by RHI Inc. in the period from June 23 through September 30, 2008.

Net loss

The net loss for the nine months ended September 30, 2008 was $(29.5) million, compared to $(62.6) million for the nine months ended September 30, 2007.

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 September 30, 2008, all of our debt was variable rate and totaled $568.8 million outstanding. To manage the related interest rate risk, we have entered into interest rate swap agreements. As of September 30, 2008, 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. As of September 30 2008, we had $6.7 million of cash compared to $1.4 million of cash at December 31, 2007. As of September 30, 2008, we had $27.8 million available under our revolving credit facility, net of an outstanding letter of credit, subject to the terms and conditions of that facility. 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. 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.

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 $9.9 million for the three months ended September 30, 2008 and $32.2 million for the nine months ended September 30, 2008. 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.

Additionally, significant unforeseen expense or any development that hampers our growth in revenue or decreases any of our revenue or collections thereof could result in the need for additional external funds in order to continue operations. While we feel that our liquidity is sufficient to satisfy our financial obligations through at least the next twelve months, management is continually reviewing its operations for opportunities to adjust the timing of expenditures to ensure that sufficient liquidity is 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 third quarter 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 liquidity. As a result of this management, the associated timing of delivery of these films to broadcast and cable licensees and the associated revenue can be impacted.

Continued turbulence in the U.S. and international financial markets and economies may adversely affect our liquidity and financial condition and the liquidity and financial condition of our distribution, production and business partners. If these market conditions continue, they may limit our ability, and the ability of our distribution, production and business partners, to timely replace maturing liabilities, and access the capital markets to meet liquidity needs, resulting in an adverse effect on our financial condition and results of operations.

Overall, 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.

The chart below shows our cash flows for nine months ended September 30, 2008 and 2007.


	(a)			(b)			(a) + (b)
	Successor			Predecessor			Combined			Predecessor
	Period from			Period from			Nine Months			Nine Months
	June 23, 2008			January 1,			Ended			Ended
	to September 30,			2008 to June 22,			September 30,			September 30,
	2008			2008			2008			2007
	(Dollars in thousands)
Net cash used in operating activities	$	(30,574	)	$	(32,331	)	$	(62,905	)	$	(103,353	)
Net cash used in investing activities		(77	)		(81	)		(158	)		(125	)
Net cash provided by financing activities		3,837			64,520			68,357			103,801
Cash (end of period)		6,701			33,515			6,701			4,074

Operating activities

Cash used in operating activities in the nine months ended September 30, 2008 was $62.9 million, and reflects spending related to production, distribution, selling, general and administrative expenses and interest, offset by the collection of cash associated with the distribution of our MFT movies, mini-series and other television programming. In the nine months ended September 30, 2008, $36.3 million of interest was paid as were $6.6 million of minimum guarantee payments to ION associated with our arrangement to provide programming for its primetime weekend schedule.

Cash used in operating activities in the nine months ended September 30, 2007 was $103.4 million, and reflects spending related to production, distribution, selling, general and administrative expenses and interest, offset by the collection of cash associated with the distribution of our MFT movies, mini-series and other television programming. In the nine months ended September 30, 2007, $37.0 million of interest was paid as were $6.2 million of minimum guarantee payments to ION associated with our arrangement to provide programming for its primetime weekend schedule, $3.0 million of professional fees incurred for the consideration of financing structures and a payment of $8.0 million to settle certain other accrued liabilities.

Investing activities

During the nine months ended September 30, 2008 and 2007, we used $0.2 million and $0.1 million, respectively, in investing activities, reflecting the purchase of property and equipment.

Financing activities

During the nine months ended September 30, 2008, $68.4 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 $32.0 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 the nine months ended September 30, 2007, $103.8 million of cash was provided by financing activities from borrowings under our credit facilities (net of deferred debt financing costs of $3.3 million and repayments of $595.5 million), principally to fund our operating activities.

Contractual obligations

The following table sets forth our contractual obligations as of September 30, 2008:


			Payments Due by Period
			Less Than						More Than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
	(Dollars in thousands)
Off balance sheet arrangements:
Operating lease commitments (1)	$	38,365	$	3,207	$	7,470	$	7,052	$	20,636
Obligations pursuant to ION Agreement (2)		15,140		15,140		—		—		—
Purchase obligations (3)		21,039		18,879		2,160		—		—

		74,544		37,226		9,630		7,052		20,636

Contractual obligations reflected on the balance sheet:
Debt obligations (4)		568,789		—		17,500		476,289		75,000
Accrued film production costs (5)		63,206		51,072		12,134		—		—
Other contractual obligations (6)		6,296		6,296		—		—		—

		638,291		57,368		29,634		476,289		75,000

Total contractual obligations	$	712,835	$	94,594	$	39,264	$	483,341	$	95,636


(1)		Operating lease commitments represent future minimum payment obligations on various long-term noncancellable leases for office and storage space.

(2)		Obligations pursuant to the ION Agreement represent minimum guarantee payments associated with our arrangement to provide programming to ION for its primetime weekend schedule.

(3)		Purchase obligation amounts represent a contractual commitment to exclusively license the rights in and to a film that is not complete.

(4)		Debt obligations exclude interest payments and include future principal payments due on our bank debt (see Note 7).

(5)		Accrued film production costs represent contractual amounts payable for the completed films as well as costs incurred for the buy out of certain participations.

(6)		Other contractual obligations primarily represent commitments to settle various accrued liabilities.

Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical accounting policies and estimates

For a complete discussion of our accounting policies, see the information under the heading “Management’s discussion and analysis of financial condition and results of operations — Critical accounting policies and estimates” in our prospectus dated June 17, 2008, filed with the SEC in accordance with Rule 424(b) of the Securities Act, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the critical accounting policies and estimates disclosed in the prospectus.

Recent accounting pronouncements

For a complete discussion of recent accounting pronouncements, see the information under the heading “Management’s discussion and analysis of financial condition and results of operations — Recent accounting pronouncements” in our prospectus dated June 17,

2008, filed with the SEC in accordance with Rule 424(b) of the Securities Act, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the recent accounting pronouncements disclosed in the prospectus.

Item 3. Quantitative and Qualitative Disclosures about Risk

Interest rate risk

We are subject to market risks resulting from fluctuations in interest rates as our credit facilities are variable rate credit facilities. To manage the related risk, we enter into interest rate swap agreements. As of September 30, 2008, we have swaps outstanding that total $435.0 million, effectively converting that portion of debt from variable rate to fixed rate.

Foreign currency risk

Our reporting currency is the U.S. Dollar. We are subject to market risks resulting from fluctuations in foreign currency exchange rates through some of our international licensees and we incur certain production and distribution costs in foreign currencies. The primary foreign currency exposures relate to adverse changes in the relationships of the U.S. Dollar to the British Pound, the Euro, the Canadian Dollar and the Australian Dollar. However, there is a natural hedge against foreign currency changes due to the fact that, while certain receipts for international sales may be denominated in a foreign currency certain production and distribution expenses are also denominated in foreign currencies, mitigating fluctuations to some extent depending on their relative magnitude.

Historically, foreign exchange gains (losses) have not been significant. Foreign exchange gains (losses) for the three months ended September 30, 2008, the period from June 23, 2008 through September 30, 2008, the three months ended September 30, 2007, the period from January 1, 2008 through June 22, 2008 and the nine months ended September 30, 2007 were $(1.0) million, $(0.9) million, $0.3 million, $0.7 million and $0.6 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. During the nine months ended September 30, 2008, we incurred a $3.1 million provision for bad debt related to one customer whose payments owed to us are past due.

Item 4. Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective, in all material respects, to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is likely to materially affect, our internal control over financial reporting.

Part 2. Other Information

Item 1. Legal Proceedings

None.

Item 1a. Risk Factors

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in our prospectus dated June 17, 2008, filed with the SEC in accordance with Rule 424(b) of the Securities Act, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the prospectus.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There have not been any unregistered sales of equity securities or repurchases of the Company’s common stock during the quarter ended September 30, 2008.

The effective date of RHI Entertainment, Inc.’s registration statement filed on Form S-1 under the Securities Act of 1933 (File No. 333-146098) relating to RHI Entertainment, Inc.’s IPO of shares of Class A Common Stock was June 17, 2008. A total of 13,500,000 shares of Class A Common Stock were sold. J.P. Morgan Securities Inc. and Banc of America Securities LLC acted as joint book-running managers of the offering.

The IPO was completed on June 23, 2008. The aggregate offering price for the common units sold pursuant to the IPO was $189.0 million. The underwriting discounts were $13.2 million and the net proceeds from the IPO 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 LLC’s new $55.0 million senior second lien credit facility, approximately $52.2 million of borrowings under RHI Entertainment, LLC’s revolving credit facility (see Note 6) and $29.0 million of cash on hand as follows: (i) approximately $260.0 million was used to repay RHI LLC’s prior 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 which KRH will use to repay its unsecured term loan facility; (iii) approximately $0.5 million, net of reimbursements was used to pay fees and expenses in connection with the IPO; (iv) approximately $9.8 million was used to pay fees and expenses in connection with the amendments to the RHI LLC’s credit facilities, including accrued interest and a 1% prepayment premium on the existing senior second lien credit facility; and (v) $6.0 million paid to Kelso in exchange for the termination of RHI LLC’s fee obligations under its existing financial advisory agreement. An additional $1.4 million of fees and expenses related to the IPO were paid subsequent to the IPO.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submissions of Matters to a Vote on Security Holders

None

Item 5. Other Information

Stockholder proposals for inclusion in the proxy materials related to the 2009 Annual Meeting of Stockholders pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, must be received at the principal offices of the Company no later than December 5, 2008. The Company’s Amended and Restated Bylaws contain time limitations, procedures and requirements relating to stockholder proposals not intended to be included in the proxy materials related to the 2009 Annual Meeting of Stockholders pursuant to Rule 14a-8.


	Page
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Qualitative and Quantitative Disclosures about Risk		24
Item 4. Controls and Procedures		24
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3. Defaults upon Senior Securities		25
Item 4. Submissions of Matters to a Vote on Security Holders		25
Item 5. Other Information		25
Item 6. Exhibits		26
Signatures		27
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION


Exhibit
Number		Exhibit

31.1		Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Date: November 6, 2008		By: /s/ Robert A. Halmi, Jr Robert A. Halmi, Jr.
		Chairman, President & Chief
		Executive Officer
		(Principal Executive Officer)

Date: November 6, 2008		By: /s/ William J. Aliber

		William J. Aliber
		Chief Financial Officer
		(Principal Accounting Officer)


Exhibit
Number		Exhibit

31.1		Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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		By: /s/ Robert A. Halmi, Jr. Robert A. Halmi, Jr.
		Chairman, President & Chief Executive Officer
		(Principal Executive Officer)


		By: /s/ William J. Aliber William J. Aliber
		Chief Financial Officer
		(Principal Accounting Officer)