SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________________
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period
ended: June 30, 2008
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
_____________ to ___________
Commission
file number 1-8625
READING
INTERNATIONAL, INC.
(Exact
name of Registrant as specified in its charter)
|
NEVADA
(State
or other jurisdiction of incorporation or organization)
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95-3885184
(IRS
Employer Identification No.)
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500
Citadel Drive, Suite 300
Commerce CA
(Address
of principal executive offices)
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90040
(Zip
Code)
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Registrant’s
telephone number, including area code: (213) 235-2240
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 twelve 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 ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer ¨ Accelerated
filer þ Non-accelerated
filer ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No þ
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date. As of August 5, 2008, there were 20,987,115 shares
of Class A Nonvoting Common Stock, $0.01 par value per share and 1,495,490
shares of Class B Voting Common Stock, $0.01 par value per share
outstanding.
READING INTERNATIONAL, INC. AND
SUBSIDIARIES
TABLE OF
CONTENTS
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Page
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PART I –
Financial Information
Item 1 – Financial
Statements
Reading
International, Inc. and Subsidiaries
Consolidated
Balance Sheets (Unaudited)
(U.S.
dollars in thousands)
|
June
30, 2008
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December
31, 2007
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|||||||
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ASSETS
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||||||||
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Current
Assets:
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||||||||
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Cash
and cash equivalents
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$ | 26,752 | $ | 20,782 | ||||
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Receivables
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7,116 | 5,671 | ||||||
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Inventory
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816 | 654 | ||||||
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Investment
in marketable securities
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4,939 | 4,533 | ||||||
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Restricted
cash
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59 | 59 | ||||||
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Prepaid
and other current assets
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2,230 | 3,800 | ||||||
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Total
current assets
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41,912 | 35,499 | ||||||
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Land
held for sale
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1,954 | 1,984 | ||||||
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Property
held for development
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13,844 | 11,068 | ||||||
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Property
under development
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77,725 | 66,787 | ||||||
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Property
& equipment, net
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223,435 | 178,174 | ||||||
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Investment
in unconsolidated joint ventures and entities
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15,369 | 15,480 | ||||||
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Investment
in Reading International Trust I
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1,547 | 1,547 | ||||||
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Goodwill
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25,697 | 19,100 | ||||||
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Intangible
assets, net
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24,866 | 8,448 | ||||||
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Other
assets
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10,494 | 7,984 | ||||||
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Total
assets
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$ | 436,843 | $ | 346,071 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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||||||||
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Current
Liabilities:
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||||||||
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Accounts
payable and accrued liabilities
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$ | 13,814 | $ | 12,331 | ||||
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Film
rent payable
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6,471 | 3,275 | ||||||
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Notes
payable – current portion
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1,253 | 395 | ||||||
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Note
payable to related party – current portion
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-- | 5,000 | ||||||
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Taxes
payable
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5,137 | 4,770 | ||||||
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Deferred
current revenue
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2,881 | 3,214 | ||||||
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Other
current liabilities
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200 | 169 | ||||||
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Total
current liabilities
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29,756 | 29,154 | ||||||
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Notes
payable – long-term portion
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187,677 | 111,253 | ||||||
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Notes
payable to related party – long-term portion
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14,000 | 9,000 | ||||||
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Subordinated
debt
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51,547 | 51,547 | ||||||
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Noncurrent
tax liabilities
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5,672 | 5,418 | ||||||
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Deferred
non-current revenue
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619 | 566 | ||||||
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Other
liabilities
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16,379 | 14,936 | ||||||
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Total
liabilities
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305,650 | 221,874 | ||||||
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Commitments
and contingencies (Note 13)
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||||||||
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Minority
interest in consolidated affiliates
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2,344 | 2,835 | ||||||
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Stockholders’
equity:
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||||||||
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Class
A Nonvoting Common Stock, par value $0.01, 100,000,000 shares authorized,
35,564,339 issued and 20,987,115 outstanding at June 30, 2008 and at
December 31, 2007
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216 | 216 | ||||||
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Class
B Voting Common Stock, par value $0.01, 20,000,000 shares authorized and
1,495,490 issued and outstanding at June 30, 2008 and at December 31,
2007
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15 | 15 | ||||||
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Nonvoting
Preferred Stock, par value $0.01, 12,000 shares authorized and no
outstanding shares
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-- | -- | ||||||
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Additional
paid-in capital
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132,446 | 131,930 | ||||||
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Accumulated
deficit
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(52,614 | ) | (52,670 | ) | ||||
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Treasury
shares
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(4,306 | ) | (4,306 | ) | ||||
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Accumulated
other comprehensive income
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53,092 | 46,177 | ||||||
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Total
stockholders’ equity
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128,849 | 121,362 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 436,843 | $ | 346,071 | ||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Consolidated
Statements of Operations (Unaudited)
(U.S.
dollars in thousands, except per share amounts)
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Three
Months Ended
June
30,
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Six
Months Ended
June
30,
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|||||||||||||||
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2008
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2007
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2008
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2007
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|||||||||||||
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Revenue
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||||||||||||||||
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Cinema
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$ | 49,488 | $ | 26,034 | $ | 84,831 | $ | 50,540 | ||||||||
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Real
estate
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4,263 | 4,105 | 8,647 | 7,575 | ||||||||||||
| 53,751 | 30,139 | 93,478 | 58,115 | |||||||||||||
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Operating
expense
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||||||||||||||||
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Cinema
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41,780 | 19,931 | 69,185 | 38,051 | ||||||||||||
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Real
estate
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2,296 | 1,864 | 4,410 | 3,865 | ||||||||||||
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Depreciation
and amortization
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5,528 | 3,047 | 9,411 | 6,016 | ||||||||||||
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General
and administrative
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4,909 | 3,879 | 9,597 | 7,555 | ||||||||||||
| 54,513 | 28,721 | 92,603 | 55,487 | |||||||||||||
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Operating
income (loss)
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(762 | ) | 1,418 | 875 | 2,628 | |||||||||||
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Non-operating
income (expense)
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||||||||||||||||
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Interest
income
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365 | 84 | 603 | 229 | ||||||||||||
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Interest
expense
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(3,404 | ) | (2,034 | ) | (6,479 | ) | (3,930 | ) | ||||||||
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Net
loss on sale of assets
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-- | -- | -- | (185 | ) | |||||||||||
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Other
income (expense)
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1,671 | 465 | 3,045 | (271 | ) | |||||||||||
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Loss
before minority interest expense, discontinued operations, income tax
expense, and equity earnings of unconsolidated joint ventures and
entities
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(2,130 | ) | (67 | ) | (1,956 | ) | (1,529 | ) | ||||||||
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Minority
interest income (expense)
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182 | (154 | ) | (161 | ) | (495 | ) | |||||||||
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Loss
before discontinued operations, income tax expense, and equity earnings of
unconsolidated joint ventures and entities
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(1,948 | ) | (221 | ) | (2,117 | ) | (2,024 | ) | ||||||||
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Gain
on sale of a discontinued operation
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-- | 1,912 | -- | 1,912 | ||||||||||||
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Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
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(1,948 | ) | 1,691 | (2,117 | ) | (112 | ) | |||||||||
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Income
tax expense
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(407 | ) | (443 | ) | (824 | ) | (942 | ) | ||||||||
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Income
(loss) before equity earnings of unconsolidated joint ventures and
entities
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(2,355 | ) | 1,248 | (2,941 | ) | (1,054 | ) | |||||||||
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Equity
earnings of unconsolidated joint ventures and entities
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189 | 386 | 547 | 2,042 | ||||||||||||
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Gain
on sale of unconsolidated entity
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2,450 | -- | 2,450 | -- | ||||||||||||
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Net
income
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$ | 284 | $ | 1,634 | $ | 56 | $ | 988 | ||||||||
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Earnings
(loss) per common share – basic and diluted:
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||||||||||||||||
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Earnings (loss) from continuing
operations
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$ | 0.01 | $ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||
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Earnings from discontinued
operations
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0.00 | 0.08 | 0.00 | 0.08 | ||||||||||||
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Basic
and diluted earnings per share
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$ | 0.01 | $ | 0.07 | $ | 0.00 | $ | 0.04 | ||||||||
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Weighted
average number of shares outstanding – basic
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22,476,355 | 22,487,943 | 22,476,355 | 22,485,480 | ||||||||||||
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Weighted
average number of shares outstanding – dilutive
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22,763,826 | 22,487,943 | 22,763,826 | 22,485,480 | ||||||||||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
(U.S.
dollars in thousands)
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Six
Months Ended
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||||||||
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June
30,
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||||||||
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2008
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2007
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|||||||
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Operating
Activities
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||||||||
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Net
income
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$ | 56 | $ | 988 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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||||||||
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Gain
recognized on foreign currency transactions
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(447 | ) | (132 | ) | ||||
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Equity
earnings of unconsolidated joint ventures and entities
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(547 | ) | (2,042 | ) | ||||
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Distributions
of earnings from unconsolidated joint ventures and
entities
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507 | 4,318 | ||||||
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(Gain)
loss on marketable securities
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1 | (224 | ) | |||||
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Gain
on sale of an unconsolidated joint venture
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(2,450 | ) | -- | |||||
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Gain
on sale of a discontinued operation
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-- | (1,912 | ) | |||||
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Loss
on disposal of assets
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-- | 185 | ||||||
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Loss
on extinguishment of debt
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-- | 97 | ||||||
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Gain
on insurance settlement
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(910 | ) | -- | |||||
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Depreciation
and amortization
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9,411 | 6,016 | ||||||
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Amortization
of prior service costs
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143 | -- | ||||||
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Amortization
of above and below market leases
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378 | -- | ||||||
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Stock
based compensation expense
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516 | 539 | ||||||
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Minority
interest
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161 | 495 | ||||||
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Changes
in operating assets and liabilities:
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||||||||
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(Increase)
decrease in receivables
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(1,177 | ) | 1,617 | |||||
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Increase
in prepaid and other assets
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479 | (183 | ) | |||||
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Increase
(decrease) in accounts payable and accrued expenses
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1,614 | (2,645 | ) | |||||
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Increase
(decrease) in film rent payable
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3,032 | (1,167 | ) | |||||
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Increase
in deferred revenues and other liabilities
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1,514 | 1,207 | ||||||
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Net
cash provided by operating activities
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12,281 | 7,157 | ||||||
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Investing
activities
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||||||||
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Acquisitions
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(51,746 | ) | (11,768 | ) | ||||
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Acquisition
deposit returned
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2,000 | -- | ||||||
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Purchases
of and additions to property and equipment
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(12,067 | ) | (7,944 | ) | ||||
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Change
in restricted cash
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-- | 326 | ||||||
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Investment
in Reading International Trust I
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-- | (1,547 | ) | |||||
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Investment
in unconsolidated joint ventures and entities
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(460 | ) | -- | |||||
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Distributions
of investment in unconsolidated joint ventures
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198 | 1,434 | ||||||
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Purchase
of marketable securities
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-- | (11,861 | ) | |||||
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Net
proceeds from the sale of an unconsolidated joint venture
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3,340 | -- | ||||||
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Sale
of marketable securities
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-- | 4,010 | ||||||
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Proceeds
from insurance settlement
|
910 | -- | ||||||
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Net
cash used in investing activities
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(57,825 | ) | (27,350 | ) | ||||
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Financing
activities
|
||||||||
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Repayment
of long-term borrowings
|
(5,416 | ) | (43,539 | ) | ||||
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Proceeds
from borrowings
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59,659 | 78,204 | ||||||
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Capitalized
borrowing costs
|
(2,498 | ) | (2,254 | ) | ||||
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Minority
interest contributions
|
75 | -- | ||||||
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Minority
interest distributions
|
(761 | ) | (838 | ) | ||||
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Net
cash provided by financing activities
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51,059 | 31,573 | ||||||
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Effect
of exchange rate changes on cash and cash equivalents
|
455 | 3 | ||||||
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Increase
in cash and cash equivalents
|
5,970 | 11,383 | ||||||
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Cash
and cash equivalents at beginning of period
|
20,782 | 11,008 | ||||||
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Cash
and cash equivalents at end of period
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$ | 26,752 | $ | 22,391 | ||||
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Supplemental
Disclosures
|
||||||||
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Interest paid
|
$ | 8,008 | $ | 5,208 | ||||
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Income taxes paid
|
$ | 161 | $ | 123 | ||||
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Non-cash
transactions
|
||||||||
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Note payable due to Seller issued
for acquisition
|
$ | 14,750 | $ | -- | ||||
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Decrease
in cost basis of Cinema 1, 2 & 3 related to the purchase price
adjustment of the call option liability to related party
|
$ | -- | $ | (2,100 | ) | |||
|
Adjustment
to accumulated deficit related to adoption of FIN 48 (Note
10)
|
$ | -- | $ | 509 | ||||
|
Decrease
in deposit payable and increase in minority interest liability related to
the exercise of the Cinema 1, 2 & 3 call option by a related
party
|
$ | -- | $ | (3,000 | ) | |||
|
Decrease
in call option liability and increase in additional paid in capital
related to the exercise of the Cinema 1, 2 & 3 call option by a
related party
|
$ | -- | $ | (2,513 | ) | |||
|
Accrued
construction-in-progress cost
|
$ | -- | $ | (2,440 | ) | |||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
For
the Six Months Ended June 30, 2008
Note
1 – Basis of Presentation
Reading International, Inc., a Nevada
corporation (“RDI” and collectively with our consolidated subsidiaries and
corporate predecessors, the “Company,” “Reading” and “we,” “us,” or “our”), was
founded in 1983 as a Delaware corporation and reincorporated in 1999 in
Nevada. Our businesses consist primarily of:
|
|
·
|
the
development, ownership and operation of multiplex cinemas in the United
States, Australia, and New Zealand
and
|
|
|
·
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the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United States, including
entertainment-themed retail centers (“ETRC”) in Australia and New Zealand,
and live theatre assets in Manhattan and Chicago in the United
States.
|
The accompanying unaudited consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”) for interim
reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X of the Securities and Exchange Commission for interim
reporting. As such, certain information and footnote disclosures
typically required by US GAAP for complete financial statements have been
condensed or omitted. There have been no material changes in the
information disclosed in the notes to the consolidated financial statements
contained in our Annual Report on Form 10-K for the year ended December 31, 2007
(“2007 Annual Report”). The financial information presented in this
quarterly report on Form 10-Q for the period ended June 30, 2008 (the “June
Report”), including the information under the heading, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, should be read in
conjunction with our 2007 Annual Report which contains the latest audited
financial statements and related footnotes.
In the opinion of management, all
adjustments of a normal recurring nature considered necessary to present fairly
in all material respects our financial position, results of our operations and
cash flows as of and for the three months and six months ended June 30, 2008 and
2007 have been made. The results of operations for the three months
and six months ended June 30, 2008 and 2007 are not necessarily indicative of
the results of operations to be expected for the entire year.
Marketable
Securities
We have investments in marketable
securities of $4.9 million at June 30, 2008. These investments are
accounted for as available for sale investments in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. In accordance with the
Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) 03-1,
The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, assessments of potential impairment for these investments
are performed for each applicable reporting period. We have
determined that there was no impairment for these investments at June 30,
2008. These investments have a cumulative unrealized gain of $22,000
included in accumulated other comprehensive income at June 30,
2008. For the three months and six months ended June 30, 2008 our net
unrealized gain on marketable securities was $3,000 and $4,000, respectively,
and for the three months and six months ended June 30, 2007 our net unrealized
gain on marketable securities was $385,000 and $738,000,
respectively. During the three months ended June 30, 2007, we sold
$5.7 million of our marketable securities resulting in a realized gain on sale
of $224,000.
Other
Income
Included
in our six months ended June 30, 2008 other income is $910,000 of insurance
settlement proceeds related to damage caused by Hurricane George in 1998 to one
of our previously owned cinemas in
Puerto
Rico, as well as legal settlement proceeds received on our Burstone litigation
of $1.1 million and credit card dispute proceeds of $385,000 (See Note 13 –
Commitments and
Contingencies).
Deferred Leasing
Costs
Direct
costs incurred in connection with obtaining tenants are amortized over the
respective term of the lease on a straight-line basis.
Deferred Financing
Costs
Direct
costs incurred in connection with financing are amortized over the respective
term of the loan utilizing the effective interest method, or straight-line
method if the result is not materially different. In addition, interest on loans
with increasing interest rates and scheduled principal pre-payments is also
recognized on the effective interest method.
Accounting Pronouncements
Adopted January 1, 2008
Statement of Financial
Accounting Standards No. 157
Effective
January 1, 2008, we adopted, on a prospective basis, SFAS No. 157, Fair Value Measurements
(“SFAS 157”) as amended by FASB Staff Position SFAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13 (“FSP FAS 157-1”) and FASB Staff Position SFAS 157-2,
Effective Date of FASB
Statement No. 157 (“FSP FAS 157-2”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and provides for
expanded disclosure about fair value measurements. SFAS 157 applies
prospectively to all other accounting pronouncements that require or permit fair
value measurements. FSP FAS 157-1 amends SFAS 157 to exclude from the scope of
SFAS 157 certain leasing transactions accounted for under SFAS No. 13, Accounting for Leases. FSP
FAS 157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis to fiscal years beginning after November 15, 2008.
The
adoption of SFAS 157 did not have a material impact on our consolidated
financial statements. We are evaluating the impact that SFAS 157 will have on
our non-financial assets and non-financial liabilities, since the application of
SFAS 157 for such items was deferred, in our case, to January 1, 2009. We
believe that the impact of these items will not be material to our consolidated
financial statements. Assets and liabilities, typically recorded at fair value
on a non-recurring basis, to which we have not yet applied SFAS 157 due to the
deferral of SFAS 157 for such items include:
|
|
·
|
Non-financial
assets and liabilities initially measured at fair value in an acquisition
or business combination
|
|
|
·
|
Long-lived
assets measured at fair value due to an impairment assessment under SFAS
No. 144, Accounting for
the Impairment or Disposal of Long-Lived
Assets
|
|
|
·
|
Asset
retirement obligations initially measured under SFAS No. 143, Accounting for Asset
Retirement Obligations
|
Statement of Financial
Accounting Standards No. 159
Effective
January 1, 2008, we adopted, on a prospective basis, SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair
value. The objective of the guidance is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The adoption of SFAS 159
did not have a material impact on our consolidated financial statements since we
did not elect to apply the fair value option for any of our eligible financial
instruments or other items on the January 1, 2008 effective date.
New Accounting
Pronouncements
Statement of Financial
Accounting Standards No. 160
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 requires (i) that noncontrolling (minority) interests
be reported as a component of shareholders’ equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be separately
identified in the consolidated statement of operations, (iii) that changes in a
parent’s ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, (iv) that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured
at fair value, and (v) that sufficient disclosures are provided that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for annual periods beginning
after December 15, 2008, which is the year ending December 31, 2009 for the
Company, and should be applied prospectively. However, the
presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. The adoption of the
provisions of SFAS 160 is not anticipated to materially impact the Company’s
consolidated financial position and results of operations.
Statement of Financial
Accounting Standards No. 161
In March
2008, the Financial Accounting Standards Board issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). This new
standard enhances disclosure requirements for derivative instruments in order to
provide users of financial statements with an enhanced understanding of (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and its related interpretations and
(iii) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS 161 is to be
applied prospectively for the first annual reporting period beginning on or
after November 15, 2008. We believe that the adoption of SFAS 161
will not have a material impact on our financial statement disclosures since we
solely have interest rate swaps as derivative instruments.
Note
2 – Stock-Based Compensation
Stock Based
Compensation
As part
of his compensation package, Mr. John Hunter, our Chief Operating Officer, was
granted $100,000 of restricted Class A Non-Voting Common Stock on February 12,
2008 and 2007. These stock grants have vesting periods of two years
and stock grant prices of $9.70 and $8.63, respectively. On February
11, 2008, $50,000 of restricted Class A Non-Voting Common Stock vested related
to Mr. Hunter’s 2007 grant. The 5,794 shares related to this vesting
have yet to be issued to him. During the three months and six months
ended June 30, 2008, we recorded compensation expense of $100,000 and $196,000,
respectively, and during the three months and six months ended June 30, 2007, we
recorded compensation expense of $59,000 and $119,000, respectively, for the
vesting of all our restricted stock grants. The following table
details the grants and vesting of restricted stock to our employees (dollars in
thousands):
|
Non-Vested
Restricted Stock
|
Fair
Value at Grant Date
|
|||||||
|
Outstanding
– December 31, 2007
|
61,756 | $ | 524 | |||||
|
Granted
|
10,309 | $ | 100 | |||||
|
Vested
|
(5,794 | ) | $ | (50 | ) | |||
|
Outstanding
– June 30, 2008
|
66,271 | $ | 574 | |||||
In 2006,
we formed two new wholly owned subsidiaries, Landplan Property Partners, Pty Ltd
and Landplan Property Partners New Zealand, Ltd collectively referred to as
Landplan Property Partners (“LPP”), to engage in the real estate development
business. We have an agreement with the president of LPP, Mr. Doug
Osborne pursuant to which he has a contingent interest in certain property
trusts, owned by LPP, ranging between 27.5% and 15%, depending on a number of
factors including the amount and duration of the investments of
LPP. Mr. Osborne’s interest is subordinated to (i) the repayment of
all third party indebtedness, (ii) the repayment of all funds invested or
advanced by Reading, and (iii) the realization by Reading of an 11% annual
compounded preferred return on its capital. Mr. Osborne’s interest of
$331,000 is included in the minority interest of LPP at June 30, 2008 (see Note
14 – Minority
Interest). During the three and six months ended June 30,
2008, we expensed $30,000 and $91,000, respectively, and during the three and
six months ended June 30, 2007, we expensed $86,000 and $96,000, respectively
associated with Mr. Osborne’s interests. At June 30, 2008, the total
unrecognized compensation expense related to the LPP equity awards was $181,000,
which is expected to be recognized over the remaining weighted average period of
approximately 96 months. These amounts will not, however, be payable
unless the properties held by LPP, on a consolidated basis, provide returns on
capital in excess of 11%, compounded annually.
Employee/Director Stock
Option Plan
We have a
long-term incentive stock option plan that provides for the grant to eligible
employees and non-employee directors of incentive stock options and
non-qualified stock options to purchase shares of the Company’s Class A
Nonvoting Common Stock.
When the
Company’s tax deduction from an option exercise exceeds the compensation cost
resulting from the option, a tax benefit is created. SFAS No. 123(R),
Accounting for Stock-Based
Compensation (“SFAS 123(R)”, requires that excess tax benefits related to
stock option exercises be reflected as financing cash inflows instead of
operating cash inflows. For the three months ended June 30, 2008 and
2007, there was no impact to the consolidated statement of cash flows because
there were no recognized tax benefits from stock option exercises during these
periods.
SFAS
123(R) requires companies to estimate forfeitures. Based on our
historical experience and the relative market price to strike price of the
options, we do not currently estimate any forfeitures of vested or unvested
options.
In
accordance with SFAS 123(R), we estimate the fair value of our options using the
Black-Scholes option-pricing model, which takes into account assumptions such as
the dividend yield, the risk-free interest rate, the expected stock price
volatility, and the expected life of the options. The dividend yield
is excluded from the calculation, as it is our present intention to retain all
earnings. We expense the estimated grant date fair values of options
issued on a straight-line basis over the vesting period.
We
granted 231,250 and 301,250 of options during the three and six months ended
June 30, 2007, respectively. Of these options, 70,000 were granted to
our directors as fully vested options during the six months
ended
June 30, 2007. There were no options granted to our employees during
the three or six months ended June 30, 2008. We estimated the fair
value of the 2007 option grants at the date of grant using a Black-Scholes
option-pricing model with the following weighted average
assumptions:
|
2007
|
|
|
Stock
option exercise price
|
$
8.35 - $10.30
|
|
Risk-free
interest rate
|
4.636
- 4.824%
|
|
Expected
dividend yield
|
--
|
|
Expected
option life
|
9.60
- 9.96 yrs
|
|
Expected
volatility
|
33.64
- 33.74%
|
|
Weighted
average fair value
|
$4.42
- $ 4.82
|
Using the
above assumptions and in accordance with the SFAS 123(R) modified prospective
method, we recorded $160,000 and $320,000 in compensation expense for the total
estimated grant date fair value of stock options that vested during the three
and six months ended June 30, 2008, respectively. We also recorded
$92,000 and $418,000 in compensation expense for the total estimated grant date
fair value of stock options that vested during the three and six months ended
June 30, 2007, respectively. At June 30, 2008, the total unrecognized
estimated compensation cost related to non-vested stock options granted was
$556,000, which is expected to be recognized over a weighted average vesting
period of 0.93 years. No options were exercised during the three or
six months ended June 30, 2008 or during the three or six months ended June 30,
2007; therefore, no cash was received and no value was realized from the
exercise of options during those periods. There were 120,625 options
vested during the three and six months ended June 30, 2008 having a current
intrinsic value of $0 for the period as all the options were “out-of-the-money”
at June 30, 2008. Except for the 70,000 fully vested options granted
to our directors during the first quarter, only 5,000 options vested during the
three and six months ended June 30, 2007; therefore, the grant date fair value
of options vesting during the three and six months ended June 30, 2007 was
$41,000. The intrinsic, unrealized value of all options outstanding,
vested and expected to vest, at June 30, 2008 was $1.5 million of which 100.0%
are currently exercisable.
All stock
options granted have a contractual life of 10 years at the grant
date. The aggregate total number of shares of Class A Nonvoting
Common Stock and Class B Voting Common Stock authorized for issuance under our
1999 Stock Option Plan is 1,287,150. At the time that options are
exercised, at the discretion of management, we will either issue treasury shares
or make a new issuance of shares to the employee or board
member. Dependent on the grant letter to the employee or board
member, the required service period for option vesting is between zero and four
years.
We had
the following stock options outstanding and exercisable as of June 30, 2008 and
December 31, 2007:
|
Common Stock Options
Outstanding
|
Weighted Average Exercise
Price of Options
Outstanding
|
Common Stock Exercisable
Options
|
Weighted Average
Price of Exercisable
Options
|
|||||||||||||||||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||||||||||||||
|
Outstanding-
January 1, 2007
|
514,100 | 185,100 | $ | 5.21 | $ | 9.90 | 488,475 | 185,100 | $ | 5.06 | $ | 9.90 | ||||||||||||||||||||
|
Granted
|
151,250 | 150,000 | $ | 9.37 | $ | 10.24 | ||||||||||||||||||||||||||
|
Exercised
|
(6,250 | ) | -- | $ | 4.01 | $ | -- | |||||||||||||||||||||||||
|
Expired
|
(81,250 | ) | (150,000 | ) | $ | 10.25 | $ | 10.24 | ||||||||||||||||||||||||
|
Outstanding-
December 31, 2007
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 477,850 | 35,100 | $ | 4.72 | $ | 8.47 | ||||||||||||||||||||
|
No activity during the
period
|
-- | -- | $ | -- | $ | -- | ||||||||||||||||||||||||||
|
Outstanding-June
30, 2008
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 477,850 | 35,100 | $ | 4.72 | $ | 8.47 | ||||||||||||||||||||
The
weighted average remaining contractual life of all options outstanding, vested
and expected to vest, at June 30, 2008 and December 31, 2007 was approximately
5.72 and 6.22 years, respectively. The weighted average remaining
contractual life of the exercisable options outstanding at June 30, 2008 and
December 31, 2007 was approximately 5.11 and 4.74 years,
respectively.
Note
3 – Business Segments
Our operations are organized into two
reportable business segments within the meaning of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Our reportable segments
are (1) cinema
exhibition and (2) real
estate. The cinema segment is engaged in the development, ownership,
and operation of multiplex cinemas. The real estate segment is
engaged in the development, ownership, and operation of commercial properties,
including ETRC’s in Australia and New Zealand and live theatres in the United
States. Historically, our development projects have included a cinema
component. Incident to our real estate operations we have acquired,
and continue to hold, raw land in urban and suburban centers in Australia and
New Zealand.
The
tables below summarize the results of operations for each of our principal
business segments for the three (“2008 Quarter”) and six (“2008 Six Months”)
months ended June 30, 2008 and the three (“2007 Quarter”) and six (“2007 Six
Months”) months ended June 30, 2007, respectively. Operating expense
includes costs associated with the day-to-day operations of the cinemas and live
theatres and the management of rental properties. All operating
results from discontinued operations are included in “Gain on sale of a
discontinued operation” (dollars in thousands):
|
Three
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 49,488 | $ | 5,813 | $ | (1,550 | ) | $ | 53,751 | |||||||
|
Operating
expense
|
43,330 | 2,296 | (1,550 | ) | 44,076 | |||||||||||
|
Depreciation
& amortization
|
4,060 | 1,287 | -- | 5,347 | ||||||||||||
|
General
& administrative expense
|
1,129 | 432 | -- | 1,561 | ||||||||||||
|
Segment
operating income
|
$ | 969 | $ | 1,798 | $ | -- | $ | 2,767 | ||||||||
|
Three
months ended June 30, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 26,034 | $ | 5,564 | $ | (1,459 | ) | $ | 30,139 | |||||||
|
Operating
expense
|
21,390 | 1,864 | (1,459 | ) | 21,795 | |||||||||||
|
Depreciation
& amortization
|
1,798 | 1,108 | -- | 2,906 | ||||||||||||
|
General
& administrative expense
|
761 | 271 | -- | 1,032 | ||||||||||||
|
Segment
operating income
|
$ | 2,085 | $ | 2,321 | $ | -- | $ | 4,406 | ||||||||
|
Reconciliation
to consolidated net income:
|
2008
Quarter
|
2007
Quarter
|
||||||
|
Total
segment operating income
|
$ | 2,767 | $ | 4,406 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
181 | 141 | ||||||
|
General and administrative
expense
|
3,348 | 2,847 | ||||||
|
Operating
income (loss)
|
(762 | ) | 1,418 | |||||
|
Interest expense,
net
|
(3,039 | ) | (1,950 | ) | ||||
|
Other income
|
1,671 | 465 | ||||||
|
Minority
interest
|
182 | (154 | ) | |||||
|
Gain on sale of a discontinued
operation
|
-- | 1,912 | ||||||
|
Income tax
expense
|
(407 | ) | (443 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
189 | 386 | ||||||
|
Gain on sale of unconsolidated
entity
|
2,450 | -- | ||||||
|
Net
income
|
$ | 284 | $ | 1,634 | ||||
|
Six
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 84,831 | $ | 11,763 | $ | (3,116 | ) | $ | 93,478 | |||||||
|
Operating
expense
|
72,301 | 4,410 | (3,116 | ) | 73,595 | |||||||||||
|
Depreciation
& amortization
|
6,669 | 2,382 | -- | 9,051 | ||||||||||||
|
General
& administrative expense
|
1,898 | 598 | -- | 2,496 | ||||||||||||
|
Segment
operating income
|
$ | 3,963 | $ | 4,373 | $ | -- | $ | 8,336 | ||||||||
|
Six
months ended June 30, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 50,540 | $ | 10,405 | $ | (2,830 | ) | $ | 58,115 | |||||||
|
Operating
expense
|
40,881 | 3,865 | (2,830 | ) | 41,916 | |||||||||||
|
Depreciation
& amortization
|
3,592 | 2,146 | -- | 5,738 | ||||||||||||
|
General
& administrative expense
|
1,525 | 457 | -- | 1,982 | ||||||||||||
|
Segment
operating income
|
$ | 4,542 | $ | 3,937 | $ | -- | $ | 8,479 | ||||||||
|
Reconciliation
to consolidated net income:
|
2008
Six Months
|
2007
Six Months
|
||||||
|
Total
segment operating income
|
$ | 8,336 | $ | 8,479 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
360 | 278 | ||||||
|
General and administrative
expense
|
7,101 | 5,573 | ||||||
|
Operating
income
|
875 | 2,628 | ||||||
|
Interest expense,
net
|
(5,876 | ) | (3,701 | ) | ||||
|
Other income
(expense)
|
3,045 | (456 | ) | |||||
|
Minority
interest
|
(161 | ) | (495 | ) | ||||
|
Gain on sale of a discontinued
operation
|
-- | 1,912 | ||||||
|
Income tax
expense
|
(824 | ) | (942 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
547 | 2,042 | ||||||
|
Gain on sale of unconsolidated
entity
|
2,450 | -- | ||||||
|
Net
income
|
$ | 56 | $ | 988 | ||||
Note
4 – Operations in Foreign Currency
We have significant assets in Australia
and New Zealand. To the extent possible, we conduct our Australian
and New Zealand operations on a self-funding basis. The carrying
value of our Australian and New Zealand assets fluctuate due to changes in the
exchange rates between the US dollar and the functional currency of Australia
(Australian dollar) and New Zealand (New Zealand dollar). We have no
derivative financial instruments to hedge foreign currency
exposure.
Presented
in the table below are the currency exchange rates for Australia and New Zealand
as of June 30, 2008 and December 31, 2007:
|
US
Dollar
|
||||||||
|
June
30, 2008
|
December
31, 2007
|
|||||||
|
Australian
Dollar
|
$ | 0.9562 | $ | 0.8776 | ||||
|
New
Zealand Dollar
|
$ | 0.7609 | $ | 0.7678 | ||||
Note
5 – Earnings (Loss) Per Share
Basic earnings (loss) per share is
computed by dividing the net income (loss) to common stockholders by the
weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed by dividing the
net income (loss) to common stockholders by the weighted average number of
common shares outstanding during the period after giving effect to all
potentially dilutive common shares that would have been outstanding if the
dilutive common shares had been issued. Stock options give rise to
potentially dilutive common shares. In accordance with SFAS
No. 128, Earnings Per
Share, these shares are
included in the dilutive loss per share calculation under the treasury stock
method. The following is a calculation of earnings (loss) per share
(dollars in thousands, except share data):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Income
(loss) from continuing operations
|
$ | 284 | $ | (278 | ) | $ | 56 | $ | (924 | ) | ||||||
|
Gain
on sale of a discontinued operation
|
-- | 1,912 | -- | 1,912 | ||||||||||||
|
Net
income
|
$ | 284 | $ | 1,634 | $ | 56 | $ | 988 | ||||||||
|
Earnings
(loss) per common share – basic and diluted:
|
||||||||||||||||
|
Earnings (loss) from continuing
operations
|
$ | 0.01 | $ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | ||||||
|
Gain on sale of a discontinued
operation
|
0.00 | 0.08 | 0.00 | 0.08 | ||||||||||||
|
Basic
and diluted earnings per share
|
$ | 0.01 | $ | 0.07 | $ | 0.00 | $ | 0.04 | ||||||||
|
Weighted
average common stock – basic
|
22,476,355 | 22,487,943 | 22,476,355 | 22,485,480 | ||||||||||||
|
Weighted
average common stock – dilutive
|
22,763,826 | 22,487,943 | 22,763,826 | 22,485,480 | ||||||||||||
For the three and six months ended June
30, 2007, we recorded losses from continuing operations. As such, the
incremental shares of 262,428 in 2007 from stock options to purchase shares of
common stock were excluded from the computation of diluted loss per share
because they were anti-dilutive in those periods.
Note
6 - Property Under Development and Property and Equipment
As of
June 30, 2008 and December 31, 2007, we owned property under development
summarized as follows (dollars in thousands):
|
Property
Under Development
|
June
30,
2008
|
December
31,
2007
|
||||||
|
Land
|
$ | 39,778 | $ | 36,994 | ||||
|
Construction-in-progress
(including capitalized interest)
|
37,947 | 29,793 | ||||||
|
Property
Under Development
|
$ | 77,725 | $ | 66,787 | ||||
We recorded capitalized interest
related to our properties under development for the three months ended June 30,
2008 and 2007 of $1.7 million and $900,000, respectively, and $3.1 million and
$2.0 million for six months ended June 30, 2008 and 2007,
respectively.
As of
June 30, 2008 and December 31, 2007, we owned investments in property and
equipment as follows (dollars in thousands):
|
Property
and equipment
|
June
30,
2008
|
December
31,
2007
|
||||||
|
Land
|
$ | 60,261 | $ | 58,757 | ||||
|
Building
|
118,476 | 112,818 | ||||||
|
Leasehold
interest
|
46,324 | 12,430 | ||||||
|
Construction-in-progress
|
741 | 1,318 | ||||||
|
Fixtures
and equipment
|
81,895 | 64,648 | ||||||
| 307,697 | 249,971 | |||||||
|
Less:
accumulated depreciation
|
(84,262 | ) | (71,797 | ) | ||||
|
Property
and equipment, net
|
$ | 223,435 | $ | 178,174 | ||||
Depreciation expense for property and
equipment was $4.7 million and $2.8 million for the three months ended June 30,
2008 and 2007, respectively, and $8.2 million and $5.5 million for the six
months ended June 30, 2008 and 2007, respectively.
In April 2008, we opened a new, leased
9-screen cinema in Rouse Hill, Australia. We fitted out the cinema
with leasehold assets costing $1.4 million (AUS$1.4 million) and fixture and
equipment costs of $3.9 million (AUS$4.1 million).
Note
7 – Investments in Unconsolidated Joint Ventures and Entities
Except as
noted below regarding our investment in Malulani Investments, Limited,
investments in unconsolidated joint ventures and entities are accounted for
under the equity method of accounting, and, as of June 30, 2008 and December 31,
2007, include the following (dollars in thousands):
|
Interest
|
June
30,
2008
|
December
31,
2007
|
||||||||||
|
Malulani
Investments Limited
|
18.4%
|
$ | 1,800 | $ | 1,800 | |||||||
|
Rialto
Distribution
|
33.3%
|
1,293 | 1,029 | |||||||||
|
Rialto
Cinemas
|
50.0%
|
5,653 | 5,717 | |||||||||
|
205-209
East 57th
Street Associates, LLC
|
25.0%
|
1,059 | 1,059 | |||||||||
|
Mt.
Gravatt Cinema
|
33.3%
|
5,418 | 5,159 | |||||||||
|
Berkeley
Cinemas – Botany
|
50.0%
|
- | 716 | |||||||||
|
Other
investments
|
146 | -- | ||||||||||
|
Total
investment
|
$ | 15,369 | $ | 15,480 | ||||||||
For the
three months and six months ended June 30, 2008 and 2007, we recorded our share
of equity earnings (loss) from our investments in unconsolidated joint ventures
and entities as follows:
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Malulani
Investments, Ltd.
|
$ | -- | $ | -- | $ | -- | $ | -- | ||||||||
|
Rialto
Distribution
|
115 | 63 | 172 | 88 | ||||||||||||
|
Rialto
Cinemas
|
(47 | ) | 3 | (14 | ) | (20 | ) | |||||||||
|
205-209
East 57th
Street Associates, LLC
|
-- | 39 | -- | 1,349 | ||||||||||||
|
Mt.
Gravatt Cinema
|
192 | 211 | 457 | 427 | ||||||||||||
|
Berkeley
Cinema – Botany
|
1 | 70 | 88 | 198 | ||||||||||||
|
Other
investments
|
(72 | ) | -- | (156 | ) | -- | ||||||||||
|
Total
equity earnings
|
$ | 189 | $ | 386 | $ | 547 | $ | 2,042 | ||||||||
Malulani Investments,
Limited
We continue to treat this investment on
a cost basis by recognizing earnings as they are distributed to
us. We are currently in litigation with certain controlling
shareholders and directors of Malulani Investments Limited. We have
contractually agreed to share these litigation costs with another minority
shareholder. The outstanding balance for their obligation is included
in our other assets as a receivable.
Berkeley
Cinemas
On June
6, 2008, we sold the Botany Downs Cinema to our joint venture partner for $3.3
million (NZ$4.3 million). We continue to have certain outstanding
claims related to interest and working capital, which may or may not increase
the total sales price of the cinema.
Other
Investments
From time to time, we will make
investments in various activities that require equity method accounting
including but not limited to investments in productions in our live
theatres. These investments are immaterial to our financials from the
perspective of our investment and their potential earnings.
Note
8 – Goodwill and Intangible Assets
Subsequent to January 1, 2002, in
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, we do not amortize goodwill. Instead, we perform an
annual impairment review of our goodwill and other intangible assets in the
fourth quarter unless changes in circumstances indicate that an asset may
be
impaired. As
of June 30, 2008 and December 31, 2007, we had goodwill consisting of the
following (dollars in thousands):
|
Cinema
|
Real
Estate
|
Total
|
||||||||||
|
Balance
as of December 31, 2007
|
$ | 13,827 | $ | 5,273 | $ | 19,100 | ||||||
|
Goodwill
acquired during 2008
|
6,307 | -- | 6,307 | |||||||||
|
Foreign
currency translation adjustment
|
297 | (7 | ) | 290 | ||||||||
|
Balance
at June 30, 2008
|
$ | 20,431 | $ | 5,266 | $ | 25,697 | ||||||
We have
intangible assets other than goodwill that are subject to amortization and are
being amortized over various periods. We amortize our beneficial
leases over the lease period, the longest of which is 20 years, our trade name
using a declining balance over 50 years, and our option fee and other intangible
assets over 10 years. For the three months ended June 30, 2008 and
2007, amortization expense totaled $804,000 and $248,000, respectively; and for
the six months ended June 30, 2008 and 2007, amortization expense totaled $1.2
million and $475,000, respectively.
Intangible
assets subject to amortization consist of the following (dollars in
thousands):
|
As
of June 30, 2008
|
Beneficial
Leases
|
Trade
name
|
Option
Fee
|
Other
Intangible Assets
|
Total
|
|||||||||||||||
|
Gross
carrying amount
|
$ | 22,316 | $ | 7,220 | $ | 2,773 | $ | 638 | $ | 32,947 | ||||||||||
|
Less:
Accumulated amortization
|
5,174 | 281 | 2,568 | 58 | 8,081 | |||||||||||||||
|
Total,
net
|
$ | 17,142 | $ | 6,939 | $ | 205 | $ | 580 | $ | 24,866 | ||||||||||
|
As
of December 31, 2007
|
Beneficial
Leases
|
Trade
name
|
Option
Fee
|
Other
Intangible Assets
|
Total
|
|||||||||||||||
|
Gross
carrying amount
|
$ | 12,295 | $ | -- | $ | 2,773 | $ | 238 | $ | 15,306 | ||||||||||
|
Less:
Accumulated amortization
|
4,311 | -- | 2,521 | 26 | 6,858 | |||||||||||||||
|
Total,
net
|
$ | 7,984 | $ | -- | $ | 252 | $ | 212 | $ | 8,448 | ||||||||||
Note
9 – Prepaid and Other Assets
Prepaid
and other assets are summarized as follows (dollars in thousands):
|
June
30,
2008
|
December
31,
2007
|
|||||||
|
Prepaid
and other current assets
|
||||||||
|
Prepaid
expenses
|
$ | 673 | $ | 569 | ||||
|
Prepaid
taxes
|
521 | 602 | ||||||
|
Deposits
|
302 | 2,097 | ||||||
|
Other
|
734 | 532 | ||||||
|
Total prepaid and other current
assets
|
$ | 2,230 | $ | 3,800 | ||||
|
Other
non-current assets
|
||||||||
|
Other
non-cinema and non-rental real estate assets
|
$ | 1,254 | $ | 1,270 | ||||
|
Deferred
financing costs, net
|
5,352 | 2,805 | ||||||
|
Interest
rate swaps
|
1,342 | 526 | ||||||
|
Other
receivables
|
1,694 | 1,648 | ||||||
|
Pre-acquisition
costs
|
162 | 948 | ||||||
|
Other
|
690 | 787 | ||||||
|
Total non-current
assets
|
$ | 10,494 | $ | 7,984 | ||||
Note
10 – Income Tax
The income tax provision for the three
months and six months ended June 30, 2008 and 2007 was composed of the following
amounts (dollars in thousands):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Foreign
income tax provision
|
$ | 46 | $ | 73 | $ | 115 | $ | 160 | ||||||||
|
Foreign
withholding tax
|
191 | 172 | 379 | 312 | ||||||||||||
|
Federal
tax provision
|
127 | 128 | 254 | 255 | ||||||||||||
|
Other
income tax
|
43 | 70 | 76 | 215 | ||||||||||||
|
Net
tax provision
|
$ | 407 | $ | 443 | $ | 824 | $ | 942 | ||||||||
We
adopted FASB Interpretation No. 48 (“FIN 48”) on January 1, 2007. As
a result, we recognized a $509,000 cumulative increase to reserves for uncertain
tax positions, which was accounted for as an adjustment to the beginning balance
of accumulated deficit in 2007. As of that date, we also reclassified
approximately $4.0 million in reserves from current taxes liabilities to
noncurrent tax liabilities. During the six months ended June 30, 2008
the Company’s FIN 48 liability increased by $254,000 reflecting the accrual of
interest for IRS matters under litigation.
Note
11 – Notes Payable
Notes
payable are summarized as follows (dollars in thousands):
|
Interest Rates as of
|
Balance as of
|
|||||||||||||||||||
|
Name
of Note Payable or Security
|
June
30, 2008
|
December
31, 2007
|
Maturity
Date
|
June
30, 2008
|
December
31, 2007
|
|||||||||||||||
|
Australian
Corporate Credit Facility
|
8.48%
|
7.75%
|
June
30, 2011
|
$ | 96,098 | $ | 85,772 | |||||||||||||
|
Australian
Shopping Center Loans
|
--
|
--
|
2007-2013
|
1,066 | 1,066 | |||||||||||||||
|
New
Zealand Corporate Credit Facility
|
9.80%
|
10.10%
|
November
23, 2010
|
2,465 | 2,488 | |||||||||||||||
|
Trust
Preferred Securities
|
9.22%
|
9.22%
|
April
30, 2027
|
51,547 | 51,547 | |||||||||||||||
|
US
Euro-Hypo Loan
|
6.73%
|
6.73%
|
June
30, 2012
|
15,000 | 15,000 | |||||||||||||||
|
US
GE Capital Term Loan
|
6.90%
|
--
|
February
21, 2013
|
44,750 | -- | |||||||||||||||
|
US
Liberty Theatres Term Loan
|
6.20%
|
--
|
April
1, 2013
|
7,050 | -- | |||||||||||||||
|
US
Nationwide Loan
|
6.50%
– 7.50%
|
--
|
|
February
21, 2013
|
15,279 | -- | ||||||||||||||
|
US
Sutton Hill Capital Note 1 – Related Party
|
9.91%
|
9.91%
|
December
31, 2010
|
5,000 | 5,000 | |||||||||||||||
|
US
Sutton Hill Capital Note 2 – Related Party
|
8.25%
|
8.25%
|
December
31, 2010
|
9,000 | 9,000 | |||||||||||||||
|
US
Union Square Theatre Term Loan
|
6.26%
|
6.26%
|
January
1, 2010
|
7,222 | 7,322 | |||||||||||||||
|
Total
|
$ | 254,477 | $ | 177,195 | ||||||||||||||||
Australian Corporate Credit
Facility
During June 2008, we extended the term
of our $105.2 million (AUS$110.0 million) Australian facility to June 30,
2011. This facility will continue to roll to a 3-year term, following
an annual bank review. Besides the extended term, the only other
changes to the original agreement was that the loan requires interest only
payments and our interest margin increased from 1.00% to 1.25%. The
drawn balance of this loan was $96.1 million (AUS$100.5 million) at June 30,
2008.
GE Capital Term
Loan
In
connection with the acquisition described in Note 17 - Acquisitions, on February 21,
2008, Consolidated Amusement Theatres, Inc., (now renamed Consolidated
Entertainment, Inc.) as borrower (“Borrower”), and Consolidated Amusement
Holdings, Inc. (“Holdings”) entered into a Credit Agreement with General
Electric Capital Corporation (“GE”) as lender and administrative agent, and GE
Capital Markets, Inc. as lead arranger, which provides Borrower with a senior
secured credit facility of up to $55.0 million in the aggregate, including a
revolving credit facility of up to $5.0 million and a $1.0 million sub-limit for
letters of credit (the “Credit Facility”). The initial
borrowings under the Credit Facility were used to finance, in part, our
acquisition of the theaters and other assets described in Note 17 - Acquisitions. We
may borrow additional amounts under the Credit Facility for other acquisitions
as permitted under the Credit Facility (and to pay any related transaction
expenses), and for ordinary working capital and general corporate needs of
Borrower, subject to the terms of the Credit Facility. We incurred
deferred financing costs of $2.6 million related to our borrowings under this
Credit Facility. The Credit Facility expires on February 21, 2013 and
is secured by substantially all the assets of Borrower and
Holdings.
Borrowings
under the Credit Facility bear interest at a rate equal to either (i) the Index
Rate (defined as the higher of the Wall Street Journal prime rate and the
federal funds rate plus 50 basis points), or (ii) LIBOR (as defined in the
Credit Facility), at the election of Borrower, plus, in each case, a margin
determined by reference to Borrower's Leverage Ratio (as defined in the Credit
Facility) that ranges between prime rate plus 2.00% and prime rate plus 2.75%,
and between LIBOR plus 3.25% and LIBOR plus 4.00%, respectively.
Borrowings
under the Credit Facility may be prepaid at any time without penalty, subject to
certain minimums and payment of any LIBOR funding breakage
costs. Borrower will be required to pay an unused commitment fee
equal to 0.50% per annum on the actual daily-unused portion of the revolving
loan facility, payable quarterly in arrears. Outstanding letters of
credit under the Credit Facility are subject to a fee of the applicable LIBOR
rate in effect per annum on the face amount of such letters of credit, payable
quarterly in arrears. Borrower will be required to pay standard fees
with respect to the issuance, negotiation, and amendment of letters of credit
issued under the letter of credit facility. In accordance with the
prepayment provisions of the credit agreement, in June 2008, we paid down on the
facility by $5.0 million. This includes a prepayment of the annual
cash flow draw of $2.0 million and a pay down of the overall facility by an
additional $3.0 million.
The
Credit Facility contains other customary terms and conditions, including
representations and warranties, affirmative and negative covenants, events of
default and indemnity provisions. Such covenants, among other things,
limit Borrower's ability to incur indebtedness, incur liens or other
encumbrances, make capital expenditures, enter into mergers, consolidations and
asset sales, engage in transactions with affiliates, pay dividends or other
distributions and change the nature of the business conducted by
Borrower.
The
Credit Agreement contains financial covenants requiring the Borrower to maintain
minimum fixed charge and interest coverage ratios and not to exceed specified
maximum leverage ratios. The compliance levels for the maximum
leverage and minimum interest coverage covenants become stricter over the term
of the Credit Facility.
The
Credit Facility provides for customary events of default, including payment
defaults, covenant defaults, cross-defaults to certain other indebtedness,
certain bankruptcy events, judgment defaults, invalidity of any loan documents
or liens created under the Credit Agreement, change of control of Borrower,
termination of certain theater leases and material inaccuracies in
representations and warranties.
Nationwide
Loan
On
February 22, 2008, we completed the acquisition of fifteen motion picture
exhibition theaters and theater-related assets from Pacific Theatres Exhibition
Corp. and its affiliates, Consolidated Amusement Theatres, Inc. and Kenmore
Rohnert, LLC (collectively, the “Sellers”) for $70.2 million. As part
of the purchase, the Sellers, through an affiliate, provided $21.0 million of
acquisition financing evidenced by a five-year promissory note of Reading
Consolidated Holdings, Inc., our wholly owned subsidiary (“RCHI”), maturing on
February 21, 2013. The promissory note (referred to in the
report as the “Nationwide Note”) bears interest (i) as to $8.0 million of
principal at the annual rates of 7.50% for the first three years of the term of
the note and 8.50% thereafter and (ii) as to $13.0 million of principal at
the annual rates of 6.50% through July 31, 2009 and 8.50%
thereafter. Accrued interest on the promissory note will be due and
payable on February 21, 2011 and thereafter on the last day of each
calendar quarter, commencing on June 30, 2011. The entire
principal amount of the promissory note will be due and payable upon maturity,
subject to our right to prepay the promissory note at any time without penalty
and to the requirement that we make mandatory prepayments equal to a portion of
free cash flow generated by the acquired theaters.
The $21.0
million loan under the Nationwide Note is recourse only to RCHI and its assets,
which include the acquired assets and our Manville Theater, Dallas Angelika
Theater and all of the cinema assets that we acquired in the transaction, other
than two cinemas located in Southern California.
In
connection with the completion of the acquisition, the Sellers also agreed to
provide us up to three additional loans: one of $3.0 million to be drawn at our
specific request, one of $1.5 million to be drawn on or before July 31, 2008,
and a third of $1.5 million to be drawn on or before July 31,
2009. If extended, such loans will bear interest at the annual rate
of 8.50%, compounded annually, and will be due and payable, in full,
on
February 21,
2011, subject to our right to prepay the loans without premium or
penalty. The $6.0 million of additional loans, if extended by the
Sellers at our request, will be general obligations of Reading. See
Note 20 – Subsequent
Events for such borrowings made subsequent to June 30,
2008.
The
aggregate purchase price of the acquired assets is subject to reduction based
upon a final determination of theater-level cash flows of the acquired theaters
for the twelve months ended December 27, 2007, possible capital improvements by
us to the acquired theaters, and post-closing matters relating to the possible
opening of competing theater projects in the vicinity of certain acquired
theaters. These acquisition price reductions can range from $0 to as
much as the full amount of the Nationwide Note, if all contingencies were
met.
The
outstanding balance of the promissory note will be subject to reduction,
retroactive to the closing date of acquisition, as the means of effecting any
reduction in the purchase price of the acquired assets as referred to
above. Pursuant to these reduction provisions, during the second
quarter of 2008, the $8.0 million portion of the promissory note was reduced by
$6.3 million to $1.7 million (see Note 17 – Acquisitions).
Additional
adjustments may be made, depending upon competitive developments with respect to
certain of the acquired cinemas.
Liberty Theatres Term
Loan
On March
17, 2008, we entered into a $7.1 million loan agreement with a financial
institution, secured by our Royal George Theatre in Chicago, Illinois and our
Minetta and Orpheum Theatres in New York. The loan has a 5-year term
loan that accrues a 6.20% interest rate payable monthly in
arrears. We incurred deferred financing costs of $527,000 related to
our borrowings of this loan. The loan agreement requires only monthly
principal and interest payments along with self-reported annual financial
statements.
Indooroopilly Construction
Line of Credit
We have negotiated with an Australia
bank a construction line of credit on our Indooroopilly property of
$8.4 million (AUS$8.7 million) which, upon completion of the development
project, converts to a term loan of up to $10.0 million (AUS$10.5
million). As of June 30, 2008, we have not drawn on this credit
facility.
Note
12 – Other Liabilities
Other
liabilities are summarized as follows (dollars in thousands):
|
June
30,
2008
|
December
31, 2007
|
|||||||
|
Current
liabilities
|
||||||||
|
Security deposit
payable
|
$ | 198 | $ | 168 | ||||
|
Other
|
2 | 1 | ||||||
|
Other current
liabilities
|
$ | 200 | $ | 169 | ||||
|
Other
liabilities
|
||||||||
|
Foreign withholding
taxes
|
$ | 5,614 | $ | 5,480 | ||||
|
Straight-line rent
liability
|
4,855 | 3,783 | ||||||
|
Environmental
reserve
|
1,656 | 1,656 | ||||||
|
Accrued pension
|
2,852 | 2,626 | ||||||
|
Other
|
1,402 | 1,391 | ||||||
|
Other
liabilities
|
$ | 16,379 | $ | 14,936 | ||||
Included in our other liabilities are
accrued pension costs of $2.9 million. Associated with our pension
plans, for the three and six months ended June 30, 2008, we recognized $63,000
and $226,000, respectively, of interest cost and $71,000 and $143,000,
respectively, of amortized prior service cost. For the three and six
months ended June 30, 2007, we recognized $39,000 and $52,000, respectively, of
interest cost and $76,000 and $101,000, respectively, of amortized prior service
cost.
Note
13 – Commitments and Contingencies
Unconsolidated
Debt
Total
debt of unconsolidated joint ventures and entities was $2.6 million and $4.2
million as of June 30, 2008 and December 31, 2007, respectively. Our
share of unconsolidated debt, based on our ownership percentage, was $872,000
and $2.0 million as of June 30, 2008 and December 31, 2007,
respectively. This debt is without recourse to Reading as of June 30,
2008 and December 31, 2007.
Litigation
Whitehorse Center
Litigation
On May
10, 2005, a mixed judgment was entered by the trial court in Reading
Entertainment Australia Pty Ltd vs. Burstone Victoria Pty Ltd. Appeal
rights have been exhausted and the net result of that judgment has been the
payment to us by the defendants during the first quarter of $830,000
(AUS$901,000) and $314,000 (AUS$333,000) during the second quarter which are
each included in other income.
Botany Downs Cinema
Litigation
This
litigation was resolved by our sale, on June 6, 2008, of the Botany Downs Cinema
to our joint venture partner for $3.3 million (NZ$4.3 million) (see Note 7 -
Investments in Unconsolidated
Joint Ventures and Entities).
Condrens
Litigation
On May 13, 2008, the High Court of
Wellington rendered a decision against the liquidators of Condrens Parking
Limited and in favor of Aeneas Edward O’Sullivan, Mark Gerard McKinley, and
Clifford Joseph Condren in the matter titled Palmer and Petterson v. O’Sullivan
et al. Because of this determination, the defendants are claiming costs of
approximately $290,000 (NZ$381,000). We have appealed this decision,
and are contesting the defendants’ cost claims.
Note
14 – Minority Interest
Minority interest is composed of the
following enterprises:
|
|
·
|
50%
of membership interest in Angelika Film Center LLC (“AFC LLC”) owned by a
subsidiary of National Auto Credit,
Inc.;
|
|
|
·
|
25%
minority interest in Australia Country Cinemas Pty Ltd (“ACC”) owned by
Panorama Cinemas for the 21st
Century Pty Ltd.;
|
|
|
·
|
33%
minority interest in the Elsternwick Joint Venture owned by Champion
Pictures Pty Ltd.;
|
|
|
·
|
Up
to 27.5% minority interest in certain property holding trusts established
by Landplan Property Partners to hold, manage and develop properties
identified by Doug Osborne;
|
|
|
·
|
25%
minority interest in the Sutton Hill Properties, LLC owned by Sutton Hill
Capital, LLC; and
|
|
|
·
|
20%
minority interest in Big 4 Farming LLC by Cecelia Packing
Corporation.
|
The
components of minority interest are as follows (dollars in
thousands):
|
June
30,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
AFC
|
$ | 1,758 | $ | 2,256 | ||||
|
Australian
Country Cinemas
|
146 | 232 | ||||||
|
Elsternwick
Unincorporated Joint Venture
|
178 | 145 | ||||||
|
Landplan
Property Partners Property Trusts
|
331 | 237 | ||||||
|
Sutton
Hill Properties
|
(70 | ) | (36 | ) | ||||
|
Other
(Big 4 Farming)
|
1 | 1 | ||||||
|
Minority interest in consolidated
affiliates
|
$ | 2,344 | $ | 2,835 | ||||
|
Expense
for the
|
Expense
for the
|
|||||||||||||||
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
AFC
LLC
|
$ | (118 | ) | $ | 61 | $ | 102 | $ | 329 | |||||||
|
Australian
Country Cinemas
|
21 | 26 | 58 | 52 | ||||||||||||
|
Elsternwick
Unincorporated Joint Venture
|
15 | (19 | ) | 19 | 18 | |||||||||||
|
Landplan
Property Partners Property Trusts
|
30 | 86 | 91 | 96 | ||||||||||||
|
Sutton
Hill Properties
|
(130 | ) | -- | (110 | ) | -- | ||||||||||
|
Other
(Big 4 Farming)
|
-- | -- | 1 | -- | ||||||||||||
|
Minority interest
|
$ | (182 | ) | $ | 154 | $ | 161 | $ | 495 | |||||||
Note
15 – Common Stock
Employee Stock
Grants
As part
of his compensation package, Mr. John Hunter, our Chief Operating Officer, was
granted $100,000 of restricted Class A Non-Voting Common Stock on February 12,
2008. This stock grant has a vesting period of two years and a stock
grant price of $9.70. On February 11, 2008, $50,000 of restricted
Class A Non-Voting Common Stock vested related to Mr. Hunter’s 2007
grant. These 5,794 vested shares have yet to be issued to
him.
Note
16 - Comprehensive Income
U.S. GAAP requires that the effect of
foreign currency translation adjustments and unrealized gains and/or losses on
securities that are available-for-sale (“AFS”) be classified as comprehensive
income. The following table sets forth our comprehensive income for
the periods indicated (dollars in thousands):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
income
|
$ | 284 | $ | 1,634 | $ | 56 | $ | 988 | ||||||||
|
Foreign
currency translation gain
|
1,258 | 8,582 | 6,768 | 12,417 | ||||||||||||
|
Accrued
pension
|
71 | 76 | 143 | (2,600 | ) | |||||||||||
|
Unrealized
gain on AFS securities
|
3 | 385 | 4 | 738 | ||||||||||||
|
Comprehensive
income
|
$ | 1,616 | $ | 10,677 | $ | 6,971 | $ | 11,543 | ||||||||
Note
17 – Acquisitions
Consolidated Entertainment
Cinemas Acquisitions
In keeping with our business plan of
being opportunistic in adding to our existing cinema portfolio, on February 22,
2008, we acquired 14 cinemas with 173 screens in Hawaii and California and
entered into an agreement to manage one cinema with 8 screens (the “Consolidated
Entertainment” acquisition) from Pacific Theatres Exhibition Corp. and
its affiliates, Consolidated Amusement Theatres, Inc. and Kenmore Rohnert, LLC
(collectively, the “Sellers”) for $70.2 million. The purchase price
was subsequently adjusted to $63.9 million as described below under post closing
adjustments, which were applied to reduce the principal amount owed under
financing provided by an affiliate of the Sellers (the “Nationwide
Note”). The financing of the transaction included $48.4 million of
new debt from GE Capital, net of deferred financing costs of $1.6 million, a
loan of $21.0 million as evidenced by the Nationwide Note, and $800,000 of cash
from Reading (see Note 11 – Notes Payable for a more
complete explanation of the new debt).
The
theaters and assets are located in California and Hawaii. We acquired
the theaters and other assets through certain special purpose entities formed by
us for this purpose. The acquired assets consist primarily of the
buildings and leasehold interests in fourteen of the theaters; a management
agreement with the Sellers under which we will manage one other theater; and
furniture, fixtures, equipment and miscellaneous inventory at the
theaters. The theaters contain a total of 181 screens, which compares
to 286 total screens owned or operated by us immediately prior to the
acquisition. The
leasehold interests have current terms ranging from approximately 2 to 12 years,
subject in some cases to renewal options in our favor. The management
agreement relating to the managed theater is for a term of approximately 4 years
and entitles us to a management fee equal to the cash flow of the
theater. These cinemas produced approximately an unaudited $78.0
million of gross revenues for the year ended December 31, 2007.
The
initial aggregate purchase price of the acquired assets was approximately $70.2
million, which has now been adjusted down to $63.9 million, and which is subject
to further additional post-closing adjustments based upon post-closing matters
relating to the possible opening of competing theater projects in the vicinity
of certain acquired theaters. These additional acquisition price
reductions can range from $0 to as much as the full amount of the Nationwide
Note as adjusted to date, if all contingencies were met. Pursuant to
the reduction in principal requirements of the seller’s note, during the second
quarter of 2008, the purchase price was reduced by $6.3 million resulting in a
decrease to the $8.0 million portion of the promissory note to $1.7 million and
the above mentioned reduction of the purchase price from approximately $70.2
million to $63.9 million. The reduction in purchase price results in
a permanent reduction in the original $21.0 million debt obligation to $14.7
million at June 30, 2008.
We have
made preliminary estimates of the value of the assets acquired from this
acquisition. These fair value estimates of the cinema assets acquired
have been allocated to the acquired tangible assets, identified intangible
assets and liabilities, consisting of the value of above and below-market
leases, if any, based in each case on their respective fair
values. Goodwill was recorded to the extent the purchase price
including certain acquisition and close costs exceeded the preliminary fair
value estimates of the net acquired assets. Once we have completed
our estimates of fair value, which includes the pending completion of an
appraisal of the assets acquired and liabilities assumed in the acquisition, we
will have completed the purchase accounting for the assets and liabilities in
accordance with SFAS No. 141, Business
Combinations. Our preliminary purchase price allocation is as
follows:
|
Inventory
|
$ | 271 | ||
|
Prepaid
assets
|
543 | |||
|
Property
& Equipment:
|
||||
|
Leasehold
improvements
|
32,303 | |||
|
Machinery and
equipment
|
4,329 | |||
|
Furniture and
fixtures
|
2,701 | |||
|
Intangibles:
|
||||
|
Trade name
|
7,220 | |||
|
Non-compete
agreement
|
400 | |||
|
Below market
leases
|
9,999 | |||
|
Goodwill
|
6,306 | |||
|
Trade
payables
|
(123 | ) | ||
|
Total
Purchase Price
|
$ | 63,949 |
The
unaudited pro forma results, assuming the above noted acquisition had occurred
as of January 1, 2007 for purposes of the 2008 and 2007 pro forma disclosures,
are presented below. These unaudited pro forma results have been
prepared for comparative purposes only and include certain adjustments, such as
increased depreciation and amortization expenses as a result of tangible and
intangible assets acquired in the acquisition, as well as higher interest
expense as a result of the debt incurred to finance the
acquisition. These unaudited pro forma results do not purport to be
indicative of what operating results would have been had the acquisition
occurred on January 1, 2007 and may not be indicative of future operating
results (dollars in thousands, except share data):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Revenue
|
$ | 53,752 | $ | 49,901 | $ | 97,823 | $ | 96,359 | ||||||||
|
Operating
income (loss)
|
(761 | ) | 1,742 | (1,132 | ) | 878 | ||||||||||
|
Net
income (loss) from continuing operations
|
282 | (1,422 | ) | (2,790 | ) | (5,609 | ) | |||||||||
|
Basic
and diluted loss per share from continuing operations
|
0.01 | (0.06 | ) | (0.12 | ) | (0.25 | ) | |||||||||
|
Weighted
average number of shares outstanding – basic
|
22,476,355 | 22,487,943 | 22,476,355 | 22,485,480 | ||||||||||||
|
Weighted
average number of shares outstanding – dilutive
|
22,763,826 | 22,487,943 | 22,476,355 | 22,485,480 | ||||||||||||
Australia
Properties
During
the first quarter of 2008, we have acquired or entered into agreements to
acquire a property in Australia, comprising four contiguous properties of
approximately 50,000 square feet, which we intend to develop. The
aggregate purchase price of these properties is $12.5 million (AUS$13.7
million), of which $2.5 million (AUS$2.8 million) relates to the three
properties that have been acquired and $10.0 million (AUS$10.9 million) relates
to the one property that is still under contract to be acquired and which is
subject to certain rezoning conditions.
Note
18 – Derivative Instruments
The
following table sets forth the terms of our interest rate swap derivative
instruments at June 30, 2008:
|
Type of Instrument
|
Notional Amount
|
Pay Fixed Rate
|
Receive Variable Rate
|
Maturity Date
|
|||||||||
|
Interest
rate swap
|
$ | 26,296,000 |
6.4400%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 15,610,000 |
6.6800%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 11,642,000 |
5.8800%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 3,347,000 |
6.3600%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 3,347,000 |
6.9600%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 2,677,000 |
|
7.0000%
|
7.9133%
|
December
31, 2008
|
|||||||
|
Interest
rate swap
|
$ | 1,329,000 |
7.1900%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 2,687,000 |
7.5900%
|
7.9133%
|
December
31, 2008
|
||||||||
|
Interest
rate swap
|
$ | 49,000,000 |
6.8540%
|
6.6975%
|
April
1, 2009
|
||||||||
|
Interest
rate swap
|
$ | 1,434,000 |
8.2500%
|
n/a
|
December
31, 2008
|
||||||||
In
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), we marked our interest
rate swap instruments to market on the consolidated balance sheet resulting in a
$754,000 and $815,000 decrease to interest expense during the three and six
months ended June 30, 2008, respectively, and a $74,000 and $111,000 increase to
interest expense during the three and six months ended June 30, 2007,
respectively. At June 30, 2008 and December 31, 2007, we have
recorded the fair market value of our interest rate swaps of $1.3 million and
$526,000, respectively, as an other noncurrent asset. The last swap
listed above with a notional amount of $1.4 million does not have a “Receive
Variable Rate” because the instrument will not be effective until July 1,
2008. In accordance with SFAS 133, we have not designated any of our
current interest rate swap positions as financial reporting hedges.
As part
of our newly adopted GE Capital loan, we are required to swap 50% our variable
rate loan for fixed rate loans for a minimum period of two
years. During April 2008, we entered into a $49.0 million swap
contract to comply with this requirement. This swap balance is
scheduled to decline to $42.0 million on April 1, 2009 and to $33.0 million on
April 1, 2010.
Note
19 – Fair Value of Financial Instruments
|
Book Value
|
Fair Value
|
|||||||||||
|
Financial
Instrument
|
Level
|
June
30, 2008
|
June
30, 2008
|
|||||||||
|
Investment
in marketable securities
|
1
|
$ | 4,939 | $ | 4,939 | |||||||
|
Interest
rate swaps asset
|
2
|
$ | 1,342 | $ | 1,342 | |||||||
SFAS 157
(see Note 1 – Basis of
Presentation) establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. As
presented in the table above, the statement requires that assets and liabilities
carried at fair value be classified and disclosed in one of the following three
categories:
Level 1:
Quoted market prices in active markets for identical assets or
liabilities.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3:
Unobservable inputs that are not corroborated by market data.
We use
appropriate valuation techniques based on the available inputs to measure the
fair values of our assets and liabilities. When available, we measure
fair value using Level 1 inputs because they generally provide the most reliable
evidence of fair value.
We used
the following methods and assumptions to estimate the fair values of the assets
and liabilities in the table above.
Level 1 Fair Value
Measurements – are based on market quotes of our marketable
securities.
Level 2 Fair Value
Measurements – Interest
Rate Swaps – The fair value of interest rate swaps are estimated using
internal discounted cash flow calculations based upon forward interest rate
curves and quotes obtained from counterparties to the agreements.
Level 3 Fair Value
Measurements – we do not have any assets or liabilities that fall into
this category.
Note
20– Subsequent Events
Nationwide Loan
Draw
As
indicated in Note 11 – Notes
Payable, the Sellers of the Pacific Theaters assets, agreed to provide us
up to three additional loans. We drew down on the first and second of
these loans on July 21, 2008 of $3.0 million and $1.5 million,
respectively.
Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
As Reading International, Inc. (RDI and
collectively with our consolidated subsidiaries, “Reading” and “we,” “us” or
“our”), our businesses consist primarily of:
|
|
·
|
the
development, ownership, and operation of multiplex cinemas in the United
States, Australia, and New Zealand;
and
|
|
|
·
|
the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United States, including
entertainment-themed retail centers (“ETRC’s”) in Australia and New
Zealand and live theatre assets in Manhattan and Chicago in the United
States.
|
We believe cinema exhibition to be a
business that will likely continue to generate fairly consistent cash flows in
the years ahead. This is based on our belief that people will
continue to spend some reasonable portion of their entertainment dollar on
entertainment outside of the home and that, when compared to other forms of
outside the home entertainment, movies continue to be a popular and
competitively priced option. In keeping with our business plan of
being opportunistic in adding to our existing cinema portfolio, on February 22,
2008, we acquired 14 cinemas with 173 screens in Hawaii and California and
entered into an agreement to manage one cinema with 8 screens (the “Consolidated
Entertainment” acquisition) and we continue to consider the acquisition of
cinema assets currently being offered for sale in Australia, New Zealand, and
the United States. Also, in April 2008, we opened a leased cinema in
Rouse Hill, Australia with 9 screens. Nevertheless, we believe it is
likely that, over the long term, we will be reinvesting the majority our free
cash flow into our general real estate development activities. We
anticipate that our cinema operations will continue as our main source of cash
flow and will support our real estate oriented activities.
In short, while we do have operating
company attributes, we see ourselves principally as a hard asset company and
intend to add to shareholder value by building the value of our portfolio of
tangible assets.
In
addition, we may from time to time identify opportunities to expand our existing
businesses and asset base, or to otherwise profit, through the acquisition of
interests in other publicly traded companies, both in the United States and in
the overseas jurisdictions in which we do business. At June 30, 2008,
our investments in the securities of other public companies aggregated $4.9
million, based on the closing price of such securities on that
date. We may also, in addition to our investment in various private
cinema joint ventures, take positions in private companies.
We manage
our worldwide cinema business under various different brands:
|
|
·
|
in
the US, under the Reading, Angelika Film Center,
Consolidated Theatres and City Cinemas
brands;
|
|
|
·
|
in
Australia, under the Reading brand;
and
|
|
|
·
|
in
New Zealand, under the Reading and Rialto
brands.
|
At June
30, 2008, we owned and operated 50 cinemas with 413 screens, had interests in
certain unconsolidated joint ventures and entities that own an additional 7
cinemas with 46 screens and managed 3 cinemas with 17 screens.
While remaining opportunistic in our
acquisitions of cinema assets, our business plan going forward is to build-out
our existing development properties and to seek out additional real estate
development opportunities while continuing to use and judiciously expand our
presence in the cinema exhibition and live theatre business, by identifying,
developing, and acquiring cinema and live theatre properties when and where
appropriate.
A significant portion of our business
is conducted in Australia and New Zealand, and as such, we are subject to a
certain degree of currency risk. We do not engage in currency hedging
activities. Rather, to the extent possible, we operate our Australian
and New Zealand operations on a self-funding basis. Our policy in
Australia and New Zealand is to match revenues and expenses, whenever possible,
in local currencies. As a result, the majority of our expenses in
Australia and New Zealand have been procured in local currencies. Due
to the developing nature of our operations in Australia and New Zealand, our
revenues are not yet significantly greater than our operating
expenses. The resulting natural operating hedge has led to a
negligible foreign currency effect on our net earnings. However, with
the recent reduction in our New Zealand and Australia debt as a result of the
application of the proceeds of the US subordinated debt placement in the first
quarter of 2007, foreign currency can have a significant effect on the value of
assets and liabilities with fluctuations noted in other comprehensive
income. As we continue to progress with our acquisition and
development activities in Australia and New Zealand, we cannot assure you that
the foreign currency effect on our earnings will be insignificant in the
future.
We continue to acquire, to dispose of,
or to reposition assets in accordance with our business plan. For a
description of our acquisitions so far in 2008, see Note 17 – Acquisitions to our June 30,
2008 Consolidated Financial Statements.
Results
of Operations
As previously stated, with the purchase
of the Consolidated Entertainment cinemas in February 2008 and the addition of
our newly opened Rouse Hill cinema in Australia, at June 30, 2008, we owned and
operated 50 cinemas with 413 screens, had interests in certain unconsolidated
joint ventures and entities that own an additional 7 cinemas with 46 screens and
managed 3 cinemas with 17 screens. Regarding real estate, we owned
and operated during the period four ETRC’s that we have developed in Australia
and New Zealand; owned the fee interests in four developed commercial properties
in Manhattan and Chicago, all of which are improved with live theatres, which
together comprise seven stages and, in two cases, ancillary retail and
commercial space; owned the fee interests underlying one of our Manhattan
cinemas and hold for development an additional seven parcels (aggregating
approximately 123 acres) located principally in urbanized areas of Australia and
New Zealand. Two of these parcels, Burwood and Moonee Ponds, comprise
approximately 54 acres, and are in areas designated by the provincial government
of Victoria, Australia as “major or principal activity centres,” and we are
currently in the planning phases of their development.
Operating expense includes costs
associated with the day-to-day operations of the cinemas and live theatres and
the management of rental properties. Our year-to-year results of
operation were principally impacted by the following:
|
|
·
|
the
above mentioned acquisition on February 22, 2008 of 15 cinemas with 181
screens in Hawaii and California as part of the Consolidated Entertainment
acquisition;
|
|
|
·
|
the
acquisition in February 2007, of the long-term ground lease interest
underlying our Tower Theater in Sacramento, California (the principal art
cinema in Sacramento); and
|
|
|
·
|
the
increase in the value of the Australian dollar vis-à-vis the US dollar
from $0.8491, as of June 30, 2007, to $0.9562, as of June 30,
2008. The New Zealand dollar to US dollar relationship was
basically flat between these dates.
|
The
tables below summarize the results of operations for each of our principal
business segments for the three (“2008 Quarter”) and six (“2008 Six Months”)
months ended June 30, 2008 and the three (“2007 Quarter”) and six (“2007 Six
Months”) months ended June 30, 2007, respectively (dollars in
thousands):
|
Three
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 49,488 | $ | 5,813 | $ | (1,550 | ) | $ | 53,751 | |||||||
|
Operating
expense
|
43,330 | 2,296 | (1,550 | ) | 44,076 | |||||||||||
|
Depreciation
& amortization
|
4,060 | 1,287 | -- | 5,347 | ||||||||||||
|
General
& administrative expense
|
1,129 | 432 | -- | 1,561 | ||||||||||||
|
Segment
operating income
|
$ | 969 | $ | 1,798 | $ | -- | $ | 2,767 | ||||||||
|
Three
months ended June 30, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 26,034 | $ | 5,564 | $ | (1,459 | ) | $ | 30,139 | |||||||
|
Operating
expense
|
21,390 | 1,864 | (1,459 | ) | 21,795 | |||||||||||
|
Depreciation
& amortization
|
1,798 | 1,108 | -- | 2,906 | ||||||||||||
|
General
& administrative expense
|
761 | 271 | -- | 1,032 | ||||||||||||
|
Segment
operating income
|
$ | 2,085 | $ | 2,321 | $ | -- | $ | 4,406 | ||||||||
|
Reconciliation
to consolidated net income:
|
2008
Quarter
|
2007
Quarter
|
||||||
|
Total
segment operating income
|
$ | 2,767 | $ | 4,406 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
181 | 141 | ||||||
|
General and administrative
expense
|
3,348 | 2,847 | ||||||
|
Operating
income (loss)
|
(762 | ) | 1,418 | |||||
|
Interest expense,
net
|
(3,039 | ) | (1,950 | ) | ||||
|
Other income
|
1,671 | 465 | ||||||
|
Minority
interest
|
182 | (154 | ) | |||||
|
Gain on sale of a discontinued
operation
|
-- | 1,912 | ||||||
|
Income tax
expense
|
(407 | ) | (443 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
189 | 386 | ||||||
|
Gain on sale of unconsolidated
entity
|
2,450 | -- | ||||||
|
Net
income
|
$ | 284 | $ | 1,634 | ||||
|
Six
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 84,831 | $ | 11,763 | $ | (3,116 | ) | $ | 93,478 | |||||||
|
Operating
expense
|
72,301 | 4,410 | (3,116 | ) | 73,595 | |||||||||||
|
Depreciation
& amortization
|
6,669 | 2,382 | -- | 9,051 | ||||||||||||
|
General
& administrative expense
|
1,898 | 598 | -- | 2,496 | ||||||||||||
|
Segment
operating income
|
$ | 3,963 | $ | 4,373 | $ | -- | $ | 8,336 | ||||||||
|
Six
months ended June 30, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 50,540 | $ | 10,405 | $ | (2,830 | ) | $ | 58,115 | |||||||
|
Operating
expense
|
40,881 | 3,865 | (2,830 | ) | 41,916 | |||||||||||
|
Depreciation
& amortization
|
3,592 | 2,146 | -- | 5,738 | ||||||||||||
|
General
& administrative expense
|
1,525 | 457 | -- | 1,982 | ||||||||||||
|
Segment
operating income
|
$ | 4,542 | $ | 3,937 | $ | -- | $ | 8,479 | ||||||||
|
Reconciliation
to consolidated net income:
|
2008
Six Months
|
2007
Six Months
|
||||||
|
Total
segment operating income
|
$ | 8,336 | $ | 8,479 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
360 | 278 | ||||||
|
General and administrative
expense
|
7,101 | 5,573 | ||||||
|
Operating
income
|
875 | 2,628 | ||||||
|
Interest expense,
net
|
(5,876 | ) | (3,701 | ) | ||||
|
Other income
(expense)
|
3,045 | (456 | ) | |||||
|
Minority
interest
|
(161 | ) | (495 | ) | ||||
|
Gain on sale of a discontinued
operation
|
-- | 1,912 | ||||||
|
Income tax
expense
|
(824 | ) | (942 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
547 | 2,042 | ||||||
|
Gain on sale of unconsolidated
entity
|
2,450 | -- | ||||||
|
Net
income
|
$ | 56 | $ | 988 | ||||
Cinema
Included
in the cinema segment above is revenue and expense from the operations of 51
cinema complexes with 421 screens during the 2008 Quarter and 35 cinema
complexes with 231 screens during the 2007 Quarter. The following
tables detail our cinema segment operating results for the three months ended
June 30, 2008 and 2007, respectively (dollars in thousands):
|
Three
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,862 | $ | 12,145 | $ | 3,627 | $ | 34,634 | ||||||||
|
Concessions
revenue
|
7,732 | 4,225 | 1,089 | 13,046 | ||||||||||||
|
Advertising
and other revenues
|
868 | 715 | 225 | 1,808 | ||||||||||||
|
Total
revenues
|
27,462 | 17,085 | 4,941 | 49,488 | ||||||||||||
|
Cinema
costs
|
22,882 | 13,609 | 3,976 | 40,467 | ||||||||||||
|
Concession
costs
|
1,598 | 975 | 290 | 2,863 | ||||||||||||
|
Total
operating expense
|
24,480 | 14,584 | 4,266 | 43,330 | ||||||||||||
|
Depreciation
and amortization
|
2,762 | 833 | 465 | 4,060 | ||||||||||||
|
General
& administrative expense
|
758 | 362 | 9 | 1,129 | ||||||||||||
|
Segment
operating income (loss)
|
$ | (538 | ) | $ | 1,306 | $ | 201 | $ | 969 | |||||||
|
Three
Months Ended June 30, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 3,911 | $ | 10,915 | $ | 4,113 | $ | 18,939 | ||||||||
|
Concessions
revenue
|
1,151 | 3,615 | 1,134 | 5,900 | ||||||||||||
|
Advertising
and other revenues
|
377 | 615 | 203 | 1,195 | ||||||||||||
|
Total
revenues
|
5,439 | 15,145 | 5,450 | 26,034 | ||||||||||||
|
Cinema
costs
|
4,178 | 11,567 | 4,278 | 20,023 | ||||||||||||
|
Concession
costs
|
242 | 835 | 290 | 1,367 | ||||||||||||
|
Total
operating expense
|
4,420 | 12,402 | 4,568 | 21,390 | ||||||||||||
|
Depreciation
and amortization
|
491 | 873 | 434 | 1,798 | ||||||||||||
|
General
& administrative expense
|
532 | 227 | 2 | 761 | ||||||||||||
|
Segment
operating income (loss)
|
$ | (4 | ) | $ | 1,643 | $ | 446 | $ | 2,085 | |||||||
|
|
·
|
Cinema
revenue increased for the 2008 Quarter by $23.5 million or 90.1% compared
to the same period in 2007. The 2008 Quarter increase was
primarily a result of $21.3 million of revenue from our newly acquired
Consolidated Entertainment cinemas and improved results from our Australia
operations including $1.2 million from admissions and $710,000 from
concessions and other revenues, offset by lower cinema revenues from our
New Zealand operations of $509,000.
|
|
|
·
|
Operating
expense increased for the 2008 Quarter by $21.9 million or 102.1% compared
to the same period in 2007. This increase followed the
aforementioned increase in revenues. Overall, our operating
expenses as a ratio to gross revenue increased from 82.2% to 87.6% for the
2007 and 2008 Quarters, respectively. This increase in cinema
costs was driven by the US and primarily related to higher film rent
expense associated with our newly acquired Consolidated Entertainment
cinemas whose film product is primarily wide release films resulting in
higher film rent cost compared to our predominately pre-acquisition art
cinemas, which generally have lower film rent
costs.
|
|
|
·
|
Depreciation
and amortization expense increased for the 2008 Quarter by $2.3 million or
125.8% compared to the same period in 2007 primarily related to our newly
acquired Consolidated Entertainment cinemas’
assets.
|
|
|
·
|
General
and administrative costs increased for the 2008 Quarter by $368,000 or
48.4% compared to the same period in 2007 primarily related to the
purchase and operations of our newly acquired Consolidated Entertainment
cinemas and legal matters associated with our cinema
assets.
|
|
|
·
|
The
Australia and New Zealand quarterly average exchange rates have increased
by 13.5% and 4.7%, respectively, since 2007, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income was
minimal.
|
|
|
·
|
Because
of the above, cinema segment income decreased for the 2008 Quarter by $1.1
million compared to the same period in
2007.
|
The
following tables detail our cinema segment operating results for the six months
ended June 30, 2008 and 2007, respectively (dollars in thousands):
|
Six
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 28,244 | $ | 24,501 | $ | 7,605 | $ | 60,350 | ||||||||
|
Concessions
revenue
|
10,933 | 8,182 | 2,232 | 21,347 | ||||||||||||
|
Advertising
and other revenues
|
1,446 | 1,249 | 439 | 3,134 | ||||||||||||
|
Total
revenues
|
40,623 | 33,932 | 10,276 | 84,831 | ||||||||||||
|
Cinema
costs
|
33,295 | 26,214 | 8,149 | 67,658 | ||||||||||||
|
Concession
costs
|
2,242 | 1,829 | 572 | 4,643 | ||||||||||||
|
Total
operating expense
|
35,537 | 28,043 | 8,721 | 72,301 | ||||||||||||
|
Depreciation
and amortization
|
4,205 | 1,535 | 929 | 6,669 | ||||||||||||
|
General
& administrative expense
|
1,296 | 588 | 14 | 1,898 | ||||||||||||
|
Segment
operating income (loss)
|
$ | (415 | ) | $ | 3,766 | $ | 612 | $ | 3,963 | |||||||
|
Six
Months Ended June 30, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 9,102 | $ | 20,545 | $ | 7,397 | $ | 37,044 | ||||||||
|
Concessions
revenue
|
2,524 | 6,480 | 2,125 | 11,129 | ||||||||||||
|
Advertising
and other revenues
|
833 | 1,100 | 434 | 2,367 | ||||||||||||
|
Total
revenues
|
12,459 | 28,125 | 9,956 | 50,540 | ||||||||||||
|
Cinema
costs
|
8,904 | 21,737 | 7,729 | 38,370 | ||||||||||||
|
Concession
costs
|
500 | 1,464 | 547 | 2,511 | ||||||||||||
|
Total
operating expense
|
9,404 | 23,201 | 8,276 | 40,881 | ||||||||||||
|
Depreciation
and amortization
|
978 | 1,774 | 840 | 3,592 | ||||||||||||
|
General
& administrative expense
|
1,071 | 450 | 4 | 1,525 | ||||||||||||
|
Segment
operating income
|
$ | 1,006 | $ | 2,700 | $ | 836 | $ | 4,542 | ||||||||
|
|
·
|
Cinema
revenue increased for the 2008 Six Months by $34.3 million or 67.8%
compared to the same period in 2007. The 2008 Six Months
increase was primarily a result of $27.8 million of revenue from our newly
acquired Consolidated Entertainment cinemas and improved results from our
Australia and New Zealand operations including $4.1 million from
admissions and $2.0 million from concessions and other
revenues.
|
|
|
·
|
Operating
expense increased for the 2008 Six Months by $31.4 million or 76.3%
compared to the same period in 2007. This increase followed the
aforementioned increase in revenues. Overall, our operating
expenses as a ratio to gross revenue increased from 80.9% to 85.2% for the
2007 and 2008 Six Months, respectively. The increase was
primarily driven by the same factor that drove the 2008 Quarter,
above.
|
|
|
·
|
Depreciation
and amortization expense increased for the 2008 Six Months by $3.1 million
or 85.7% compared to the same period in 2007 primarily related to our
newly acquired Consolidated Entertainment cinemas’ assets being added
during the 2008 Six Months.
|
|
|
·
|
General
and administrative costs increased for the 2008 Six Months by $373,000 or
24.5% compared to the same period in 2007 primarily related to our newly
acquired Consolidated Entertainment cinemas. The
increase was primarily driven by the same factor that drove the 2008
Quarter, above.
|
|
|
·
|
The
Australia and New Zealand quarterly average exchange rates have increased
by 14.3% and 9.0%, respectively, since 2007, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income was
minimal.
|
|
|
·
|
Because
of the above, cinema segment income decreased for the 2008 Six Months by
$579,000 compared to the same period in
2007.
|
Real
Estate
For the three months ended June 30,
2008, our third party, rental generating real estate holdings consisted
of:
|
|
·
|
ETRC’s
at Belmont in Perth; at Auburn in Sydney; and at Courtenay Central in
Wellington, New Zealand; and our Newmarket shopping center in Brisbane,
Australia;
|
|
|
·
|
three
single auditorium live theatres in Manhattan (Minetta Lane, Orpheum, and
Union Square) and a four auditorium live theatre complex in Chicago (The
Royal George) and, in the case of the Union Square and the Royal George
their accompanying ancillary retail and commercial
tenants;
|
|
|
·
|
the
ancillary retail and commercial tenants at some of our non-ETRC cinema
locations; and
|
|
|
·
|
certain
raw land, used in our historic activities, which generates minimal
rent.
|
The
following tables detail our real estate segment operating results for the three
months ended June 30, 2008 and 2007, respectively (dollars in
thousands):
|
Three
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 1,131 | $ | -- | $ | -- | $ | 1,131 | ||||||||
|
Property
rental income
|
411 | 2,517 | 1,754 | 4,682 | ||||||||||||
|
Total
revenues
|
1,542 | 2,517 | 1,754 | 5,813 | ||||||||||||
|
Live
theatre costs
|
540 | -- | -- | 540 | ||||||||||||
|
Property
rental cost
|
495 | 828 | 433 | 1,756 | ||||||||||||
|
Total
operating expense
|
1,035 | 828 | 433 | 2,296 | ||||||||||||
|
Depreciation
and amortization
|
91 | 651 | 545 | 1,287 | ||||||||||||
|
General
& administrative expense
|
2 | 392 | 38 | 432 | ||||||||||||
|
Segment
operating income
|
$ | 414 | $ | 646 | $ | 738 | $ | 1,798 | ||||||||
|
Three
Months Ended June 30, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 997 | $ | -- | $ | -- | $ | 997 | ||||||||
|
Property
rental income
|
370 | 2,445 | 1,752 | 4,567 | ||||||||||||
|
Total
revenues
|
1,367 | 2,445 | 1,752 | 5,564 | ||||||||||||
|
Live
theatre costs
|
526 | -- | -- | 526 | ||||||||||||
|
Property
rental cost
|
211 | 717 | 410 | 1,338 | ||||||||||||
|
Total
operating expense
|
737 | 717 | 410 | 1,864 | ||||||||||||
|
Depreciation
and amortization
|
95 | 590 | 423 | 1,108 | ||||||||||||
|
General
& administrative expense
|
2 | 164 | 105 | 271 | ||||||||||||
|
Segment
operating income
|
$ | 533 | $ | 974 | $ | 814 | $ | 2,321 | ||||||||
|
|
·
|
Real
estate revenue increased for the 2008 Quarter by $249,000 or 4.5% compared
to the same period in 2007. The increase was primarily related
to rental revenues from our newly acquired Consolidated Entertainment
cinemas that have ancillary real estate and an increase in revenues from
our U.S. live theatres.
|
|
|
·
|
Operating
expense for the real estate segment increased for the 2008 Quarter by
$432,000 or 23.2% compared to the same period in 2007. This
increase in expense was primarily related to our newly acquired
Consolidated Entertainment cinemas that have ancillary real estate coupled
with increasing utility and other operating costs primarily in our US
properties.
|
|
|
·
|
Depreciation
expense for the real estate segment increased by $179,000 or 16.2% for the
2008 Six Months compared to the same period in
2007.
|
|
|
·
|
General
and administrative costs increased for the 2008 Quarter by $161,000 or
59.4% compared to the same period in 2007 primarily related to an increase
in administrative activities associated with our properties in
Australia.
|
|
|
·
|
The
Australia and New Zealand quarterly average exchange rates have increased
by 13.5% and 4.7%, respectively, since 2007, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income was
minimal.
|
|
|
·
|
As
a result of the above, real estate segment income decreased for the 2008
Quarter by $523,000 compared to the same period in
2007.
|
The
following tables detail our real estate segment operating results for the six
months ended June 30, 2008 and 2007, respectively (dollars in
thousands):
|
Six
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 2,054 | $ | -- | $ | -- | $ | 2,054 | ||||||||
|
Property
rental income
|
924 | 5,022 | 3,763 | 9,709 | ||||||||||||
|
Total
revenues
|
2,978 | 5,022 | 3,763 | 11,763 | ||||||||||||
|
Live
theatre costs
|
1,075 | -- | -- | 1,075 | ||||||||||||
|
Property
rental cost
|
723 | 1,694 | 918 | 3,335 | ||||||||||||
|
Total
operating expense
|
1,798 | 1,694 | 918 | 4,410 | ||||||||||||
|
Depreciation
and amortization
|
181 | 1,271 | 930 | 2,382 | ||||||||||||
|
General
& administrative expense
|
14 | 523 | 61 | 598 | ||||||||||||
|
Segment
operating income
|
$ | 985 | $ | 1,534 | $ | 1,854 | $ | 4,373 | ||||||||
|
Six
Months Ended June 30, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 1,729 | $ | -- | $ | -- | $ | 1,729 | ||||||||
|
Property
rental income
|
907 | 4,483 | 3,286 | 8,676 | ||||||||||||
|
Total
revenues
|
2,636 | 4,483 | 3,286 | 10,405 | ||||||||||||
|
Live
theatre costs
|
1,010 | -- | -- | 1,010 | ||||||||||||
|
Property
rental cost
|
562 | 1,441 | 852 | 2,855 | ||||||||||||
|
Total
operating expense
|
1,572 | 1,441 | 852 | 3,865 | ||||||||||||
|
Depreciation
and amortization
|
191 | 1,147 | 808 | 2,146 | ||||||||||||
|
General
& administrative expense
|
14 | 309 | 134 | 457 | ||||||||||||
|
Segment
operating income
|
$ | 859 | $ | 1,586 | $ | 1,492 | $ | 3,937 | ||||||||
|
|
·
|
Real
estate revenue increased for the 2008 Six Months by $1.4 million or 13.1%
compared to the same period in 2007. The increase was primarily
related to real estate associated with our newly acquired Consolidated
Entertainment cinemas, higher rental revenues from the majority of our
Australia tenancies, and our newly acquired properties in New
Zealand. Also, revenue from our domestic live theatre
operations was higher than the same period in
2007.
|
|
|
·
|
Operating
expense for the real estate segment increased for the 2008 Six Months by
$545,000 or 14.1% compared to the same period in 2007. This
increase in expense was primarily related to our newly acquired
Consolidated Entertainment cinemas that have ancillary real estate coupled
with increasing utility and other operating costs primarily in our US
properties.
|
|
|
·
|
Depreciation
expense for the real estate segment increased by $236,000 or 11.0% for the
2008 Six Months compared to the same period in
2007.
|
|
|
·
|
General
and administrative costs increased for the 2008 Six Months by $141,000 or
30.9% compared to the same period in 2007 primarily related to an increase
in administrative activities associated with our properties in
Australia.
|
|
|
·
|
The
Australia and New Zealand quarterly average exchange rates have increased
by 14.3% and 9.0%, respectively, since 2007, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income
was
|
|
|
minimal.
|
|
|
·
|
As
a result of the above, real estate segment income increased for the 2008
Six Months by $436,000 compared to the same period in
2007.
|
Corporate
General and administrative expense
includes expenses that are not directly attributable to other operating
segments. General and administrative expense increased by $501,000 in
the 2008 Quarter compared to the 2007 Quarter and by $1.5 million in the 2008
Six Months compared to the 2007 Six Months. These increases primarily
related to additional pension costs in 2008 for our Chief Operating Officer;
cost related to the Supplemental Executive Retirement Plan; and legal and
professional fees associated principally with our real estate investment
activities.
Net interest expense increased by $1.1
million and by $2.2 million for the 2008 Quarter and the 2008 Six Months,
respectively, compared to last year primarily related to higher outstanding loan
balances during the 2008 compared to the 2007 associated with our current year’s
acquisitions.
Other income increased by approximately
$1.2 million and by $3.5 million for the 2008 Quarter and the 2008 Six Months,
respectively, compared to the same periods last year. The quarterly
increase related to a $314,000 receipt related to our Burstone litigation and
$910,000 of insurance proceeds related to damage caused by Hurricane George in
1998 to one of our previously owned cinemas in Puerto Rico. The six
month increase related to the aforementioned insurance proceeds and litigation
payment coupled with settlements on our Burstone litigation of $836,000 and
credit card dispute of $385,000 in 2008 and a $950,000 mark-to-market expense in
2007 not repeated in 2008 related to our option liability for the option held by
Sutton Hill Capital, LLC to acquire a 25% non-managing membership interest in
our Cinemas 1, 2 & 3 property.
During
the three and six months ended June 30, 2007, upon the fulfillment of our
commitment, we recorded the release of a deferred gain on the sale of a
discontinued operation of $1.9 million associated with a previously sold
property.
Equity
earnings of unconsolidated joint ventures and entities decreased by
approximately $197,000 and $1.5 million for the 2008 Quarter and the 2008 Six
Months, respectively compared to the same periods last year. The
decrease is primarily related to the changing sales activity in our investment
related to the 205-209 East
57th Street Associates, LLC, that has now completed the development of a
residential condominium complex in midtown Manhattan called Place
57. During 2007 and 2006, all of the residential condominiums were
sold and only the retail condominium is still available for
sale. During 2007, the partnership closed on the sale of one and
seven condominiums during the three and six months ended June 30, 2007,
respectively, resulting in gross sales of $2.3 million and $22.6 million,
respectively, and equity earnings from unconsolidated joint ventures and
entities to us of $39,000 and $1.3 million, respectively.
In
addition to the aforementioned equity earnings, we recorded a gain on sale of
unconsolidated entities of $2.5 million (NZ$3.2 million), from the sale of our
interest in the cinema at Botany Downs, New Zealand.
Consolidated Net
Income/Losses
During
2008, we recorded net income of $284,000 and $56,000 for the 2008 Quarter and
2008 Six Months, respectively. During 2007, we recorded a net income
of $1.6 million and $988,000 for the 2007 Quarter and 2007 Six Months,
respectively. As noted above, the increase in earnings is primarily
related to improved operating results from both our cinema (driven primarily by
our US acquisition) and our real estate segments offset by increases in interest
expense, litigation expense and a decrease in equity earnings.
Acquisitions
Consolidated
Entertainment Cinemas
On
February 22, 2008, we completed the acquisition of fifteen motion picture
exhibition theaters and theater-related assets from Pacific Theatres Exhibition
Corp. and its affiliates, Consolidated Amusement Theatres, Inc. and Kenmore
Rohnert, LLC (collectively, the “Sellers”) for $70.2 million. The
purchase price has been subsequently reduced to $63.9 million during the quarter
ended June 30, 2008 due to the settlement of a contingency in the purchase and
sales agreement. The cinemas, which are located in the United States,
contain 181 screens with annual revenue of approximately $78.0
million. The acquisition was made through certain wholly owned
subsidiaries of RDI and was financed principally by a combination of debt
financing from GE Capital Corporation and financing provided by an affiliate of
the Sellers. For a more detailed description of this acquisition, see
Note 17 – Acquisitions.
Australia
Properties
Since the
close of 2007, we have acquired or entered into agreements to acquire
approximately 50,000 square foot of property in Australia, comprising four
contiguous properties, which we intend to develop. The aggregate
purchase price of these properties is $12.5 million (AUS$13.7 million), of which
$2.5 million (AUS$2.8 million) relates to the three properties that have been
acquired and $10.0 million (AUS$10.9 million) relates to the one property that
is still under contract which is subject to certain rezoning
conditions.
Business
Plan, Capital Resources, and Liquidity
Business
Plan
Our
cinema exhibition business plan is to continue to identify, develop, and acquire
cinema properties, where reasonably available, that allow us to leverage our
cinema expertise and technology over a larger operating base. Our
real estate business plan is to continue to develop our existing land assets,
focusing principally on uses that incorporate entertainment elements such as
cinemas, and to continue to be sensitive to opportunities to convert our
entertainment assets to higher and better uses. In addition, we will
actively seek out potential real estate sites in Australia and New Zealand that
show profitable redevelopment opportunities.
Contractual
Obligations
The
following table provides information with respect to the maturities and
scheduled principal repayments of our secured debt and lease obligations at June
30, 2008 (in thousands):
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||||||
|
Long-term
debt
|
$ | 525 | $ | 1,267 | $ | 10,410 | $ | 97,151 | $ | 16,060 | $ | 63,517 | ||||||||||||
|
Notes
payable to related parties
|
-- | -- | 14,000 | -- | -- | -- | ||||||||||||||||||
|
Subordinated
notes
|
-- | -- | -- | -- | -- | 51,547 | ||||||||||||||||||
|
Pension
liability
|
3 | 10 | 15 | 20 | 25 | 2,370 | ||||||||||||||||||
|
Lease
obligations
|
12,349 | 24,949 | 24,559 | 24,115 | 22,674 | 96,808 | ||||||||||||||||||
|
Estimated
interest on long-term debt
|
9,584 | 19,043 | 14,390 | 13,094 | 8,271 | 50,700 | ||||||||||||||||||
|
Total
|
$ | 22,461 | $ | 45,269 | $ | 63,374 | $ | 134,380 | $ | 47,030 | $ | 264,942 | ||||||||||||
Estimated interest on long-term debt is
based on the anticipated loan balances for future periods calculated against
current fixed and variable interest rates.
Unconsolidated
Debt
Total
debt of unconsolidated joint ventures and entities was $2.6 million and $4.2
million as of June 30, 2008 and December 31, 2007, respectively. Our
share of unconsolidated debt, based on our ownership percentage, was $872,000
and $2.0 million as of June 30, 2008 and December 31, 2007,
respectively. This debt is without recourse to Reading as of June 30,
2008 and December 31, 2007.
Off-Balance Sheet
Arrangements
There are
no off-balance sheet transactions, arrangements or obligations (including
contingent obligations) that have, or are reasonably likely to have, a current
or future material effect on our financial condition, changes in the financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Liquidity and Capital
Resources
Our ability to generate sufficient cash
flows from operating activities in order to meet our obligations and commitments
drives our liquidity position. This is further affected by our
ability to obtain adequate, reasonable financing and/or to convert
non-performing or non-strategic assets into cash. We cannot separate
liquidity from capital resources in achieving our long-term goals in order to
meet our debt servicing requirements.
Currently, our liquidity needs arise
mainly from:
|
|
·
|
working
capital requirements;
|
|
|
·
|
debt
servicing requirements; and
|
|
|
·
|
capital
expenditures, centered on obtaining the right financing for the
development of our Burwood
property.
|
Operating
Activities
Cash
provided by operations was $12.3 million in the 2008 Six Months compared to $7.2
million for the 2007 Six Months. The increase in cash provided by
operations of $5.1 million is due primarily to:
|
|
·
|
increased
cinema operational cash flow primarily from our Australia and domestic
acquisition operations;
|
|
|
·
|
increased
real estate operational cash flow predominately from our Australia and New
Zealand operations; and
|
|
|
·
|
one
time cash receipts related to litigation and other claims of $2.4
million;
|
offset
by
|
|
·
|
a
decrease in distributions from predominately our Place 57 joint venture of
$3.6 million.
|
Investing
Activities
Cash used in investing activities for
the 2008 Six Months increased by $30.5 million to $57.8 million from $27.4
million compared to the same period in 2007. The $57.8 million cash
used for the 2008 Six Months was primarily related to:
|
|
·
|
$49.2
million to purchase the assets of the Consolidated Cinemas
circuit;
|
|
|
·
|
$2.5
million to purchase real estate assets associated with our Australia
properties investments with Landplan Property Parties Pty Ltd;
and
|
|
|
·
|
$12.1
million in property enhancements to our existing
properties;
|
offset
by
|
|
·
|
$2.0
million of deposit returned upon acquisition of the Consolidated Cinema
circuit;
|
|
|
·
|
$910,000
of proceeds from insurance settlement;
and
|
|
|
·
|
$3.3
million of cash received from the sale of our interest in the Botany Downs
cinema in New Zealand.
|
The $27.4 million cash used for the
2007 Six Months was primarily related to:
|
|
·
|
$11.9
million to purchase marketable
securities;
|
|
|
·
|
$11.8
million to purchase real estate assets including $11.2 million for real
estate purchases made in New Zealand, $100,000 for the purchase of the
Cinemas 1, 2, & 3 building, and $493,000 for the purchase of the
ground lease of our Tower Cinema in Sacramento,
California;
|
|
|
·
|
$7.9
million in property enhancements to our properties;
and
|
|
|
·
|
$1.5
million in our investment in Reading International Trust I securities (the
issuer of our Trust Preferred
Securities);
|
offset
by
|
|
·
|
$4.0
million in cash provided by the sale of marketable securities;
and
|
|
|
·
|
$1.4
million in distributions from our investment in Place
57.
|
Financing
Activities
Cash
provided by financing activities for the 2008 Six Months increased by $19.5
million to $51.1 million from $31.6 million compared to the same period in
2007. The $51.1 million in cash provided in the 2008 Six Months was
primarily related to:
|
|
·
|
$48.0
million of net proceeds from our new GE Capital loan used to finance the
purchase of Consolidated Cinemas;
|
|
|
·
|
$6.6
million of net proceeds from our new Liberty Theatres loan;
and
|
|
|
·
|
$2.6
million of borrowing on our Australia credit
facility;
|
offset
by
|
|
·
|
$5.4
million of loan repayments including $5.3 million to paydown on our GE
Capital loan; and
|
|
|
·
|
$761,000
in distributions to minority
interests.
|
The $31.6
million in cash provided in the 2007 Six Months was primarily related
to:
|
|
·
|
$49.9
million of net proceeds from our new Trust Preferred
Securities;
|
|
|
·
|
$14.4
million of net proceeds from our new Euro-Hypo
loan;
|
|
|
·
|
$3.1
million of proceeds from our margin account on marketable securities;
and
|
|
|
·
|
$8.6
million of borrowing on our Australia and New Zealand credit
facilities;
|
|
|
offset
by
|
|
|
·
|
$43.5
million of cash used to retire bank indebtedness including $34.4 million
(NZ$50.0 million) to pay off our New Zealand term debt, $5.8 million
(AUS$7.4 million) to retire a portion of our bank indebtedness in
Australia, and $3.1 million to pay off our margin account on marketable
securities; and
|
|
|
·
|
$838,000
in distributions to minority
interests.
|
Critical Accounting
Policies
The Securities and Exchange Commission
defines critical accounting policies as those that are, in management’s view,
most important to the portrayal of the company’s financial condition and results
of operations and the most demanding in their calls on
judgment. Although accounting for our core business of cinema and
live theatre exhibition with a real estate focus is relatively straightforward,
we believe our most critical accounting policies relate to:
|
|
·
|
impairment
of long-lived assets, including goodwill and intangible
assets;
|
|
|
·
|
tax
valuation allowance and obligations;
and
|
|
|
·
|
legal
and environmental obligations.
|
These
critical accounting policies are fully discussed in our 2007 Annual Report and
you are advised to refer to that discussion.
Financial Risk
Management
Our
internally developed risk management procedure, seeks to minimize the
potentially negative effects of changes in foreign exchange rates and interest
rates on the results of operations. Our primary exposure to
fluctuations in the financial markets is currently due to changes in foreign
exchange rates between U.S and Australia and New Zealand, and interest
rates.
As our operational focus continues to
shift to Australia and New Zealand, unrealized foreign currency translation
gains and losses could materially affect our financial position. We
currently manage our currency exposure by creating, whenever possible, natural
hedges in Australia and New Zealand. This involves local country
sourcing of goods and services as well as borrowing in local
currencies.
Our
exposure to interest rate risk arises out of our long-term debt
obligations. Consistent with our internally developed guidelines, we
seek to reduce the negative effects of changes in interest rates by changing the
character of the interest rate on our long-term debt, converting a variable rate
into a fixed rate. Our internal procedures allow us to enter into
derivative contracts on certain borrowing transactions to achieve this
goal. Our Australian credit facilities provide for floating interest
rates but require that not less than a certain percentage of the loans be
swapped into fixed rate obligations using the derivative contracts.
In
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, we marked our interest rate swap
instruments to market on the consolidated balance sheet resulting in a $754,000
and $815,000 decrease to interest expense during the three and six months ended
June 30, 2008, respectively, and a $74,000 and $111,000 increase to interest
expense during the three and six months ended June 30, 2007,
respectively. At June 30, 2008 and December 31, 2007, we have
recorded the fair market value of our interest rate swaps of $1.3 million and
$526,000, respectively, as an other noncurrent asset. The last swap
listed above with a notional amount of $1.4 million does not have a “Receive
Variable Rate” because the instrument will not
be
effective until July 1, 2008. In accordance with SFAS 133, we have
not designated any of our current interest rate swap positions as financial
reporting hedges.
As part
of our newly adopted GE Capital loan, we are required to swap 50% our variable
rate loan for fixed rate loans for minimum period of two
years. During April 2008, we entered into a $49.0 million swap
contract to comply with this requirement.
Inflation
We
continually monitor inflation and the effects of changing
prices. Inflation increases the cost of goods and services
used. Competitive conditions in many of our markets restrict our
ability to recover fully the higher costs of acquired goods and services through
price increases. We attempt to mitigate the impact of inflation by
implementing continuous process improvement solutions to enhance productivity
and efficiency and, as a result, lower costs and operating
expenses. In our opinion, the effects of inflation have been managed
appropriately and as a result, have not had a material impact on our operations
and the resulting financial position or liquidity.
Litigation
We are
currently, and are from time to time, involved with claims and lawsuits arising
in the ordinary course of our business. Some examples of the types of
claims are:
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·
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contractual
obligations;
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·
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insurance
claims;
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·
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IRS
claims;
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·
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employment
matters;
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·
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environmental
matters; and
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·
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anti-trust
issues.
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Where we
are the plaintiffs, we expense all legal fees on an on-going basis and make no
provision for any potential settlement amounts until received. In
Australia, the prevailing party is entitled to recover its attorneys fees, which
typically works out to be approximately 60% of the amounts actually spent where
first class legal counsel is engaged at customary rates. Where we are
a plaintiff, we have likewise made no provision for the liability for the
defendant’s attorneys' fees in the event we were determined not to be the
prevailing party.
Where we are the defendants, we accrue
for probable damages, which may not be covered by insurance, as they become
known and can be reasonably estimated. In our opinion, any claims and
litigation in which we are currently involved are not reasonably likely to have
a material adverse effect on our business, results of operations, financial
position, or liquidity. However, we do not give any assurance as to
the ultimate outcome of such claims and litigation. The resolution of
such claims and litigation could be material to our operating results for any
particular period, depending on the level of income for such
period. There have been no material changes to our litigation
exposure since our Company’s 2007 Annual Report.
During
the quarter, two litigation matters were resolved. The Botany Downs
Litigation, (Tobrooke Holdings Ltd. Everard Entertainment Ltd) was resolved by
the sale of our 50% joint venture interest in the Botany Downs cinema to our
joint venture partner. The Whitehorse Litigation, Reading
Entertainment Australia Pty, Ltd vs. Burstone Victoria Pty, Ltd, was resolved
(after the exhaustion of all appeals) by the net payment by the defendants to us
of $830,000 (AUS$901,000) in the first quarter of 2008 and $314,000
(AUS$333,000) in the second quarter of 2008.
Forward-Looking
Statements
Our
statements in this interim quarterly report contain a variety of forward-looking
statements as defined by the Securities Litigation Reform Act of
1995. Forward-looking statements reflect only our expectations
regarding future events and operating performance and necessarily speak only as
of the date the information was prepared. No guarantees can be given
that our expectation will in fact be realized, in whole or in
part. You can recognize these statements by our use of words such as,
by way of example, “may,” “will,” “expect,” “believe,” and “anticipate” or other
similar terminology.
These
forward-looking statements reflect our expectation after having considered a
variety of risks and uncertainties. However, they are necessarily the
product of internal discussion and do not necessarily completely reflect the
views of individual members of our Board of Directors or of our management
team. Individual Board members and individual members of our
management team may have different view as to the risks and uncertainties
involved, and may have different views as to future events or our operating
performance.
Among the
factors that could cause actual results to differ materially from those
expressed in or underlying our forward-looking statements are the
following:
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·
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With
respect to our cinema operations:
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o
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The
number and attractiveness to movie goers of the films released in future
periods;
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o
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The
amount of money spent by film distributors to promote their motion
pictures;
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o
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The
licensing fees and terms required by film distributors from motion picture
exhibitors in order to exhibit their
films;
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o
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The
comparative attractiveness of motion pictures as a source of entertainment
and willingness and/or ability of consumers (i) to spend their dollars on
entertainment and (ii) to spend their entertainment dollars on movies in
an outside the home environment;
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o
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The
extent to which we encounter competition from other cinema exhibitors,
from other sources of outside of the home entertainment, and from inside
the home entertainment options, such as “home theaters” and competitive
film product distribution technology such as, by way of example, cable,
satellite broadcast, DVD and VHS rentals and sales, and so called “movies
on demand;” and
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o
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The
extent to and the efficiency with which, we are able to integrate
acquisitions of cinema circuits with our existing
operations.
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·
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With
respect to our real estate development and operation
activities:
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o
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The
rental rates and capitalization rates applicable to the markets in which
we operate and the quality of properties that we
own;
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o
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The
extent to which we can obtain on a timely basis the various land use
approvals and entitlements needed to develop our
properties;
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o
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The
risks and uncertainties associated with real estate
development;
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o
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The
availability and cost of labor and
materials;
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o
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Competition
for development sites and tenants;
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o
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Environmental
remediation issues; and
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o
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The
extent to which our cinemas can continue to serve as an anchor tenant
which will, in turn, be influenced by the same factors as will influence
generally the results of our cinema operations;
and
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·
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With
respect to our operations generally as an international company involved
in both the development and operation of cinemas and the development and
operation of real estate; and previously engaged for many years in the
railroad business in the United
States:
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o
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Our
ongoing access to borrowed funds and capital and the interest that must be
paid on that debt and the returns that must be paid on such
capital;
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o
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The
relative values of the currency used in the countries in which we
operate;
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o
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Changes
in government regulation, including by way of example, the costs resulting
from the implementation of the requirements of
Sarbanes-Oxley;
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o
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Our
labor relations and costs of labor (including future government
requirements with respect to pension liabilities, disability insurance and
health coverage, and vacations and
leave);
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o
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Our
exposure from time to time to legal claims and to uninsurable risks such
as those related to our historic railroad operations, including potential
environmental claims and health related claims relating to alleged
exposure to asbestos or other substances now or in the future recognized
as being possible causes of cancer or other health related
problems;
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o
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Changes
in future effective tax rates and the results of currently ongoing and
future potential audits by taxing authorities having jurisdiction over our
various companies; and
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o
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Changes
in applicable accounting policies and
practices.
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The above
list is not necessarily exhaustive, as business is by definition unpredictable
and risky, and subject to influence by numerous factors outside of our control
such as changes in government regulation or policy, competition, interest rates,
supply, technological innovation, changes in consumer taste and fancy, weather,
and the extent to which consumers in our markets have the economic wherewithal
to spend money on beyond-the-home entertainment.
Given the
variety and unpredictability of the factors that will ultimately influence our
businesses and our results of operation, it naturally follows that no guarantees
can be given that any of our forward-looking statements will ultimately prove to
be correct. Actual results will undoubtedly vary and there is no
guarantee as to how our securities will perform either when considered in
isolation or when compared to other securities or investment
opportunities.
Finally,
please understand that we undertake no obligation to update publicly or to
revise any of our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable law. Accordingly, you should always note the date to which
our forward-looking statements speak.
Additionally, certain of the
presentations included in this interim quarterly report may contain “non-GAAP
financial measures.” In such case, a reconciliation of this
information to our GAAP financial statements will be made available in
connection with such statements.
Item 3 –
Quantitative and Qualitative Disclosure about Market
Risk
The
Securities and Exchange Commission requires that registrants include information
about potential effects of changes in currency exchange and interest rates in
their filings. Several alternatives, all with some limitations, have
been offered. The following discussion is based on a sensitivity
analysis, which models the effects of fluctuations in currency exchange rates
and interest rates. This analysis is constrained by several factors,
including the following:
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·
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It
is based on a single point in time.
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·
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It
does not include the effects of other complex market reactions that would
arise from the changes modeled.
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Although
the results of such an analysis may be useful as a benchmark, they should not be
viewed as forecasts.
At June
30, 2008, approximately 46% and 20% of our assets were invested in assets
denominated in Australian dollars (Reading Australia) and New Zealand dollars
(Reading New Zealand), respectively, including approximately $9.6 million in
cash and cash equivalents. At December 31, 2007, approximately 51%
and 25% of our assets were invested in assets denominated in Australian dollars
(Reading Australia) and New Zealand dollars (Reading New Zealand) including
approximately $10.3 million in cash and cash equivalents.
Our policy in Australia and New Zealand
is to match revenues and expenses, whenever possible, in local
currencies. As a result, a majority of our expenses in Australia and
New Zealand have been procured in local currencies. Due to the
developing nature of our operations in Australia and New Zealand, our revenue is
not yet significantly greater than our operating expense. The
resulting natural operating hedge has led to a somewhat negligible foreign
currency effect on our current earnings. Although foreign currency
has had a nominal effect on our current earnings, the effect of the translation
adjustment on our assets and liabilities noted in our other comprehensive income
was $1.3 million and $6.8 million for the three and six months ended June 30,
2008. As we continue to progress our acquisition and development
activities in Australia and New Zealand, we cannot assure you that the foreign
currency effect on our earnings will be insignificant in the
future.
Historically, our policy has been to
borrow in local currencies to finance the development and construction of our
ETRC’s in Australia and New Zealand whenever possible. As a result,
the borrowings in local currencies have provided somewhat of a natural hedge
against the foreign currency exchange exposure. Even so, and as a
result of our issuance of fully subordinated notes described below,
approximately 46% and 85% of our Australian and New Zealand assets,
respectively, remain subject to such exposure unless we elect to hedge our
foreign currency exchange between the US and Australian and New Zealand
dollars. If the foreign currency rates were to fluctuate by 10% the
resulting change in Australian and New Zealand assets would be $9.3 million and
$7.3 million, respectively, and the change in our quarterly net income would be
$206,000 and $153,000, respectively. At the present time, we have no
plan to hedge such exposure.
We record unrealized foreign currency
translation gains or losses that could materially affect our financial
position. As of June 30, 2008 and December 31, 2007, we have recorded
a cumulative unrealized foreign currency translation gain of approximately $55.0
million and $48.2 million, respectively.
Historically,
we maintained most of our cash and cash equivalent balances in short-term money
market instruments with original maturities of three months or
less. Some of our money market investments may decline in value if
interest rates increase. Due to the short-term nature of such
investments, a change of 1% in short-term interest rates would not have a
material effect on our financial condition.
The
majority of our U.S. loans have fixed interest rates; however, one of our
domestic loans has a variable interest rate and a change of approximately 1% in
short-term interest rates would have resulted in an approximately $13,000
increase or decrease in our 2008 Quarter interest expense.
While we
have typically used fixed rate financing (secured by first mortgages) in the
U.S., fixed rate financing is typically not available to corporate borrowers in
Australia and New Zealand. The majority of our Australian and New
Zealand bank loans have variable rates. The Australian facilities
provide for floating interest rates, but require that not less than a certain
percentage of the loans be swapped into fixed rate obligations (see Financial Risk Management
above). If we consider the interest rate swaps, a 1% increase
in short-term interest rates would have resulted in approximately $98,000
increase in our 2008 Quarter Australian and New Zealand interest expense while a
1% decrease in short-term interest rates would have resulted in approximately
$101,000 decrease the 2008 Quarter of Australian and New Zealand interest
expense.
Item 4 –
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s 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 for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that
our disclosure controls and procedures were effective as of the end of the
period covered by this quarterly report.
Changes
in Internal Control over Financial Reporting
Except as
noted below, no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the quarter ended June 30, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART II –
Other Information
Item 1 - Legal
Proceedings
For a
description of legal proceedings, please refer to Item 3 entitled Legal
Proceedings contained in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007.
Item 2 – Unregistered Sales of Equity
Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults upon
Senior Securities
Not applicable.
Item 4 - Submission of
Matters to a Vote of Securities Holders
None.
Item 5 - Other
Information
Not applicable.
Item 6 -
Exhibits
|
10.76*
|
Employment
Agreement dated June 5, 2008 between Reading International, Inc. and Jay
Laifman, filed herewith
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
|
32
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
*This
exhibit constitutes an executive compensation plan or arrangement of the
Company.
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
READING INTERNATIONAL,
INC.
|
Date:
|
August
6, 2008
|
By:
|
/s/ James J. Cotter
|
|
James
J. Cotter
|
|||
|
Chief
Executive Officer
|
|||
|
Date:
|
August
6, 2008
|
By:
|
/s/ Andrzej Matyczynski
|
|
Andrzej
Matyczynski
|
|||
|
Chief
Financial Officer
|
-46-