View:
VIA
EDGAR
FILING
September
14, 2006
Linda
van
Doorn
Senior
Assistant Chief Accountant
Securities
and Exchange Commission
Washington,
D.C. 20549
Re: Reading
International, Inc.
Form
10-K for the year ended December 31, 2005
Filed
March 16, 2006
File
No. 1-08625
Dear
Mr.
Gordon,
Thank
you
for your letter dated August 31, 2006. We appreciate the opportunity to
elaborate on our 2005 10-K filing made on March 16, 2006. While we continue
to
believe that we have made full and complete disclosure to our shareholders,
we
have endeavored to address the issues you have noted in your letter. We feel
that based on the responses provided in this letter, we have met the goal stated
in your letter of August 31, 2006 of enhancing the overall disclosure of our
filing.
Form
10-K
Item
7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
1.
|
Please
disclose any off-balance sheet arrangements in a separately-captioned
section of your MD&A. Refer to Item 303(a)(4) of Regulation
S-K.
|
Response:
In
response to your suggestion, we will include the following disclosure in our
future filings:
Off
Balance Sheet Arrangements or Commitments
We
had no
off-balance sheet arrangements as of December 31, 2005.
Notes
to Consolidated Financial Statements
Note
2 - Summary of Significant Accounting Policies, page
79
|
2.
|
Please
disclose your policy for accounting for allocating the purchase price
of
acquired real estate to the various components, such as land, buildings
and related in-place leases, and any other intangible assets. Refer
to
paragraph 37 of SFAS 141, which provides general guidance for assigning
amounts to the assets acquired, and liabilities assumed. Please clarify
how you determine the fair value for each of these components of
the
assets acquired. Also, disclose how you determine the respective
amortization periods. It appears from your disclosure in Note 10
on page
94 that you allocate a portion of the purchase price to beneficial
leases,
but not to leases that are at or below market
terms.
|
-1-
Response:
In
response to your suggestion, we will include the following disclosure in our
future filings:
Real
Estate Purchase Price Allocation
We
allocate the purchase price to tangible assets of an acquired property (which
includes land, building and tenant improvements) based on the estimated fair
values of those tangible assets assuming the building was vacant. Estimates
of
fair value for land are based on factors such as comparisons to other properties
sold in the same geographic area adjusted for unique characteristics. Estimates
of fair values of buildings and tenant improvements are based on present values
determined based upon the application of hypothetical leases with market rates
and terms.
We
record
above-market and below-market in-place lease values for acquired properties
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii)
management’s estimate of fair market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of
the
lease. We amortize any capitalized above-market lease values as a reduction
of
rental income over the remaining non-cancelable terms of the respective leases.
We amortize any capitalized below-market lease values as an increase to rental
income over the initial term and any fixed-rate renewal periods in the
respective leases.
We
measure the aggregate value of other intangible assets acquired based on the
difference between (i) the property valued with existing in-place leases
adjusted to market rental rates and (ii) the property valued as if vacant.
Management’s estimates of value are made using methods similar to those used by
independent appraisers (e.g., discounted cash flow analysis). Factors considered
by management in its analysis include an estimate of carrying costs during
hypothetical expected lease-up periods considering current market conditions,
and costs to execute similar leases. We also consider information obtained
about
each property as a result of our pre-acquisition due diligence, marketing and
leasing activities in estimating the fair value of the tangible and intangible
assets acquired. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost rentals
at
market rates during the expected lease-up periods. Management also estimates
costs to execute similar leases including leasing commissions, legal and other
related expenses to the extent that such costs are not already incurred in
connection with a new lease origination as part of the transaction.
-2-
The
total
amount of other intangible assets acquired is further allocated to in-place
lease values and customer relationship intangible values based on management’s
evaluation of the specific characteristics of each tenant’s lease and our
overall relationship with that respective tenant. Characteristics considered
by
management in allocating these values include the nature and extent of our
existing business relationships with the tenant, growth prospects for developing
new business with the tenant, the tenant’s credit quality and expectations of
lease renewals (including those existing under the terms of the lease
agreement), among other factors.
We
amortize the value of in-place leases to expense over the initial term of the
respective leases. The value of customer relationship intangibles is amortized
to expense over the initial term and any renewal periods in the respective
leases, but in no event may the amortization period for intangible assets exceed
the remaining depreciable life of the building. Should a tenant terminate its
lease, the unamortized portion of the in-place lease value and customer
relationship intangibles would be charged to expense.
These
assessments have a direct impact on net income and revenues. If we assign more
fair value to the in-place leases versus buildings and tenant improvements,
assigned costs would generally be depreciated over a shorter period, resulting
in more depreciation expense and a lower net income on an annual basis.
Likewise, if we estimate that more of our leases in-place at acquisition are
on
terms believed to be above the current market rates for similar properties,
the
calculated present value of the amount above market would be amortized monthly
as a direct reduction to rental revenues and ultimately reduce the amount of
net
income.
Business
Acquisition Valuations Under FAS 141
The
assets and liabilities of businesses acquired are recorded at their respective
preliminary fair values as of the acquisition date in accordance with SFAS
141
“Business Combinations”. We obtain third-party valuations of material property,
plant and equipment, intangible assets, debt and certain other assets and
liabilities acquired. We also perform valuations and physical counts of
property, plant and equipment, valuations of investments and the involuntary
termination of employees, as necessary. Costs in excess of the net fair values
of assets and liabilities acquired is recorded as goodwill.
We
record
above-market and below-market operating leases assumed in the acquisition of
a
business where we are the tenant/lessee based on the present value (using an
interest rate which reflects the risks associated with the leases assumed of
the
difference between (i) the contractual amounts to be paid pursuant to the lease
agreement and (ii) management’s estimate of fair market lease rates for the
corresponding leases, measured over a period equal to the remaining
non-cancelable term of the lease. We amortize any capitalized below-market
lease
asset as an increase of rental expense over the remaining non-cancelable term
of
the respective lease. We amortize any capitalized above-market lease liability
as a decrease to rental expense over the initial term and any fixed-rate renewal
periods in the respective leases.
The
fair
values of any other intangible assets acquired are based on the expected
discounted cash flows of the identified intangible assets. Finite-lived
intangible assets are amortized using the straight-line method of amortization
over the expected period in which those assets are expected to contribute to
our
future cash flows. We do not amortize indefinite lived intangibles and
goodwill.
-3-
Note
2 - Summary of Significant Accounting Policies, page
79
|
3.
|
Please
tell us how you determined that your investment in Rialto Cinemas
should
be accounted for on a cost basis. Additionally, tell us, and disclose
in
future filings, whether you have evaluated your non-consolidated
investments under FIN 46(R) to determine whether any of these investments
would be variable interest
entities.
|
Response:
The
transaction in question was structured as the acquisition of all of the stock
of
a corporation (Rialto Entertainment) which held as its principal asset a 50%
joint venture interest in an unincorporated joint venture doing business as
Rialto Cinemas. Our participation in that joint venture and access to
information regarding the joint venture, was initially restricted, as the
entities owning the remaining 50% interest in the joint venture, and which
had
day-to-day responsibility for the operation of the joint venture, initially
took
the position that our acquisition of the stock of Rialto Entertainment was
not
executed in accordance with the joint venture agreement which controlled Rialto
Cinemas.
We
evaluated our particular circumstances in this Investee-Investor relationship
in
accordance with FASB Interpretation No. 35, Criteria
for Applying the Equity Method of Accounting for Investments in Common Stock
an
interpretation of APB Opinion No. 18,
which
states:
“2.
Opinion 18 requires that the equity method of accounting be followed by an
investor whose investment in voting stock gives it the ability to exercise
significant influence over operating and financial policies of an
investee. The presumptions in paragraph 17 of Opinion 18 are intended to
provide a reasonable degree of uniformity in applying the equity method.
The presumptions can be overcome by predominant evidence to the
contrary.
a.
Opposition by the investee, such as litigation or complaints to
governmental regulatory authorities, challenges the investor's ability to
exercise significant influence.
-4-
b.
The investor and investee sign an agreement under which the
investor surrenders significant rights as a shareholder.
c.
Majority ownership of the investee is concentrated among a small
group of shareholders who operate the investee without regard to the views
of
the investor.
d.
The investor needs or wants more financial information to apply the
equity method than is available to the investee's other shareholders (for
example, the investor wants quarterly financial information from an investee
that publicly reports only annually), tries to obtain that information, and
fails.
e.
The investor tries and fails to obtain representation on the
investee's board of directors.
This
list
is illustrative and is not all-inclusive. None of the individual
circumstances is necessarily conclusive that the investor is unable to exercise
significant influence over the investee's operating and financial
policies. However, if any of these or similar circumstances exists, an
investor with ownership of 20 percent or more shall evaluate all facts and
circumstances relating to the investment to reach a judgment about whether
the
presumption that the investor has the ability to exercise significant influence
over the investee's operating and financial policies is overcome.”
Consistent
with paragraph 4(d) above, we tried to obtain the annual financial information
and/or financial statements of Rialto Cinemas for the year-ended December 31,
2005 and failed because the investor responsible for financial reporting did
not
recognize us as a proper partner based on the manner in which we acquired our
equity interest, and refused to provide us with such information. Also,
consistent with paragraph 4(e) above, during the period from the date we
acquired the equity interest until recently, we tried to obtain representation
on the investee’s board of directors and failed as well. In addition, during the
same period we were unable to exercise our voting interests in any manner to
influence the operations of Rialto Cinemas.
As
a
result of consideration of the relevant guidance and the particular
circumstances of this investee-investor relationship, we concluded that the
presumption that the investor has the ability to exercise significant influence
over the investee’s operating and financial policies has been overcome by
predominant evidence to the contrary, and that the cost method was the
appropriate method of accounting in these circumstances.
We
have
now resolved this dispute with the other Joint Venture parties, and as a result,
we anticipate changing the accounting for this joint venture from a cost method
to an equity method by the end of the quarter ended September 30,
2006.
-5-
Additionally,
in response to your suggestion, we will include the following disclosure in
our
future filings:
Variable
Interest Entities
In
December 2003, the FASB issued Interpretation 46R, Consolidation of Variable
Interest Entities, or FIN 46R. The purpose of this interpretation is to provide
guidance on how to identify a variable interest entity, or VIE, and determine
when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE need to be included in a company’s consolidated financial
statements. A company that holds variable interests in any entity will need
to
consolidate that entity if the company’s interest in the VIE is such that the
company will absorb a majority of the VIE’s anticipated losses and/or receive a
majority of the VIE’s expected residual returns. As of December 31, 2005, we did
not have any investment interests in VIEs.
Note
18 - Commitments and Contingencies, page 104
Tax
Audit,
page
105
|
4.
|
Please
disclose whether or not it is probable that you will incur a loss,
and if
so, disclose the amount that you have accrued as your best estimate
of
your settlement with the IRS. If you believe it is reasonably possible
that you will incur a loss, or an additional loss above what you
have
accrued, give an estimate of the possible loss or range of loss or
state
that such an estimate cannot be made. If you believe the possibility
that
you will incur a loss is remote, please state that. Refer to paragraph
10
of SFAS 5.
|
Response:
This
issue was addressed with the Staff through an exchange of letters commencing
with the Staff’s letter to us of October 14, 2005 and ending with the Staff’s
letter to us of November 30, 2005. For your convenience, we have included as
Appendix 1 and Appendix 2, respectively, to this letter the relevant portions
of
these letters. We believe that the disclosure made was consistent with the
commitments made in our letter to Staff dated November 30, 2005.
Specifically:
We
have
estimated and accrued an appropriate liability as of 12/31/05, based on our
estimate of the probable future settlement of the case (see Note
14 - Income Taxes).
We
have
disclosed in Note
14 - Income Taxes
that our
income tax liabilities include income tax contingencies of $3.5 million related
to the 1996 Tax Audit. We have disclosed that our total current income tax
liability is $6.9 million and we have separately noted that the IRS has offered
to settle for $8.0 million (see Note
14 - Income Taxes).
-6-
We
have
disclosed in Note
18 - Commitments
and Contingencies that
an
exposure to loss exists in excess of the amount accrued pursuant to the
provisions of paragraph 8 of SFAS 5 and we have provided substantial disclosure
related to the nature of the contingency and an estimate of the range of loss
in
that same footnote.
Set
forth
below is the relevant disclosure currently set forth in our Note
14 - Income Taxes:
“We
have accrued $11.8 million in income tax liabilities as of December 31, 2005,
of
which $6.9 million have been classified as income taxes payable and $4.9 million
have been classified as other non-current liabilities. As part of income taxes
payable, we have reserved $3.5 million in connection with the 1996 Tax Audit
described in Note 18 - Commitments and Contingencies. We believe these amounts
represent an adequate provision for our income tax exposures, including income
tax contingencies related to foreign withholding taxes described in Note 15
-
Other Liabilities.”
Based
on
the above disclosures, we do not believe that further disclosure is required
in
the 2005 financial statements.
Note
18 - Commitments and Contingencies, page 104
|
5.
|
Please
disclose whether or not it is probable that you will incur a loss
related
to the environmental decontamination of the North Viaduct property,
and if
so, disclose the amount that you will have accrued as your best estimate
of the loss. If you believe the possibility of incurring a loss is
probable, but have accrued an amount less than the $3.5 million that
has
been asserted by the City of Philadelphia, please tell us why you
have not
accrued the full amount. If you believe it is reasonably possible
that you
will incur a loss or an additional loss above what has been accrued,
give
an estimate of the possible loss or range of loss or state that such
an
estimate cannot be made. If you believe the possibility that you
will
incur a loss is remote, please state that. Refer to paragraph 10
of SFAS
5.
|
We
have
included within our other liabilities our best estimate of the probable cost
to
remove the environmental hazard, should such action ultimately be compelled,
and
have provided adequate disclosure in accordance with Regulation S-X and SFAS
5
“Accounting for Contingencies”. We believe that our disclosure on this matter
has been sufficient. Our analysis follows:
Specifically,
we considered the following paragraphs of SFAS 5:
Paragraph
8:
“An
estimated loss from a loss contingency (as defined in paragraph 1) shall
be
accrued by a charge to income if both of the following conditions are
met:
-7-
|
a)
|
Information
available prior to issuance of the financial statements indicates
that it
is probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements. It is implicit
in this
condition that it must be probable that one or more future events
will
occur confirming the fact of the
loss.
|
|
b)
|
The
amount of loss can be reasonably
estimated.”
|
We
have estimated and accrued an appropriate liability as of 12/31/05, based on
our
estimate of the probable future cost to remove the environmental hazard based
on
contractor estimates and proposals. While we now believe, based upon advice
of
counsel, that we have no current obligation to undertake any remedial action,
we
would need to address this remediation issue prior to any sale or redevelopment
of the property.
Paragraph
9:
“Disclosure
of the nature of an accrual made pursuant to the provisions of paragraph 8,
and
in some circumstances the amount accrued may be necessary for the financial
statements not to be misleading.”
We
have disclosed in our financial statements that “we continue to believe that our
recorded remediation reserves related to the North Viaduct are adequate.” We
have accrued $1.7 million in decontamination reserve based on contractor
estimates and proposals. We do not consider it is necessary for us to separately
disclose the loss contingency in further detail for the financial statements
not
to be misleading, particularly given that we are not currently under any
obligation to effect any such cleanup and have no current intention of
voluntarily effecting such a clean-up nor any current plan for the sale of
development of the property.
Paragraph
10:
“If
no accrual is made for a loss contingency because one or both of the conditions
in paragraph 8 are not met, or if an exposure to loss exists in excess of the
amount accrued pursuant to the provisions of paragraph 8, disclosure of the
contingency shall be made when there is at least a reasonable possibility that
a
loss or an additional loss may have been incurred. The disclosure shall indicate
the nature of the contingency and shall give an estimate of the possible loss
or
range of loss or state that such an estimate cannot be made. Disclosure is
not
required of a loss contingency involving an unasserted claim or assessment
when
there has been no manifestation by a potential claimant of an awareness of
a
possible claim or assessment unless it is considered probable that a claim
will
be asserted
and there is a reasonable possibility that the outcome will be
unfavorable.”
Based
on legal advice and bid information received to date, we believe that our
reserve is adequate, and that the disclosure is
sufficient.
-8-
On
behalf
of Reading International, Inc., I acknowledge the following:
|
·
|
The
company is responsible for the adequacy and accuracy of the disclosure
in
the filing;
|
|
·
|
Staff
comments or changes to the disclosure in response to staff comments
do not
foreclose the Commission from taking any action with respect to the
filing; and
|
|
·
|
The
company may not assert staff recommendations as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United
States.
|
We
await
your comments re the above responses and attached revisions and hope that they
would have fully satisfied your enquiries.
Sincerely,
Andrzej
J. Matyczynski
Chief
Financial Officer
Tel:
213
235 2238
-9-
Appendix
1 -
Tax
Question Excerpt from Reading’s Response Letter Dated October 14,
2005
Note
17 - Commitments and Contingencies
Tax
Audit, page 96
|
6.
|
Tell
us and disclose in future filings whether the probability of loss
is
probable, reasonably possible or remote. Also, tell us the amount
of the
loss that has been accrued if any. For reference see paragraphs 8-10
of
SFAS 5. We may have further
comment.
|
Response:
-
We
believe the probability of a material loss arising from the resolution of IRS
proposed changes to the RDGE 1996 tax return and the CRG 1997 tax return to
be
remote. The Company has been advised by outside legal counsel that it is more
likely than not that we will prevail if the IRS chooses to litigate this
matter.
We
have
provided full disclosure of the facts and circumstances surrounding the case
and
the full range of exposure to the Company. We also disclosed the fact that
Company received an offer in compromise from the IRS to settle this matter
for
approximately $5.5 million plus accrued interest of $2.5 million. Based on
the
advice of legal counsel, we determined not to accept this settlement offer.
Given the level of initial settlement offer made by the IRS, we believe it
likely that this matter will not go to trial and ultimately, expect to resolve
the issue with all taxing authorities through a negotiated settlement. Our
best
estimate of the probable settlement amount for this matter has been recorded
within other current income taxes payable.
-A1-1-
Appendix
2 -
Tax
Question Excerpt from Reading’s Response Letter Dated November 30,
2005
Note
17 - Commitments and Contingencies
Tax
Audit, page 96
2. We
have reviewed your response to comment 6. Please tell us and disclose the amount
recorded within other current income taxes payable as the best estimate of
your
settlement with the IRS. In addition, please disclose in your amendment to
your
Form 10-K whether the Company believes the probability of a loss is probable,
reasonably possible or remote.
Response:
We
have
included within current income taxes payable our best estimate of the probable
settlement amount with the IRS and we have provided adequate disclosure in
accordance with SFAS 109 “Accounting for Income Taxes”, Regulation S-X and SFAS
5 “Accounting for Contingencies”.
Specifically,
we considered the following paragraphs of SFAS 5:
Paragraph
8:
“An
estimated loss from a loss contingency (as defined in paragraph 1) shall be
accrued by a charge to income if both of the following conditions are
met:
|
c)
|
Information
available prior to issuance of the financial statements indicates
that it
is probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements. It is implicit
in this
condition that it must be probable that one or more future events
will
occur confirming the fact of the
loss.
|
|
d)
|
The
amount of loss can be reasonably
estimated.”
|
We
have estimated and accrued an appropriate liability as of 12/31/04, based on
our
estimate of the probable future settlement of the case.
Paragraph
9:
“Disclosure
of the nature of an accrual made pursuant to the provisions of paragraph 8,
and
in some circumstances the amount accrued may be necessary for the financial
statements not to be misleading.”
We
have disclosed in our financial statements our income tax liabilities, noting
that such liabilities are “including income tax contingencies related to….the
1996 Tax Audit”. We have disclosed that our total current income tax liability
is $6.3 million and we have separately noted that the IRS has offered to settle
for $8 million. As such, we do not consider it is necessary for us to separately
disclose the loss contingency in further detail for the financial statements
not
to be misleading.
-A2-1-
Paragraph
10:
“If
no accrual is made for a loss contingency because one or both of the conditions
in paragraph 8 are not met, or if an exposure to loss exists in excess of the
amount accrued pursuant to the provisions of paragraph 8, disclosure of the
contingency shall be made when there is at least a reasonable possibility that
a
loss or an additional loss may have been incurred. 6 The disclosure shall
indicate the nature of the contingency and shall give an estimate of the
possible loss or range of loss or state that such an estimate cannot be made.
Disclosure is not required of a loss contingency involving an unasserted claim
or assessment when there has been no manifestation by a potential claimant
of an
awareness of a possible claim or assessment unless it is considered probable
that a claim will be asserted and there is a reasonable possibility that the
outcome will be unfavorable.”
An
exposure to loss exists in excess of the amount accrued pursuant to the
provisions of paragraph 8 and we have provided substantial disclosure related
to
the nature of the contingency and an estimate of the range of
loss.
We
do not
believe that further disclosure is required in the 2004 financial statements.
We
propose to include further information as it develops in a future filing. While
we do not consider this to be necessary disclosure, in future filings we will
include a statement indicating that the we consider the likelihood of losing
the
IRS litigation to be remote and that we have accrued our best estimate of the
probable loss upon settlement in current income taxes payable. As of December
31, 2004, this amount was $3.1 million.
-A2-2-