UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2006
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 No. 1-8625
READING
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
|
NEVADA
(State
or other jurisdiction of incorporation or organization)
500
Citadel Drive, Suite 300
Commerce,
CA
(Address
of principal executive offices)
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95-3885184
(I.R.S.
Employer Identification Number)
90040
(Zip
Code)
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Registrant’s
telephone number, including Area Code: (213) 235-2240
Securities
Registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Nonvoting Common Stock, $0.01 par value
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American
Stock Exchange
|
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Class
B Voting Common Stock, $0.01 par value
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American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨
No
þ
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934. Yes
¨
No
þ
Indicate
by check mark whether registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for shorter period than 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K of any amendments to
this Form 10-K. ¨
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.
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 March 28, 2007, there were
20,992,453 shares of Class A Non-voting Common Stock, par value $0.01 per share
and 1,495,490 shares of Class B Voting Common Stock, par value $0.01 per share,
outstanding. The
aggregate market value of voting and nonvoting stock held by non-affiliates
of
the Registrant was $137,646,000 as of March 28, 2007.
ANNUAL
REPORT ON FORM 10-K
YEAR
ENDED DECEMBER 31, 2006
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Item
1 - Our Business
General
Description of Our Business
Reading
International, Inc., a Nevada corporation (“RDI”), was incorporated in 1999
incident to our reincorporation in Nevada. However, we trace our corporate
roots
back to the Reading Railroad and its corporate predecessors, first incorporated
in 1833. Our Class A Nonvoting Common Stock (“Class A Stock”) and Class B Voting
Common Stock (“Class B Stock”) are listed for trading on the American Stock
Exchange under the symbols RDI and RDI.B. Our principal executive offices are
located at 500
Citadel Drive, Suite 300, Commerce, California 90040. Our general telephone
number is (213) 235-2240. Our website can be found at www.readingrdi.com.
In this
Annual Report, we from time to time use terms such as the “Company,” “Reading”
and “we,” “us,” or “our” to refer collectively to RDI and our various
consolidated subsidiaries and corporate predecessors.
Our
businesses consist primarily of:
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·
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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 (“ETRCs”) in Australia and New Zealand
and live theater assets in Manhattan and Chicago in the United States.
|
While
we
do not believe the cinema exhibition business to be a growth business at this
time, we do believe it 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. However, since we believe the cinema
exhibition business to be a mature business with most markets either adequately
screened or over-screened, we see our future asset growth coming more from
our
real estate development activities than from the acquisition or development
of
additional cinemas. While we intend to be opportunistic in adding to our
existing cinema portfolio, we believe it likely that, going forward, we will
be
reinvesting our free cash flow more in our general real estate development
activities than in the acquisition or development of additional cinemas. Over
time, we anticipate that our cinema operations will become increasingly a source
of cash flow to support our real estate oriented activities, rather than a
focus
of growth, and that our real estate activities will become the principal thrust
of our business.
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.
Consistent
with this business philosophy, during 2006, we have, with respect to our cinema
assets and operations:
|
·
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worked
to consolidate our joint venture cinema holdings and cut down our
operating complexity by selling to our joint venture partner (Everard
Entertainment) our 50% joint venture interests in three mainstream
cinemas
(aggregating 13 screens) operated under the “Berkeley” name in suburban
Auckland, New Zealand, and acquired from Everard Entertainment its
50%
interest in our joint venture cinema (8 screens) in Christchurch,
New
Zealand. As a result of these transactions, we only have one joint
venture
cinema remaining with Everard Entertainment;
|
|
·
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entered
into an agreement to acquire the long-term ground lease interest
underlying our Tower Theater in Sacramento, California (the principal
art
cinema in Sacramento); refurbished, expanded and reopened the Rialto
art
cinema in Auckland, in which we have a 50% unconsolidated joint venture
interest with SkyCity Leisure Ltd. This Rialto cinema is the premier
art
house in New Zealand;
|
|
·
|
entered into agreements for lease with respect to two new 8-screen cinemas currently under development in regional shopping centers located in fast growing residential areas in Australia. It is anticipated that these cinemas will open in the first quarters of 2008 and 2010. One of these agreements to lease was executed in 2006 and the other in February 2007; and |
|
·
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obtained
the final governmental approvals required for the construction of
the
approximately 33,000 square foot cinema component of our Newmarket
ETRC.
|
and
with respect to our real estate assets and operations:
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·
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obtained
final approval for the rezoning of our 50.6 acre Burwood property
from an
essentially extractive industry use to a mixed retail, entertainment,
commercial and residential use;
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·
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completed
construction and lease-up of the retail components of our Newmarket
ETRC;
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·
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completed
the assemblage of two additional parcels of land, totaling 0.4 acres,
into
our existing Moonee Ponds property. This acquisition increases our
holdings at Moonee Ponds (a suburb of Melbourne) to 3.3 acres and
gives us
frontage facing the principal transit station servicing the area.
We are
currently working to finalize plans for the development of this property
into a mixed use entertainment based retail and commercial
complex;
|
|
·
|
formed
Landplan Property Partners, Ltd (“Landplan”) to identify, acquire and
develop or redevelop properties in Australia and New Zealand on an
opportunistic basis. Through March 28, 2007, we have acquired two
such
properties, one in Australia and one in New Zealand, for a total
investment of approximately $6.7
million;
|
|
·
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acquired
for $1.8 million, an 18.4% equity interest in Malulani Investments,
Limited (“MIL”), a closely held Hawaiian company that currently owns
approximately 763,000 square feet of developed commercial real estate
principally in California, Hawaii and Texas, and approximately 22,000
acres of agricultural land in Northern California. Included among
MIL’s
assets is the Guenoc Winery, consisting of approximately 400 acres
of
vineyard land and a winery equipped to bottle up to 120,000 cases
of wine
annually. This land and commercial real estate holdings are encumbered
by
debt; and
|
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·
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on
the financing front, in February 2007 we privately placed $50.0 million
of
20-year Trust Preferred Securities, with dividends fixed at 9.22%
for the
first five years, to serve as a long term financing foundation for
our
real estate assets. There are no principal payments until maturity
in 2027
when the notes are paid in full. Although structured as the issuance
of
trust preferred securities by a related trust, the financing is
essentially the same as an issuance of fully subordinated debt: the
payments are tax deductible to us and the default remedies are the
same as
debt. The net proceeds of this issuance have been used principally
to
retire all of our bank indebtedness in New Zealand of $34.4 million
(NZ$50.0 million) and to pay down our bank indebtedness in Australia
by
$5.8 million (AUS$7.4 million).
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At
December 31, 2006, our assets include:
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·
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interests
in 44 cinemas comprising some 286 screens;
|
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·
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fee
ownership of approximately 1.1 million square feet of developed commercial
real estate, and approximately 16.9 million square feet of land (including
approximately 2.5 million square feet of land held for development),
located principally in urbanized areas of Australia, New Zealand
and the
United States;
|
|
·
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cash,
cash equivalents and investments in marketable securities aggregating
$19.4 million;
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·
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a
25% interest,
representing an investment of $3.0 million, in
the limited liability company currently completing final sell-out
of
Place
57,
the 36-story, 68-residential unit mixed use condominium project on
57th
Street near 3rd
Avenue in Manhattan; and
|
|
·
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an
18.4% interest in MIL, already described
above.
|
At
December 31, 2006, the book value of our assets was approximately $289.2
million; and as of that same date, we had a consolidated stockholders’ book
equity of approximately $107.7 million. Calculated based on book value, nearly
70% of our assets, or approximately $202.1 million, relates to our real estate
activities. Calculated based on book value, nearly 74% of our assets, or
approximately $214.7 million, represents assets located in Australia and New
Zealand.
At
December 31, 2006, the allocation between our cinema assets and our non-cinema
assets was approximately 22% and 78%, respectively.
We
believe that, given the nature of our real estate oriented balance sheet, our
development activities, and the appreciation enjoyed by real estate assets
over
the past several years, that our book value substantially understates the fair
market value of our assets.
Summary
of Our Cinema Exhibition Activities
We
conduct our cinema operations on four basic and rather simple
premises:
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·
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first,
notwithstanding the enormous advances that have been made in home
entertainment technology, humans are essentially social beings, and
will
continue to want to go beyond the home for their entertainment, provided
that the they are offered clean, comfortable and convenient facilities,
with state of the art technology;
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|
·
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second,
cinemas can be used as anchors for larger retail developments, and
our
involvement in the cinema business can give us an advantage over
other
real estate developers or redevelopers who must identify and negotiate
exclusively with third party anchor
tenants;
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·
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third,
pure cinema operators can get themselves into financial difficulty
as
demands upon them to produce cinema based earnings growth tempt them
into
reinvesting their cash flow into increasingly marginal cinema sites.
While
we believe that there will continue to be attractive cinema acquisition
opportunities in the future, we do not feel pressure to build or
acquire
cinemas for the sake of simply adding on units, and intend to focus
our
cash flow on our real estate development and operating activities,
to the
extent that attractive cinema opportunities are not available to
us;
and
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|
·
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fourth,
we are never afraid to convert an entertainment property to another
use,
if that is a higher and better use of our property, or to sell individual
assets, if we are presented with an attractive
opportunity.
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Our
current cinema assets are described in the following chart:
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Wholly
Owned
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Consolidated1
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Unconsolidated2
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Managed3
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Totals
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Australia
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16
cinemas
120
screens
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3
cinemas
16
screens
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1
cinema4
16
screens
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None
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20
cinemas
152
screens
|
|
New
Zealand
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9
cinemas
48
screens
|
None
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6
cinemas5
30
screens
|
None
|
15
cinemas
78
screens
|
|
United
States
|
6
cinemas
41
screens
|
1
cinema6
6
screens
|
None
|
2
cinemas
9
screens
|
9
cinemas
56
screens
|
|
TOTALS
|
31
cinemas
209
screens
|
4
cinemas
22
screens
|
7
cinemas
46
screens
|
2
cinemas
9
screens
|
44
cinemas
286
screens
|
1
Cinemas owned and operated through consolidated, but not wholly owned, majority
owned subsidiaries.
2
Cinemas owned and operated through unconsolidated subsidiaries.
3
Cinemas in which we have no ownership interest, but which are operated
by
us under management agreements.
4
33.3% unincorporated joint venture interest.
5
50% unincorporated joint venture interests.
6 The
Angelika Film Center and Café in Manhattan is owned by a limited liability
company in which we own a 50% interest with rights to manage.
We
focus
on the ownership and operation of three categories of cinemas:
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·
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first,
modern stadium seating multiplex cinemas featuring conventional film
product;
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·
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second,
specialty and art cinemas, such as our Angelika Film Centers in Manhattan
and Dallas and the Rialto cinema chain in New Zealand; and
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·
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third,
in some markets, particularly small town markets that will not support
the
development of a modern stadium design multiplex cinema, conventional
sloped floor cinemas.
|
With
the
exception of certain of our joint venture cinemas, we operate and book all
of
our cinemas on an “in-house” basis, through cinema executives located in
Manhattan, Melbourne, Australia and Wellington, New Zealand.
Summary
of Our Real Estate Activities
Our
real
estate activities have historically consisted principally of:
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·
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the
ownership of fee or long term leasehold interests in properties used
in
our cinema exhibition and live theater activities or which were acquired
in anticipation of the development of cinemas or ETRCs;
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|
·
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the
acquisition of fee interests for the development of cinemas or ETRCs;
and
|
|
·
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the
redevelopment of existing cinema sites to their highest and best
use.
|
For
example, Place
57,
a
36-story 68-residential unit mixed-use condominium project on 57th
Street
near 3rd
Avenue
was the result of the redevelopment of one of our Manhattan cinema sites.
Recently, however, we have begun to diversify into other types of real estate
investments.
In
2006,
we formed Landplan Property Partners, Ltd, to identify, acquire and develop
or
redevelop properties on an opportunistic basis. Typically, properties are
acquired or held in individual special purpose entities. We refer to Landplan
Property Partners, Ltd, collectively with these special purpose entities as
“Landplan.” To date, Landplan has acquired one property in Australia and one in
New Zealand for an aggregate investment of $6.7 million. The Australia property
was acquired in September 2006 and the New Zealand property was acquired in
February 2007.
In
addition, we have acquired an approximately 18.4% common equity interests in
Malulani Investments Limited, a closely held Hawaiian company which currently
owns approximately 763,000 square feet of developed commercial real estate
principally in California, Hawaii and Texas, and approximately 22,000 acres
of
agricultural land in Northern California. Included among Malulani’s assets are
the Guenoc Winery, consisting of approximately 400 acres of vineyard land and
a
winery configured to bottle up to 120,000 cases of wine annually and Langtry
Estates and Vineyards. This land and commercial real estate holdings are
encumbered by debt.
To
date,
we have developed, in Australia and New Zealand, three ETRCs comprising
approximately 337,000 square feet of development and the shopping center
component of a fourth ETRC, comprising some 100,000 square of development.
The
100,000 square feet of shopping center space in this fourth ETRC is fully
leased, and it is anticipated that the cinema component will be completed in
early 2009.
Set
forth below is a list and brief description of our principal development
properties:
The
Burwood Project: Melbourne, Australia
Our
Burwood Project is an approximately 50.6 acre parcel of unimproved real estate
located in the demographic center of Melbourne and now zoned for mixed retail,
entertainment, commercial and residential uses. The build-out of our Burwood
project will likely be an area of particular focus for us over the next several
years.
We
purchased this property, originally zoned for extractive industry purposes,
with
the intention of upgrading the zoning and developing an ETRC. Our Burwood
project, together with certain adjoining properties owned by third parties,
was
designated as a “major activity centre” in 2002. In order to qualify as a “major
activity centre” an area must have the following characteristics:
|
·
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a
mix of activities that generate high number of trips, including business,
retail services and entertainment;
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|
·
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being
generally well-served by multiple transport routes (some being on
the rail
network) and on the Principal Public Transport Network or capable
of being
linked to that network;
|
|
·
|
having
potential to grow and support intensive housing development without
conflicting with surrounding land
uses;
|
|
·
|
supplement
the network of Principal Activity Centres;
and
|
|
·
|
provide
additional scope to accommodate ongoing investment and change in
retail,
office, service and residential
markets.
|
This
re-designation has allowed us to substantially increase the intensity and
diversity of the permitted use for the property and we were last year successful
in obtaining a final rezoning of the property for mixed retail, entertainment,
commercial and residential uses.
Our
Burwood property is located at the intersection of the Burwood Highway and
Middleborough Road and is the largest undeveloped parcel of land in any “major
activity centre” in Victoria, Australia. Approximately 430,000 people live
within five miles of the site, which is well served by both public transit
and
surface streets. We estimate that approximately 70,000 people pass by the site
each day.
Incident
to the development of our Burwood property, in late 2006, we began various
fill
and earth moving operations. In late February 2007, it became apparent that
our
cost estimates with respect to site preparation were low, as the extent of
the
contaminated soil present at the site - a former brickworks - was greater
than
we had originally believed. We are currently evaluating the additional site
preparation costs likely to be associated with the removal of this contaminated
soil. As we were not the source of this contamination, we are not currently
under any legal obligation to remove this contaminated soil from the site.
However, as a practical matter we intend to address these issues in connection
with our planned redevelopment of the site as a mixed-use retail, entertainment,
commercial and residential complex.
We
anticipate that the project will be
constructed in a variety of separate phases, commencing late in 2007 and
looking
to final completion sometime in 2015 and will require an investment in excess
of
$500.0 million. Under the now approved zoning scheme, each of these separate
phases will still require the approval of specific development plans consistent
with this overall zoning designation. The zoning approval has provided a
framework for allowable uses that can be defined in a Development Plan Overlay
currently in the process of approval. Key issues are building envelopes and
traffic generation. To date, 32,000 square feet of retail - as of right,
with
entertainment, commercial, and residential uses are being considered under
this
Development Plan Overlay.
The
Courtenay Central, Phase II Project; Wellington, New Zealand
Courtenay
Central is an approximately 160,000 square foot ETRC we developed in central
Wellington, New Zealand. Phase II is an approximately 38,000 square foot
property adjacent to Courtenay Central, and currently used as an auto sales
yard. We anticipate the construction of an approximately 155,000 square foot
retail project.
The
Moonee Ponds Project, Melbourne, Australia
Our
Moonee Ponds Project is a 3.3 acre unimproved infill site in suburban Melbourne.
Moonee Ponds has been designated under the Melbourne 2030 Planning Strategy
as a
Principal Activity Centre and our land benefits from the allowable density
of
development. During 2006, we added approximately 0.4 acres to the project site,
through the acquisition of two additional parcels. These additions have, in
our
view, added significant value to our holdings, by giving our property frontage
onto the site of the area’s major transit station. We are currently in the
planning stages with respect to this property, and currently anticipate
development of a cinema based mixed-use project.
The
Redyard Phase II Project; Auburn, Sydney, Australia.
Redyard
is an approximately 109,383 square foot ETRC we developed in Auburn, Australia
along Parramatta Road. Auburn is a suburb of Sydney located adjacent to the
site
of the 2000 Sydney Summer Olympics. Phase II is an approximately 96,000 square
foot unimproved parcel located adjacent to our existing ETRC.
The
Parramatta Road area is currently undergoing a land use review by the local
governments having jurisdiction over the area. We understand the intention
of
this review is to develop a plan for a more intensive and upgraded use for
the
area, designed to develop Parramatta Road as the “Gateway to Sydney.” Our
intention is to continue to hold this property and to work with this review
process with the goal of obtaining use rights for a more intensive use of this
property than our existing ETRC use.
Entertainment
Property Redevelopment Projects
While,
other than the Place
57
project,
we are not currently actively involved in the redevelopment of any of our
entertainment properties, we continue to monitor these properties with an eye
towards potential redevelopment, and continue to have discussions with parties
interested in participating with us in such redevelopment endeavors. We
currently own the fee interest in one of our domestic cinemas, four of our
Australian cinemas (28 screens), and in four of our New Zealand cinemas (24
screens). In addition, three of our domestic cinemas are on long-term leases,
which are not restricted to cinema use. Included in our non-cinema real estate
holdings are the fee interests in three “off Broadway” style live theaters
located in Manhattan (the Union Square, Orpheum and Minetta Lane), and in our
four stage “off Broadway” style theater/restaurant/office complex in Chicago
(the Royal George).
Miscellaneous
Real Estate Assets
We
currently own approximately 317.5 acres of land previously used in connection
with our Company’s long ago discontinued railroad operations, most of which is
located in Delaware and Pennsylvania. Insofar as we are aware, this land is
not
of material value to our Company as it is located principally in rural areas
of
Pennsylvania. We currently carry this property on our books at approximately
$1.3 million. While this land is not used in our operations, we are not
currently engaged in any active marketing efforts with respect to these
properties. Rather, we respond to offers, when and if made. Included within
our
fee land holdings is approximately 2.1 acres of raised railroad right of way,
located in the City of Philadelphia. While we have received a number of
inquiries from prospective purchasers of that property, no decision has been
made with respect to its possible disposition.
Certain
Segment and Geographical Distribution Information
Financial
Information about our various segments is set out in Note 21 - Business
Segments and Geographic Area Information.
The
following table sets forth the book value of our property and equipment by
geographical area (dollars in thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Australia
|
$
|
86,317
|
$
|
84,615
|
|||
|
New
Zealand
|
38,772
|
37,025
|
|||||
|
United
States
|
45,578
|
45,749
|
|||||
|
Property
and equipment
|
$
|
170,667
|
$
|
167,389
|
|||
The
following table sets forth our revenues by geographical area (dollars in
thousands):
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Australia
|
$
|
53,434
|
$
|
47,181
|
$
|
43,666
|
||||
|
New
Zealand
|
21,230
|
20,179
|
13,531
|
|||||||
|
United
States
|
31,461
|
30,745
|
26,892
|
|||||||
|
Total
Revenues7
|
$
|
106,125
|
$
|
98,105
|
$
|
84,089
|
||||
7
2005
and
2004 revenues have been adjusted from the amounts previously reported. See
Note
2 and Note 21 to the 2006 Consolidated Financial Statements.
We
Are a Controlled Company under American Stock Exchange Rules and
Regulations
We
are a
“Controlled Company” under Section 801(a) of the American Stock Exchange Company
Guide. Accordingly, we are not subject to the American Stock Exchange
requirements that at least half of our directors be independent or that we
have
an independent nominating committee.
As
of
December 31, 2006, we had outstanding 20,980,865 shares of our Class A Stock
and
1,495,490 shares of our Class B Stock. As of this same date, Mr. James J. Cotter
was our controlling stockholder, with fully diluted beneficial ownership of
1,161,388 shares of our Class B Stock, representing approximately 71.1% of
such
shares. In addition, Mr. Cotter, his affiliates, and members of his immediate
family are the fully diluted beneficial owners of 5,788,430 shares of our Class
A Stock. Collectively, their beneficial ownership represents approximately
30.7%
of our aggregate outstanding Class A Stock and Class B Stock.
Mr.
Cotter and two of his children, Margaret Cotter and James J. Cotter, Jr.,
currently serve as three of the eight members of the our Company’s Board of
Directors. Ms. Ellen Cotter, also a child of Mr. Cotter, Sr., is the Chief
Operating Officer for our Domestic Cinemas. A company wholly owned by Ms.
Margaret Cotter manages our live theater operations.
The
Cotter Family has advised us that they consider their investment in our Company
to be a long term investment, and that they do not currently contemplate any
change of control transaction with respect to the Company or any material
portion of its assets.
A
discussion of related party transactions is set forth in Note 25 - Related
Parties and Transactions
to the
2006 Consolidated Financial Statements.
A
More Detailed Description of Our Business
Our
Pacific Rim Cinema Operations (Australia and New Zealand)
General
On
a
consolidated basis, we currently own or operate 19 cinemas consisting of 136
screens in Australia, and 9 cinemas with 48 screens in New Zealand. We also
own,
directly or indirectly, 50% unincorporated joint venture interests in six
cinemas, consisting of 30 screens, in New Zealand and a 33% unincorporated
joint
venture interest in a 16-screen cinema in the Brisbane area of Australia.
We
commenced activities in Australia in mid-1995, conducting business in Australia
through our wholly owned subsidiary, Reading Entertainment Australia Pty Ltd
(“REA” and, collectively with its consolidated subsidiaries, “Reading
Australia”).
We
commenced operations in New Zealand in 1997, conducting operations in New
Zealand through our wholly owned affiliate, Reading New Zealand Limited (“RNZ”
and collectively with its consolidated subsidiaries, “Reading New Zealand”).
Our
Australian and New Zealand cinemas derive approximately 73% of their 2006
revenues from box office receipts. Ticket prices vary by location, and provide
for reduced rates for senior citizens and children. Box office receipts are
reported net of state and local sales or service taxes. Show times and features
are placed in advertisements in local newspapers with the costs of such
advertisements paid by the exhibitor. Film distributors may advertise certain
feature films and pay the cost of such advertising. Film rental costs average
approximately 41% of box office revenues in Australia and in New
Zealand.
Concession
sales account for approximately 23% and 22% of our total 2006 revenues in
Australia and New Zealand, respectively. Concession products primarily include
popcorn, candy and soda; although certain of Reading’s Australia and New Zealand
cinemas have licenses for the sale and consumption of alcoholic beverages.
During 2006, we realized a gross margin on concession sales of approximately
76%
and 74% in Australia and New Zealand, respectively.
Screen
advertising and other revenues contributed approximately 4% and 5% of our total
2006 revenues in Australia and New Zealand, respectively. The screen advertising
business in Australia and New Zealand has moved to prominently 35mm film
advertisements by national advertisers. Local advertising is undertaken by
individual cinema operators on a site-by-site basis and is largely undertaken
via the improved technology offered by digital projection. Our cinemas, where
it
is applicable, undertake slide advertising as an ancillary function to the
overall cinema business.
Entertainment-Themed
Retail Center Development
We
are
engaged through Reading Australia and Reading New Zealand in the development
of
ETRCs that typically consist of a multiplex cinema, complementary restaurant
and
retail facilities, and convenient parking on land that we own or control. In
December 1999, we opened the cinema portion of our first ETRC in Australia.
Located in Perth, the ETRC includes a 10-screen cinema and approximately 19,000
square feet of restaurant and retail space. We opened the multiplex cinema
component of our second ETRC in September 2000. That ETRC, located in the Sydney
suburb of Auburn, near the site of the Sydney Olympic Village, includes a
10-screen cinema, approximately 57,000 square feet of retail space and an
871-space subterranean parking garage. The Auburn site also includes
approximately 93,000 square feet of raw land, available for expansion of the
ETRC. In March 2002, we opened our Wellington ETRC, comprised of a 10-screen
cinema, approximately 38,000 square feet of restaurant and retail space and
1,086 parking spaces located in an adjacent nine level parking garage. The
Wellington site also includes approximately 38,000 square feet of raw land,
available for expansion of the ETRC. We are presently in the design phase of
a
plan to develop an additional 155,000 square feet of retail space (including
a
multiplex art cinema) on this land. During 2005, we completed the construction
of an approximately 100,000 square foot shopping centre as stage one of a larger
ETRC on our approximately 177,000 square foot parcel in Newmarket, a suburb
of
Brisbane, in Queensland, Australia. We have now completed the lease-up of the
retail portions of that center, and have obtained the zoning and building
approvals necessary to commence construction of the cinema component of the
center. We currently anticipate that the cinema portion will be completed by
early 2009.
Our
Ongoing Entertainment-Themed Retail Center Projects
Auburn,
New South Wales
In
Auburn, the Auburn City Council, in coordination with other local governments,
is currently reviewing the land use parameters for the areas adjacent to
Parramatta Road in which our property is located. Parramatta Road, which runs
adjacent to Homebush Bay, the site of the 2000 Olympic Games, is one of the
busiest arterial roadways in the greater Sydney area, and is considered by
many
to be the “gateway” to Sydney. Consequently, there is significant community
interest in upzoning the uses along this road. As a major landowner in this
area, we intend to be actively involved in this process and are hopeful that
this rezoning process will substantially enhance the value of our remaining
unimproved 93,000 square foot parcel. This parcel is currently carried on our
books at $28.2 million (AUS$35.8 million).
Burwood,
Victoria
The
biggest real estate project in our pipeline is the development of our 50.6
acre
Burwood Project. On February 20, 2006, the Victoria State Government approved
a
rezoning of that parcel from an industrial classification to a mixed-use
classification allowing a broad range of entertainment, retail, commercial
and
residential uses.
We
contemplate developing the project in a series of phases, with final completion
sometime in 2015. While the land use issues are now resolved, individual
development plans will need to be prepared and approved for each of the phases,
dealing with issues such as project design and traffic management. The
Development Plan Overlays have been prepared and are currently under review
for
local government approval. Ultimately, we estimate that the total project will
require development funding of approximately $500.0 million. We currently carry
this property on our books at $24.3 million (AUS$30.9 million).
Moonee
Ponds, Victoria
We
are
also in the planning stages of a proposed combination ETRC/residential
development for our 3.3 acre Moonee Ponds site. This property is within the
Moonee Ponds designated “Principal Activity Area,” allowing high density
development. Accordingly, our plans for that property will be necessarily
influenced by the manner in which adjacent properties are developed within
the
“Principal Activity Area.” Our Moonee Ponds property is currently carried on our
books at $8.9 million (AUS$11.2 million).
Newmarket,
Queensland
Last
year
we completed the construction and lease-up of the 100,000 square foot retail
component of our Newmarket development in a suburb of Brisbane. The design
for
the anticipated 33,000 square foot cinema component of the project has now
been
approved by the relevant government authorities, and we anticipate completion
of
this final element by early 2009.
Wellington,
New Zealand
We
are
currently reviewing our options for the second phase of our Wellington ETRC.
While we were successful in obtaining regulatory approval last year for an
approximately 155,000 square foot expansion of our existing centre, the timing
of the development of that space will ultimately depend upon the retail market
in Wellington, which has not been strong in recent periods. Accordingly, our
plans for that site are currently in a holding pattern, while we wait for demand
for retail space to improve and consider other complementary entertainment
center uses for the property. The 38,000 square foot pad intended to support
this second phase is currently carried on our books at $2.3 million (NZ$3.2
million), and is being currently rented on a month-to-month basis as a car
sales
yard.
Joint
Venture Interests
Two
of
our cinemas, consisting of 11 screens and located in country towns, are owned
by
Australia Country Cinemas Pty, Limited (“ACC”), a company owned 75% by Reading
Australia and 25% by a company owned by an individual familiar with the market
for cinemas in country towns. ACC has a limited right of first refusal to
develop any cinema sites identified by Reading Australia that are located in
country towns. Our interest in this joint venture is reported on a consolidated
basis.
One
of
our cinemas, a 5-screen facility in Melbourne, is owned by a joint venture
in
which we have a 66.6% unincorporated joint venture interest with the original
owner. Our interest in this joint venture is likewise reported on a consolidated
basis.
Effective
October 1, 2005, we purchased, indirectly, the beneficial ownership of 100%
of
the stock of Rialto Entertainment for $4.8 million (NZ$6.9 million). Rialto
Entertainment is a 50% joint venture partner with SkyCity Leisure Ltd (“Sky”) in
Rialto Cinemas, the largest art cinema circuit in New Zealand. The joint venture
owns or manages five cinemas with 22 screens in the New Zealand cities of
Auckland, Wellington, Dunedin, Hamilton and Christchurch. All of the cinemas
are
in leased facilities. Our interest in this joint venture is accounted for using
the equity method.
Also,
as
of October 1, 2005, we purchased for $694,000 (NZ$1.0 million) a one-third
interest in Rialto Distribution. Rialto Distribution, an unincorporated joint
venture, is engaged in the business of distributing art film in New Zealand
and
Australia. The remaining 2/3rd
interest
was retained by the founders of the company, who intend to remain active in
the
business and who have been in the art film distribution business since 1993.
While we have not historically been involved in the distribution of film, we
believe that this investment complements our cinema exhibition operations in
Australia and New Zealand and could potentially complement our art film
exhibition activities in the United States. Our interest in this joint venture
is accounted for using the equity method.
One
of
our cinemas, consisting of eight screens, in Botany Downs, New Zealand is held
in 50/50 unincorporated joint venture with Everard Entertainment. Since this
joint venture is unincorporated joint venture, we own a direct undivided
interest in the lease, equipment, and business comprising the joint venture’s
assets. In 2003, we acquired a 33% unincorporated joint venture interest in
a
16-screen multiplex cinema located in a suburb of Brisbane, and operated under
the Birch Carroll & Coyle name. Since this is also an unincorporated joint
venture, we hold our 33% interest directly as an undivided interest in the
lease, equipment and business comprising this cinema asset. Our interest in
this
joint venture is accounted for using the equity method.
Management
of Cinemas
Our
employees manage Reading Australia’s wholly owned and consolidated cinemas and
Reading New Zealand’s wholly owned cinemas. Our six New Zealand joint venture
cinemas are operated by two joint ventures in which Reading New Zealand is,
directly or indirectly, a 50% joint venture partner. While our employees are
actively involved in the management of the Botany Downs joint venture, the
management of the five cinemas operated under the Rialto
name is,
generally speaking, performed by Sky, while we are principally responsible
for
the booking of the Rialto Cinemas. The 16-screen Brisbane joint venture cinema
is operated under the supervision of a management committee over which each
of
the joint venture partners holds certain veto rights and is managed by Birch
Carroll & Coyle.
Background
Information Concerning Australia
Australia
is a self-governing and fully independent member of the Commonwealth of Nations.
The constitution resembles that of the United States in that it creates a
federal form of government, under which the powers of the central government
are
specified and all residual powers are left to the states. The country is
organized into five mainland states (New South Wales, Queensland, South
Australia, Victoria and Western Australia), one island state (Tasmania) and
two
territories (Australian Capital Territory and the Northern
Territory).
The
ceremonial supreme executive is the British monarch, represented by the
governor-general and in each of the six states by a governor. These officials
are appointed by the British monarch, but appointments are always recommended
by
the Australian government. True executive power rests with the prime minister,
the leader of the
majority
party in the House of Representatives. The legislature is bicameral, with a
Senate and a House of Representatives, and the ministers are appointed by the
prime minister from the membership of the House and the Senate. The organization
of the state government is similar to that of the central government. Each
state
has an appointed governor, an elected premier and a legislature.
Australia
is the sixth largest country in the world in landmass with a population of
approximately 20.3 million people. This population is concentrated in a few
coastal urban areas, with approximately 4.2 million in the greater Sydney area,
3.6 million in the greater Melbourne area, 1.8 million in the Brisbane area,
1.5
million in Perth and 1.1 million in Adelaide. Australia is one of the richest
countries in the world in terms of natural resources per capita and one of
the
most economically developed countries in the world, although vast areas of
the
interior, known as “the Outback,” remain all but uninhabited. The principal
language is English, and the largest part of the population traces its origin
to
Britain and Europe, although an increasing portion of the population has
emigrated from the Far East. Australian taste in film has historically been
similar to that of American audiences.
Internal
trade is dominated by the two most populous states, New South Wales (mainly
Sydney) and Victoria (mainly Melbourne). Together these two states account
for a
majority of all wholesale trade and a significant percentage of retail sales.
At
the present time, Australia’s principal trading partners are Japan and the
European Union.
Australia
does not restrict the flow of currency into the country from the U.S. or out
of
Australia to the U.S. Also, subject to certain review procedures, U.S. companies
are typically permitted to operate businesses and to own real estate. On July
1,
2000, Australia implemented a goods and services tax (“GST”) on all goods and
services at a consistent rate of 10%. We do not believe that the GST has had
a
significant impact on our business.
Background
Information Concerning New Zealand
New
Zealand is also a self-governing member of the Commonwealth of Nations. It
is
comprised of two large islands, and numerous small islands, with a total land
area of approximately 104,500 square miles. The country has a population of
approximately 4.1 million people, most of who are of European descent and the
principal language is English. Wellington, with a population of approximately
450,000, is the capital and Auckland, with a population of approximately 1.2
million, is the largest city. Most of the population lives in urban
areas.
New
Zealand is a prosperous country with a high standard of social services. The
national economy is largely dependent upon the export of raw and processed
foods, timber, and machinery. Principally a trading nation, New Zealand exports
about 30% of its gross national product. In the past (particularly before the
United Kingdom entered the Common Market in 1973), New Zealand’s marketing
focused on a small number of countries, principally the United Kingdom.
Currently, only approximately 5% of New Zealand’s trade is with the United
Kingdom. Australia and the United States are New Zealand’s principal trading
partners. New Zealand’s economy remains sensitive to fluctuations in demand for
its principal exports.
Like
Australia, New Zealand has a largely ceremonial governor-general, appointed
by
the Queen of England. However, the executive branch is run by a prime minister,
typically the leader of the majority party in Parliament, and appointed
ministers (typically chosen from the members of Parliament). The Parliament
is
elected by universal adult suffrage using a mixed member proportional system.
Under this system, each voter casts two votes at the federal level, one for
a
local representative and one for a party. Fifty percent of the 120 seats in
Parliament are determined by the direct election of local representatives,
and
the remaining fifty percent are elected based upon the number of votes garnered
by the parties. The Prime Minister and his cabinet serve so long as they retain
the confidence of the Parliament.
With
the
exception of special excise taxes on tobacco, liquor, petroleum products and
motor vehicles the only general sales tax is a GST imposed on all such services
at the consistent rate of 12.5%. In effect, by a series of refunds, GST is
only
paid by the end-user of the goods or services in question. Resident companies
pay income tax at a rate of 33%; however, dividend imputation credits generally
prevent double taxation of company profits. There are no restrictions on
repatriation of capital or profits, but some payments to overseas parties are
subject to withholding tax. There is no capital gains tax, and there are tax
treaties with many countries, including the United States.
The
laws
for monitoring and approving significant overseas investment into New Zealand
reflect the country’s generally receptive attitude towards such investment and
the generally facilitating nature of the country’s foreign investment policies.
One hundred percent overseas ownership can be approved in nearly all industry
sectors, including motion picture exhibition and distribution. A review process
is also applicable to certain land transactions and the purchase of businesses
or assets having a value of NZ$100,000 or more.
Licensing/Pricing
Films
exhibited in Australia and New Zealand are licensed under agreements with major
film distributors and several local distributors who distribute specialized
films. Film exhibitors are provided with an opportunity to view films prior
to
negotiating with the film distributor the commercial terms applicable to its
release. Films are licensed on a film-by-film, theater-by-theater basis. Reading
Australia and Reading New Zealand license films from all film distributors
as
appropriate to each of our cinema location. Generally, film payment terms are
based upon various formulas that provide for payments based upon a specified
percentage of box office receipts.
Competition
The
film
exhibition market in both Australia and New Zealand is highly concentrated
and,
in certain cases in Australia, vertically integrated. The principal exhibitors
in Australia include a joint venture of Greater Union and Village (GUV) in
certain suburban multiplexes. The major exhibitors control approximately 67%
of
the total cinema box office: Village/Greater Union/Birch Carroll and Coyle
45%
and Hoyts Cinemas (“Hoyts”) 22%. Greater Union have 255 screens nationally;
Village 219 screens; Birch Carroll & Coyle (a subsidiary of Greater Union)
218 screens and Hoyts 333 screens. By comparison, our cinemas represent
approximately 6% of the total box office.
The
major
change in New Zealand this year was the exiting of Village Theatres from this
market. The major players are now Sky Cinemas (who purchased Village’s share of
these theaters) with 88 screens nationally, Reading with 48 screens (not
including partnerships), and Hoyts with 51 screens. The major exhibitors in
New
Zealand control approximately 62% of the total box office: Sky Cinemas 30%,
Reading 17% and Hoyts 15%, (Sky and Reading market share figures again do not
include any partnership theaters).
In
2003,
we acquired a 33% unincorporated joint venture interest in an existing 16-screen
cinema located in suburban Brisbane that is currently owned in principal part
by
Village and Birch Carroll & Coyle. This marks our only joint venture
arrangement with any of the Major Exhibitors in Australia. We are a 50/50 joint
venture partner with Sky in the Rialto circuit in New Zealand.
Greater
Union is the owner of Birch Carroll & Coyle. Generally speaking, all new
multiplex cinema projects announced by Village are being jointly developed
by a
joint venture comprised of Greater Union and Village. These companies have
substantial capital resources. Village had a publicly reported consolidated
net
worth of approximately $909.8 million (AUS$1.2 billion) at June 30, 2005. The
Greater Union organization does not separately publish financial reports, but
its parent, Amalgamated Holdings, had a publicly reported consolidated net
worth
of approximately $350.2 million (AUS$461.9 million) at June 30, 2006. Hoyts
does
not separately publish financial reports. Hoyts is currently owned 50% by West
Australian Newspapers and 50% by Publishing and Broadcasting, Ltd., a company
controlled, until his recent death, by Mr. Kerry Packer. Mr. Packer was
considered one of the wealthiest men in Australia with a net worth estimated
at
$4.7 billion (AUS$6.5 billion).
The
industry is also somewhat vertically integrated in that Roadshow Film
Distributors serves as a distributor of film in Australia and New Zealand for
Warner Brothers and New Line Cinema. Films produced or distributed by the
majority of the local international independent producers are also distributed
by Roadshow Film Distributors. Hoyts has also begun involvement in film
production and distribution.
In
our
view, the principal competitive restraint on the development of our business
in
Australia and New Zealand is the limited availability of good sites for future
development. We already have access to substantially all first run film on
competitive terms at all of our cinemas. However, our competitors and certain
major commercial real estate interests have historically utilized land use
development laws and regulations in Australia to prevent or delay our
construction of freestanding cinemas in new entertainment oriented complexes,
particularly where those complexes are located outside of an established central
business district or shopping center development. We also face ongoing
competition for alternative sources of entertainment, including, in particular,
increased compensation
from
in-the-home viewing alternatives. These competitive issues are discussed in
greater detail below under the caption, Competition,
and
under the caption, Item 1A - Risk Factors.
Currency
Risk
Generally
speaking, we do not engage in currency hedging. Rather, to the extent possible,
we operate our Australian and New Zealand operations on a self-funding basis.
Other than the capitalization of existing debt from time to time, no funds
have
been contributed from our U.S. operations to our Australia or New Zealand
operations since 2001 until our February 2007 Trust Preferred Offering described
below. The book value, stated in U.S. dollars, of our net assets in Australia
and New Zealand, (assets less third party liabilities and without intercompany
debt), at December 31, 2006 are as follows (dollars in thousands):
|
Net
Assets
|
||||
|
Reading
Australia
|
$
|
64,360
|
||
|
Reading
New Zealand
|
18,549
|
|||
|
Net
Assets
|
$
|
82,909
|
||
In
2006,
we determined that it would be beneficial to have a layer of long term fully
subordinated debt financing to help support our long term real estate assets.
On
February 5, 2007 we issued $50.0 million in 20-year fully subordinated notes,
interest fixed for five years at 9.22%, to a trust which we control, and which
in turn issued $50.0 million in trust preferred securities in a private
placement. There are no principal payments until maturity in 2027 when the
notes
are paid in full. The trust is essentially a pass through, and the transaction
is accounted for on our books as the issuance of fully subordinated notes.
The
placement generated $48.4 million in net proceeds, which were used principally
to retire all of our bank indebtedness in New Zealand $34.4 million (NZ$50.0
million) and to retire a portion of our bank indebtedness in Australia $5.8
million (AUS$7.4 million). This is a departure from our historic practice of
borrowing principally in local currencies and adds an increased element of
currency risk to our Company. We believe that this currency risk is mitigated
by
the comparatively favorable interest rate and the long-term nature of the fully
subordinated notes.
Virtually
all of our operating costs in Australia and New Zealand are denominated in
the
respective currencies of these two countries. Our concessions are purchased
locally, and our film rental is calculated as a percentage of box office
receipts. We have also attempted to keep our general and administrative costs
localized, although in recent periods, we have begun concentrating more of
our
financial reporting, control and analysis functions in our Los Angeles corporate
headquarters.
At
the
present time, the Australian and New Zealand dollars are trading at the upper
half of their historic 20-year range vis-à-vis the U.S. dollar. Set forth below
is a chart of the exchange ratios between these three currencies over the past
ten years:
Seasonality
Major
films are generally released to coincide with the school holiday periods,
particularly the summer holidays. Accordingly, our Australian and New Zealand
operations typically record greater revenues and earnings during the first
half
of the calendar year.
Employees
Reading
Australia has 27 full time executive and administrative employees and
approximately 727 cinema and property employees. None of our Australia based
employees is unionized. Reading New Zealand has 7 full time executive and
administrative employees and approximately 296 cinema and property level
employees. On January 26, 2007, we entered into a collective agreement with
the
employees of our Courtenay Central complex which has an 18-month term. This
agreement defines the terms of engagement of our employees and is consistent
with other industry agreements. Notwithstanding the unionization effort in
New
Zealand, we believe our relations with our employees to be generally good.
Our
Domestic Cinemas
General
We
currently operate 56 screens in nine cinemas in the United States (including
two
managed cinemas with nine screens). Our domestic cinema operations engage in
the
exhibition of mainstream general release film in our conventional cinemas,
such
as the Cinemas 1, 2 & 3, the Village East Theatre and the East
86th
Street
Cinema in Manhattan and the Manville 12 in Manville, New Jersey. We also engage
in the exhibition of art and specialty film at our art cinemas such as the
Angelika Film Centers in Manhattan, Dallas, Houston and Plano and the Tower
Theatre in Sacramento, California.
Most
of
our domestic cinemas are leased, other than the Cinemas 1, 2 & 3 property
which we own and the East 86th
Street
Cinema in Manhattan and the Plano Angelika which are operated pursuant to
management contracts. Our Angelika cinema in Manhattan is owned by a limited
liability company owned 50% by us and 50% by a subsidiary of National Auto
Credit, but it is under our management. The Manville 12 is leased pursuant
to a
ground
lease
through April 2024 (with various renewal rights through 2049) which allows
the
property to be used, at our discretion, for other retail uses.
In
recent
years, the domestic cinema exhibition industry has gone through major
retrenchment and consolidation, creating considerable uncertainty as to the
direction of the domestic film exhibition industry, and our role in that
industry. Several major cinema exhibition companies have gone through bankruptcy
over the past five years, or have been otherwise financially restructured.
Regal
Cinemas emerged from bankruptcy and combined with Edwards and United Artists
(which also went through bankruptcy) to create a circuit that has now grown
to
approximately 6,386 screens, in approximately 539 cinemas. Loews merged into
AMC
on January 26, 2006. AMC now has approximately 4,621 screens in approximately
337 cinemas in the United States and Canada. Landmark Theaters, the largest
art
and specialty film exhibitor in the United States, has also emerged from
bankruptcy and is now owned by a private company controlled by Mark Cuban (an
individual with a reported personal net worth of $1.3 billion). These companies,
having used bankruptcy to restructure their debt and to rid themselves of
burdensome leases and in some cases to consolidate, are now much stronger
competitors than they were just a few years ago.
A
significant number of older conventional screens have, as a result of this
consolidation process, been taken out of the market. We estimate that the total
domestic screen count has decreased from 37,396 in 2000 to 36,247 in
2005.
Industry
analysts project further consolidation in the industry, as players such as
Cablevision seek to divest their domestic cinema exhibition assets. Accordingly,
while we believe that recent developments may in some ways have aided the
overall health of the domestic cinema exhibition industry, there remains
considerable uncertainty as to the impact of this consolidation trend on us
and
our domestic cinema exhibition business, as we are forced to compete with these
stronger and reinvigorated competitors and the significant market share
commanded by these competitors.
In
2003,
we commenced antitrust litigation against, among others, Regal, Loews, Columbia,
Disney, Fox, MGM, Paramount and Universal, in an effort to stop Regal from,
in
essence, preventing the distribution defendants from providing quality first
run
film to our Village East cinema in Manhattan. Warner Bros, New Line and Miramax
were not named as defendants, since they have continued to supply first run
film
to our cinema. During 2005 and 2004, we incurred costs and expenses related
to
the litigation. We have, however, now reached settlement with all of the
defendant distributors on terms that we believe to be beneficial to our Company.
In January 2006, we lost a summary judgment motion to Regal and have determined
not to pursue an appeal, as our principal objective of the litigation, to open
film supply to our Village East cinema, has now been accomplished.
There
is
also considerable uncertainty as to the future of digital exhibition and
in-the-home entertainment alternatives. In the case of digital exhibition,
there
is currently considerable discussion within the industry as to the benefits
and
detriments of moving from conventional film projection to digital projection
technology. There are issues:
|
·
|
as
to when it will be available on an economically attractive
basis;
|
|
·
|
as
to who will pay for the conversion from conventional to digital technology
between exhibitors and
distributors;
|
|
·
|
as
to what the impact will be on film licensing expense; and
|
|
·
|
as
to how to deal with security and potential pirating issues if film
is
distributed in a digital format.
|
Several
major exhibitors have now announced plans to convert their cinemas to digital
projection. At some point, this will compel us likewise to incur the costs
of
conversion, as the costs of digital production are much less than the cost
of
conventional film production, from the studio’s point of view and as
distributors will, at some point in time to cease distributing film prints.
We
estimate that, at the present time, it would likely cost in the range of $23.7
million for us to convert our wholly owned cinemas to digital distribution
on a
worldwide basis.
In
the
case of in-the-home entertainment alternatives, the industry is faced with
the
significant leaps achieved in recent periods in both the quality and
affordability of in-the-home entertainment systems and in the accessibility
to
entertainment programming through cable, satellite and DVD distribution
channels. These alternative distribution channels are putting pressure on cinema
exhibitors to reduce the time period between theatrical and secondary release
dates, and certain distributors are talking about possible simultaneous or
near
simultaneous
releases in multiple channels of distribution. These are issues common to both
our domestic and international cinema operations.
While
no
assurances can be given, it may be that the reorganization and restructuring
of
the domestic cinema exhibition market will produce opportunities for us to
grow
our art and specialty circuit by acquiring, on favorable terms, rights to
operate cinemas no longer seen as suitable or competitive as conventional first
run film venues, or for other reasons, no longer attractive to other exhibitors.
However, the revitalization of Landmark with the acquisition of that company
in
2003 by Mark Cuban may present us with new hurdles and new challenges. Also,
the
owners of large modern multiplex cinemas are to some degree seeking out the
higher grossing art product to fill their screens, thus reducing the ability
of
older art specialty cinemas to attract such films. This can materially adversely
affect the viability of these specialty theaters, since they often need these
high grossing art and specialty films in order to survive. In any event, we
do
not intend to aggressively pursue domestic expansion opportunities simply to
buy
market share, and if attractive opportunities do not become available, we will
continue to focus on the operation of our existing cinemas and the exploitation
of the real estate elements underlying those cinemas.
Our
domestic cinemas derive approximately 72% of their revenues from box office
receipts. Ticket prices vary by location, and provide for reduced rates for
senior citizens and children. Box office receipts are reported net of state
and
local sales or service taxes. Show times and features are placed in
advertisements in local newspapers and, in some cases, Reading contributes
a
small percentage of these costs. Film distributors may also advertise certain
feature films and those costs are generally paid by distributors. Film rental
expense represented approximately 41% of box office receipts for
2006.
Concession
sales account for approximately 21% of total revenues for 2006. Concession
products primarily include popcorn, candy and soda, but Reading’s art cinemas
typically offer a wider variety of concession offerings. Our Angelika cinemas
in
Manhattan, Dallas, Houston and Plano include café facilities, and the operations
in Dallas, Houston and Plano are licensed to sell alcoholic beverages. Our
domestic cinemas achieved a gross margin on concession sales of approximately
81% for 2006.
Screen
advertising and other revenues contribute approximately 7% of total revenues
for
2006. Other sources of revenue include revenues from theater rentals for
meetings, conferences, special film exhibitions and vending machine receipts
or
rentals.
Licensing/Pricing
Film
product is available from a variety of sources ranging from the major film
distributors such as Columbia, Disney, Buena Vista, DreamWorks, Fox, MGM,
Paramount, Warner Bros and Universal, to a variety of smaller independent film
distributors such as Miramax. The major film distributors dominate the market
for mainstream conventional films. Similarly, most art and specialty films
come
from the art and specialty divisions of these major distributors, such as Fox’s
Searchlight and Disney’s Miramax. Generally speaking, film payment terms are
based upon an agreed upon percentage of box office receipts. In 2004, however,
our access to film was adversely affected by the decision by Fox, Fox
Searchlight and Universal not to distribute film to us domestically during
the
pendency of our antitrust litigation against them. As our claims against them
have now been settled, we are once again able to access their film product.
Our
access to film was likewise adversely affected in 2005 by a decision by
Paramount to not distribute film to us domestically during the pendency of
that
same lawsuit. However, that claim was settled in early 2006, and we had full
access to film from all distributors for most of 2006.
Until
recently, the surplus of screens currently available to distributors had eroded
the bargaining power of the exhibitors and that bargaining power has been on
the
side of the distributors. However, with the emergence of the mega circuits,
it
appears that the balance of power may be somewhat shifting towards the
exhibitors. Indeed, as discussed in greater detail below, we believe that in
certain situations, our access to first-run film has been adversely affected
by
the market power of exhibitors such as Regal and AMC.
Competition
The
principal factor in the success or failure of a particular cinema is access
to
popular film products. If a particular film is only offered at one cinema in
a
given market, then customers wishing to see that film will, of necessity, go
to
that cinema. If two or more cinemas in the same market offer the same film,
then
customers will typically take into account factors such as the relative
convenience and quality of the various cinemas. In many
markets,
the number of prints in distribution is less than the number of exhibitors
seeking that film for that market, and distributors typically take the position
that they are free to provide or not provide their films to particular
exhibitors, at their complete and absolute discretion.
Accordingly,
competition for films can be intense, depending upon the number of cinemas
in a
particular market. Our ability to obtain top grossing first run feature films
may be adversely impacted by our comparatively small size, and the limited
number of screens we can supply to distributors. Moreover, as a result of the
dramatic and recent consolidation of screens into the hands of a few very large
and powerful exhibitors such as Regal and AMC, these mega exhibition companies
are in a position to offer distributors access to many more screens in major
markets than can we. Accordingly, distributors may decide to give preferences
to
these mega exhibitors when it comes to licensing top grossing films, rather
than
deal with independents such as ourselves. The situation is different in
Australia and New Zealand where typically every major multiplex cinema has
access to all of the film currently in distribution, regardless of the ownership
of that multiplex cinema.
In
addition, the competitive situation facing our Company is uncertain given the
ongoing development of in-the-home entertainment alternatives such as DVD,
cable
and satellite distribution of films, and the increasing quality and declining
cost of in-the-home entertainment components.
Seasonality
Traditionally,
the exhibition of mainstream commercial films has been somewhat seasonal, with
most of the revenues being generated over the summer and Christmas holiday
seasons. However, with the increasing number of releases, this seasonality
is
becoming less of a factor. The exhibition of art and specialty films has
historically been less seasonal than the exhibition of mainstream commercial
films.
Management
All
of
our domestic cinemas are managed by our officers and employees. Angelika Film
Center, LLC (the owner of the Angelika Film Center & Café in the Soho
district of New York), is owned by us on a 50/50 basis with a subsidiary of
National Auto Credit, Inc (“NAC”). However, we manage that theater pursuant to a
management contract. Furthermore, the operating agreement of Angelika Film
Center, LLC provides that, in the event of deadlock our Chairman will cast
the
deciding vote.
Employees
At
December 31, 2006, we employed approximately 366 individuals to operate our
domestic cinemas and to attend to our real property operations. On January
31,
2003, we renegotiated our collective bargaining agreement with the projectionist
union with respect to our Manhattan cinemas and this agreement expired January
31, 2006. We negotiated a termination of our contract with the union effective
January 31, 2007. Our principal executive and administrative offices are located
in Los Angeles, California. Approximately 6 executives and 22 other employees
are located at our executive offices in Los Angeles and Manhattan. We believe
our relations with our employees to be good.
Our
Real Estate Activities
General
While
we
report our real estate as a separate segment, it has historically operated
as an
integral portion of our overall business. Since our entry into the cinema
exhibition business, our real estate activities have principally been in support
of that business. Accordingly, in this Annual Report, consistent with our
practice in prior periods, we have described our real estate activities as
an
integrated portion of our cinema operating and development activities.
However,
in light of our view that future growth opportunities in the cinema industries
are now quite limited in the countries in which we operate, and, as we have
no
current plan to enter any new foreign markets, we intend to focus more on our
real estate activities as a separate business activity.
Landplan
Property Partners, Ltd
In
2006,
we formed Landplan Property Partners, Ltd, to identify, acquire and develop
or
redevelop properties on an opportunistic basis. In connection with the formation
of Landplan, we entered into an agreement with Mr. Doug Osborne pursuant to
which (i) Mr. Osborne will serve as the chief executive officer of Landplan
and
(ii) Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”), will perform
certain property management services for Landplan. The agreement provides for
Mr. Osborne to hold an equity interest in the entities formed to hold these
properties; such equity interest to be (i) subordinate to our right to an 11%
compounded return on investment and (ii) subject to adjustment depending upon
various factors including the term of the investment and the amount invested.
Generally speaking, this equity interest will range from 27.5% to 15%. At
December 31, 2006, Landplan had acquired one property in Australia.
Malulani
Investments
In
addition, we have acquired an approximately 18.4% common equity interests in
Malulani Investments Limited (MIL), a closely held Hawaiian company which
currently owns approximately 763,000 square feet of developed real estate
principally in California, Hawaii and Texas, and approximately 22,000 acres
of
agricultural land in Northern California. Included among Malulani’s assets are
the Guenoc Winery, consisting of approximately 400 acres of vineyard land and
a
winery configured to bottle up to 120,000 cases of wine annually and Langtry
Estates and Vineyards. This land and commercial real estate holdings are
encumbered by debt. To date, our requests to management for information about
MIL, including consolidated financial information, have not been
honored. We have brought litigation against MIL and certain
of its directors in an effort to improve our access to information, including
consolidated financial information. While we believe that we should
prevail in our efforts in this regard, as in all litigation matters, no
assurances can be given.
Incident
to that investment, we have entered into a shareholders agreement with Magoon
Acquisition & Development, LLC (“Magoon LLC”), which includes certain right
of first refusal and cost sharing provisions and which grants to James J. Cotter
(our Chairman, Chief Executive Officer and controlling shareholder), a proxy
to
vote the shares held by Magoon LLC in MIL and in MIL's parent company, The
Malulani Group, Limited (“TMG”). Magoon LLC owns approximately 12% of MIL and
30% of TMG. Accordingly, through Mr. Cotter, we currently vote 30% of the shares
of MIL and TMG which represents a voting interest sufficient to elect one
representative to the boards of directors of each of these two companies.
Through the use of this voting power, we have elected Mr. Cotter to the Board
of
Directors of MIL. The shareholders agreement also gives us the right to cause
Magoon LLC to join with us in the formation of a limited liability company
which
we would control, and which would provide to us, after return of capital on
a
last in, first out basis, a 20% preferred allocation of profits and
distributions.
Real
Estate Holdings
Our
current real estate holdings are described in detail in Item 2, Properties,
below. At December 31, 2006, our principal wholly owned fee income generating
real estate assets with their percentage leased are as follows:
|
Property8
|
Square
Feet of Improvements
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Auburn
100
Parramatta Road
Auburn,
NSW, Australia
|
57,000
/ 57,000
Plus
an 871-space subterranean parking structure
|
71%
|
$28,191,000
|
|
Belmont
Knutsford
Ave and Fulham St
Belmont,
WA, Australia
|
19,000
/ 49,000
|
80%
|
$11,775,000
|
|
Cinemas
1, 2 & 3
1003
Third Avenue
Manhattan,
NY, USA
|
0
/
24,000
|
N/A
|
$24,986,000
|
|
Courtenay
Central
100
Courtenay Place
Wellington,
New Zealand
|
38,000
/ 68,000
Plus
a 245,000 square foot parking structure
|
76%
|
$26,815,000
|
|
Invercargill
Cinema
29
Dee Street
Invercargill,
New Zealand
|
7,000
/ 20,000
|
85%
|
$2,311,000
|
|
Maitland
Cinema
Ken
Tubman Drive
Maitland,
NSW, Australia
|
0
/
22,000
|
N/A
|
$1,873,000
|
|
Minetta
Lane Theatre
18-22
Minetta Lane
Manhattan,
NY, USA
|
0
/
9,000
|
N/A
|
$4,354,000
|
8
A number of our properties include entertainment components rented to one or
more of our subsidiaries. The rental area and percentage leased numbers are
net
of such entertainment components as is the book value. Book value and rental
information are as of December 31, 2006.
|
Property9
|
Square
Footage of Improvements
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Napier
Cinema
154
Station Street
Napier,
New Zealand
|
5,000
/ 18,000
|
100%
|
$2,603,000
|
|
Newmarket10
Newmarket,
QLD, Australia
|
93,000
/ 0
|
99%
|
$33,773,000
|
|
Orpheum
Theatre
126
2nd
Street
Manhattan,
NY, USA
|
0
/
5,000
|
N/A
|
$1,892,000
|
|
Royal
George
1633
N. Halsted Street
Chicago,
IL, USA
|
37,000
/ 23,000
Plus
21,000 square feet of parking
|
91%
|
$3,302,000
|
|
Rotorua
Cinema
1281
Eruera Street
Rotorua,
New Zealand
|
0
/
19,000
|
N/A
|
$2,530,000
|
|
Union
Square Theatre
100
E. 17th
Street
Manhattan,
NY, USA
|
21,000
/ 17,000
|
100%
|
$8,430,000
|
9
A number of our properties include entertainment
components rented to one or more of our subsidiaries. The rental area and
percentage leased numbers are net of such entertainment components as is the
book value. Book value and rental information are as of December 31,
2006.
10
The
rental components of this project have been opened for business. The cinema
component is, however, still in the design phase and not anticipated to open
before early 2009.
In
addition, in certain cases we have long term leases which we view more akin
to
real estate investments than cinema leases. These interests are described in
the
following chart:
|
Property11
|
Square
Footage
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Manville
|
0
/
63,000
|
N/A
|
$1,642,000
|
|
Village
East
|
5,000
/ 37,000
|
100%
|
$2,520,000
|
|
Waurn
Ponds
|
6,000
/ 52,000
|
100%
|
$8,170,000
|
11
A
number of our properties include entertainment components rented to one or
more
of our subsidiaries. The rental area and percentage leased numbers are net
of
such entertainment components. Book value, however, includes the entire
investment in the leased property, including any cinema fit-out. Rental and
book
value information is as of December 31, 2006.
Live
Theaters (Liberty Theaters)
Included
among our real estate holdings are four “Off Broadway” style live theaters,
operated through our Liberty Theaters subsidiary. We lease theater auditoriums
to the producers of “Off Broadway” theatrical productions and provide various
box office and concession services. The terms of our leases are, naturally,
principally dependent upon the commercial success of our tenants. STOMP has
been
playing at our Orpheum Theatre for many years. While we attempt to choose
productions that we believe will be successful, we have no control over the
production itself. At the current time, we have three single auditorium theaters
in Manhattan:
|
·
|
the
Minetta Lane (399 seats);
|
|
·
|
the
Orpheum (364 seats); and
|
|
·
|
the
Union Square (499 seats).
|
We
also
own a four auditorium theater complex, the Royal George in Chicago (main stage
452 seats, cabaret 199 seats, great room 100 seats and gallery 60 seats). We
own
the fee interest in each of these theaters. Two of the properties, the Union
Square and the Royal George, have ancillary retail and office
space.
We
are
basically in the business of leasing theatre space, and accordingly we do not
typically invest in plays. However, we may from time to time participate as
a
minority investor in order to facilitate the production of a play at one of
our
facilities, and do from time to time rent space on a basis that allows us to
share in a productions revenues or profits. Revenues, expenses and profits
are
reported as apart of the real estate segment of our business.
Our
Development Projects
Our
current real estate development projects are as follows:
|
·
|
Auburn,
New South Wales:
|
|
o
|
our
Auburn site is currently improved with a 109,000 square foot ETRC,
anchored by a 10 screen, 57,000 square foot cinema. Commonly known
as “Red
Yard,” the centre also includes an 871 space subterranean parking garage.
|
|
o
|
approximately
93,000 square feet of the site is currently unimproved, and is intended
to
provide expansion space for phase II of our Red Yard
project.
|
|
o
|
the
Auburn City Council, in coordination with other local governments,
is
currently reviewing the land use parameters for the areas adjacent
to
Parramatta Road in which our property is located. Parramatta Road,
which
runs adjacent to Homebush Bay, the site of the 2000 Olympic Games,
is one
of the busiest arterial roadways in the greater Sydney area, and
is
considered by many to be the “gateway” to Sydney. Consequently, there is
significant community interest in rezoning the uses along this road.
As a
major landowner in this area, we intend to be actively involved in
this
process and are hopeful that this rezoning process will materially
enhance
the value of our remaining unimproved parcel. We have deferred further
work on phase II until we get a better idea of the opportunities
that may
be opened by this rezoning process.
|
|
o
|
this
unimproved parcel is currently carried on our books at $1.6 million
(AUS$2.0 million).
|
|
·
|
Burwood,
Victoria:
|
|
o
|
our
Burwood site is comprised of 50.6 acres of unimproved land, previously
used as a brickworks and quarry. The property was rezoned in February
2006
to permit a broad range of entertainment, retail, commercial and
residential uses. Located in the Burwood suburb of Melbourne, it
was
designated as a “major activity centre” by the Victoria government,
hopefully paving the way for its redevelopment as a multi-use suburban
in-fill site.
|
|
o
|
the
site is the largest undeveloped parcel of land in the Burwood Heights
“major activity centre” and the largest undeveloped parcel of land in any
“major activity centre” in Victoria. Approximately 430,000 people live
within five miles of the site, which is well served by both public
transit
and surface streets. We estimate that approximately 70,000 people
pass by
the site each day.
|
|
o
|
we
anticipate that the project will be built in phases, over a significant
period of years, and will not likely be completed before sometime
in 2015.
The initial phase, however, will likely be an ETRC, as this is the
area of
development and construction with which we are most familiar.
|
|
o
|
we
do not currently have any funding in place for the development, and
are
paying for current master planning activities out of cash flow and
working
capital. The permitted uses outlined in the rezoning for the site
are
being defined through a Development Plan Overlay review by local
government. We currently estimate that complete build-out of the
site will
require funding in the range of $500.0 million (AUS$635.0
million).
|
|
o
|
our
original cost basis in the site is approximately $4.2 million (AUS$5.3
million). The property was originally acquired in 1996, but was revalued
upward in connection with the Consolidation in 2001, which was treated
as
a purchase for accounting purposes. This revaluation was made prior
to the
designation of the site as a “major activity center” in 2004. The current
book value of this property under construction is $24.3 million (AUS$30.9
million).
|
|
o
|
as
the
property was used by its prior owner as a brickworks, it will
be necessary
to remove the contaminated soil that resulted from those operations
from
the site before it can be used for mixed-use retail, entertainment,
commercial and residential purposes. In February of this year,
we
determined that our estimates as to the cost of such removal
were too low,
in light of the amount of contaminated soil discovered at the
site during
our grading and fill work at the site. We are currently re-evaluating
these estimates and the possible availability of legal recourse
against
those who were responsible for such
contamination.
|
|
·
|
Courtenay
Central, Wellington, New Zealand:
|
|
o
|
we
are currently the owner operator of an approximately 160,000 square
foot
ETRC in Wellington, New Zealand, known as Courtenay Central. The
existing
ETRC consists of a ten screen cinema and approximately 38,000 square
feet
of retail space. The property also includes a separate nine level
parking
structure, with approximately 1,086 parking spaces. During 2006,
approximately 3.5 million people went through the
center.
|
|
o
|
approximately
38,000 square feet of the site is currently unimproved and is intended
to
provide expansion space for phase II of our Courtenay Central
project.
|
|
o
|
we
have completed the design and statutory approval phase of the development
and we are seeking potential tenants to pre-commit to the centre
with
respect to the approximately 155,000 Phase II expansion to the centre.
The
retail market in Wellington is not presently strong and this has
delayed
our ability to secure suitable anchor tenants for the development.
Accordingly, this project is essentially in a holding pattern while
we
await a turnaround in the retail market and consider alternative
uses for
the site.
|
|
o
|
no
financing is currently in place with respect to Phase II, and current
work
is being funded from working capital and cash
flow.
|
|
o
|
this
unimproved parcel is currently being used for parking and is carried
on
our books at $2.3 million (NZ$3.2
million).
|
|
·
|
Moonee
Ponds, Victoria:
|
|
o
|
our
Moonee Ponds site is located in suburban Melbourne and currently
consists
of approximately 3.3 acres of mostly unimproved land.
|
|
o
|
we
are currently working on a plan for the mixed use development of
the site.
The site is located in a “Principal Activity Area.” Accordingly, our
development of the property will be influenced by other development
activity in the area.
|
|
o
|
we
acquired 2.9 acres of the property in April 1997, for a purchase
price of
$4.9 million (AUS$6.4 million). The remaining 0.4 acres was acquired
in
September 2006 for a purchase price of $2.5 million (AUS$3.3 million).
The
additional parcels now give us direct access to the principal transit
stop
serving the Moonee Ponds area. The total property is carried on our
books
at $8.9 million (AUS$11.2 million).
|
|
o
|
we
intend to work towards the finalization of a plan for the development
of
this site over 2007.
|
|
·
|
Place
57, Manhattan, New York:
|
|
o
|
we
have a 25% non-managing membership interest in the single purpose
limited
liability company formed to develop the site located at 205-209 E.
57th
Street, near the intersection of 57th
Street and 3rd
Avenue in Manhattan.
|
|
o
|
the
property, which was originally the site of our Sutton Theater, has
now
been redeveloped as an approximately 100,000 square foot residential
condominium project with ground floor retail under the name “Place
57.”
|
|
o
|
as
of December 31, 2006, approximately 88% of the units have been sold,
and
an additional 9% are under contract for sale. All the debt has been
retired and we had received distributions of approximately $5.9
million.
|
|
o
|
efforts
are continuing to lease the ground flow retail
space.
|
Investing
in our securities involves risk. Set forth below is a summary of various risk
factors which you should consider in connection with your investment in our
company. This summary should be considered in the context of our overall Annual
Report on Form 10K, as many of the topics addressed below are discussed in
significantly greater detail in the context of specific discussions of our
business plan, our operating results and the various competitive forces that
we
face.
Business
Risk Factors
We
are
currently engaged principally in the cinema exhibition and real estate
businesses. Since we operate in two business segments (cinema exhibition and
real estate), we have discussed separately the risks we believe to be material
to our involvement in each of these segments. We have discussed separately
certain risks relating to the international nature of our business activities,
our use of leverage, and our status as a controlled corporation. Please note,
that while we report the results of our live theatre operations as real estate
operations - since we are principally in the business or renting space to
producers rather than in licensing or producing plays ourselves - the cinema
exhibition and live theatre businesses share certain risk factors and are,
accordingly, discussed together below.
Cinema
Exhibition and Live Theatre Business Risk Factors
We
operate in a highly competitive environment, with many competitors who are
significantly larger and may have significantly better access to funds than
do
we.
We
are a
comparatively small cinema operator and face competition from much larger cinema
exhibitors. These larger circuits are able to offer distributors more screens
in
more markets - including markets where they may be the exclusive exhibitor
-
than can we. In some cases, faced with such competition, we may not be able
to
get access to all of the films we want, which may adversely affect our revenues
and profitability.
These
larger competitors may also enjoy (i) greater cash flow, which can be used
to
develop additional cinemas, including cinemas that may be competitive with
our
existing cinemas, (ii) better access to equity capital and debt, and (iii)
better visibility to landlords and real estate developers, than do we.
In
the
case of our live theatres, we compete for shows not only with other “for profit”
off-Broadway theaters, but also with not-for-profit operators and, increasingly,
with Broadway theaters. We believe our live theaters are generally competitive
with other off-Broadway venues. However, due to the increased cost of staging
live theater productions, we are seeing an increasing tendency for plays which
would historically have been staged in an off-Broadway theatre, moving directly
to larger Broadway venues.
We
face competition from other sources of entertainment and other entertainment
delivery systems.
Both
our
cinema and live theatre operations face competition from developing “in-home”
sources of entertainment. These include competition from DVDs, pay television,
cable and satellite television, the internet and other sources of entertainment,
and video games. The quality of in-house entertainment systems has increased
while the cost of such systems has decreased in recent periods, and some
consumers may prefer the security of an at-home entertainment experience to
the
more public experience offered by our cinemas and live theaters. The movie
distributors have been responding to these developments by, in some cases,
decreasing the period of time between cinema release and the date such product
is made available to “in-home” forms of distribution.
The
narrowing of this so called “window” for cinema exhibition may be problematic
since film licensing fees have historically been front end loaded. On the other
hand, the significant quantity of films produced in recent periods has probably
had more to do, at least to date, with the shortening of the time most movies
play in the cinemas, than any shortening of the cinema exhibition window. In
recent periods, there has been discussion about the possibility of eliminating
the cinema window altogether for certain films, in favor of a simultaneous
release in multiple channels of distribution, such as theaters, pay-per-view
and
DVD. However, again to date, this move has been strenuously resisted by the
cinema exhibition industry and we view the total elimination of the cinema
exhibition window, while theoretically possible, to be unlikely.
We
also
face competition from various other forms of beyond-the-home entertainment,
including sporting events, concerts, restaurants, casinos, video game arcades,
and nightclubs. Our cinemas also face competition from live theatres and
visa
versa.
Our
cinemas operations depend upon access to film that is attractive to our patrons
and our live theatre operations depend upon the continued attractiveness of
our
theaters to producers.
Our
ability to generate revenues and profits is largely dependent on factors outside
of our control; specifically the continued ability of motion picture and live
theater producers to produce films and plays that are attractive to audiences,
and the willingness of these producers to license their films to our cinemas
and
to rent our theatres for the presentation of their plays. To the extent that
popular movies and plays are produced, our cinema and live theatre activities
are ultimately dependent upon our ability, in the face of competition from
other
cinema and live theater operators, to book these movies and plays into our
facilities.
Adverse
economic conditions could materially affect our business by reducing
discretionary income.
Cinema
and live theater attendance is a luxury, not a necessity. Accordingly, a decline
in the economy resulting in a decrease in discretionary income, or a perception
of such a decline, may result in decreased discretionary spending, which could
adversely affect our cinema and live-theatre businesses.
Our
screen advertising revenues may decline.
Over
the
past several years, cinema exhibitors have been looking increasingly to screen
advertising as a way to boost income. No assurances can be given that this
source of income will be continuing or that the use of such advertising will
not
ultimately prove to be counter productive by giving consumers a disincentive
to
choose going to the movies over at-home entertainment alternatives.
We
face uncertainty as to the timing and direction of technological innovations
in
the cinema exhibition business and as to our access to those
technologies.
It
is
generally assumed that eventually, and perhaps in the relatively near future,
cinema exhibition will change over from film projection to digital projection
technology. Such technology offers various cost benefits to both distributors
and exhibitors. While the cost of such a conversion could be substantial, it
is
presently difficult to forecast the costs of such conversion, as it is not
presently clear how these costs would be allocated as between exhibitors and
distributors. Also, we anticipate that, as with most technologies, the cost
of
the equipment will reduce significantly over time. As technologies are always
evolving, it is, of course, also possible that other new technologies may evolve
that will adversely affect the competitiveness of current cinema exhibition
technology.
Real
Estate Development and Ownership Business Risks.
We
operate in a highly competitive environment, in which we must compete against
companies with much greater financial and human resources than we
have.
We
have
limited financial and human resources, compared to our principal real estate
competitors. In recent periods, we have relied heavily on outside professionals
in connection with our real estate development activities. Many of our
competitors have significantly greater resources than do we and may be able
to
achieve greater economies of scale than can we.
Risks
Related to the Real Estate Industry Generally
Our
financial performance will be affected by risks associated with the real estate
industry generally.
Events
and conditions generally applicable to developers, owners and operators of
real
property will affect our performance as well. These include (i) changes in
the
national, regional and local economic climate; (ii) local conditions such as
an
oversupply of, or a reduction in demand for commercial space and/or
entertainment oriented properties; (iii) reduced attractiveness of our
properties to tenants; (iv) competition from other properties; (v) inability
to
collect rent from tenants; (vi) increased operating costs, including real estate
taxes, insurance premiums and utilities; (vii) costs of complying with changes
in government regulations; and (viii) the relative illiquidity of real
estate
investments.
In addition, periods of economic slowdown or recession, rising interest rates
or
declining demand for real estate, or the public perception that any of these
events may occur, could result in declining rents or increased lease
defaults.
We
may incur costs complying with the Americans with Disabilities Act and similar
laws.
Under
the
Americans with Disabilities Act and similar statutory regimes in Australia
and
New Zealand or under applicable state law, all places of public accommodation
(including cinemas and theaters) are required to meet certain governmental
requirements related to access and use by persons with disabilities. A
determination that we are not in compliance with those governmental requirements
with respect to any of our properties could result in the imposition of fines
or
an award of damages to private litigants. The cost of addressing these issues
could be substantial. Fortunately, the great majority of our facilities were
built after the adoption of the Americans with Disabilities Act.
Illiquidity
of real estate investments could impede our ability to respond to adverse
changes in the performance of our properties.
Real
estate investments are relatively illiquid and, therefore, tend to limit our
ability to vary our portfolio promptly in response to changes in economic or
other conditions. Many of our properties are either (i) “special purpose”
properties that could not be readily converted to general residential, retail
or
office use, or (ii) undeveloped land. In addition, certain significant
expenditures associated with real estate investment, such as real estate taxes
and maintenance costs, are generally not reduced when circumstances cause a
reduction in income from the investment and competitive factors may prevent
the
pass-though of such costs to tenants.
Real
estate development involves a variety of risks.
Real
estate development includes a variety of risks, including the
following:
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The
identification and acquisition of suitable development
properties.
Competition for suitable development properties is intense. Our ability
to
identify and acquire development properties may be limited by our
size and
resources. Also, as we and our affiliates are considered to be “foreign
owned” for purposes of certain Australia and New Zealand statutes, we have
been in the past, and may in the future be, subject to regulations
that
are not applicable to other persons doing business in those
countries.
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The
procurement of necessary land use entitlements for the
project.
This process can take many years, particularly if opposed by competing
interests. Competitors and community groups (sometimes funded by
such
competitors) may object based on various factors including, for example,
impacts on density, parking, traffic, noise levels and the historic
or
architectural nature of the building being replaced. If they are
unsuccessful at the local governmental level, they may seek recourse to
the courts or other tribunals. This can delay projects and increase
costs.
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The
construction of the project on time and on budget.
Construction risks include the availability and cost of finance;
the
availability and costs of material and labor, the costs of dealing
with
unknown site conditions (including addressing pollution or environmental
wastes deposited upon the property by prior owners), inclement weather
conditions, and the ever present potential for labor related disruptions.
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The
leasing or sell-out of the project.
Ultimately, there are the risks involved in the leasing of a rental
property or the sale of condominium or built-for-sale property. Leasing
or
sale can be influenced by economic factors that are neither known
nor
knowable at the commencement of the development process and by local,
national and even international economic conditions, both real and
perceived.
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The
refinancing of completed properties.
Properties are often developed using relatively short term loans.
Upon
completion of the project, it may be necessary to find replacement
financing for these loans. This process involves risk as to the
availability of such permanent or other take-out financing, the interest
rates and the payment terms applicable to such financing, which may
be
adversely influenced by local, national or international factors.
To date,
we have been successful in negotiating development loans with roll
over or
other provisions mitigating our need to refinance immediately upon
completion of construction.
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The
ownership of properties involves risk.
The
ownership of investment properties involves risks, such as: (i) ongoing leasing
and re-leasing risks, (ii) ongoing financing and re-financing risks, (iii)
market risks as to the multiples offered by buyers of investment properties,
(iv) risks related to the ongoing compliance with changing governmental
regulation clause (iv) (including, without limitation, environmental laws and
requirements to remediate environmental contamination that may exist on a
property, even though not deposited on the property by us) (v) relative
illiquidity compared to some other types of assets, and (vi) susceptibility
of
assets to uninsurable risks, such as biological, chemical or nuclear terrorism.
Furthermore, as our properties are typically developed around an entertainment
use, the attractiveness of these properties to tenants, sources of finance
and
real estate investors will be influenced by market perceptions of the benefits
and detriments of such entertainment type properties.
International
Business Risks
Our
international operations are subject to a variety of risks, including the
following:
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Risk
of currency fluctuations.
While we report our earnings and assets in US dollars, substantial
portions of our revenues and of our obligations are denominated in
either
Australian or New Zealand dollars. The value of these currencies
can vary
significantly compared to the US dollar and compared to each other.
We
typically have not hedged against these currency fluctuations, but
rather
have relied upon the natural hedges that exist as a result of the
fact
that our film costs are typically fixed as a percentage of box office,
and
our local operating costs and obligations are likewise typically
denominated in local currencies.
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Risk
of adverse government regulation. At
the present time, we believe that relations between the United States,
Australia and New Zealand are good. However, no assurances can be
given
that this relationship will continue and that Australia and New Zealand
will not in the future seek to regulate more highly the business
done by
US companies in their countries.
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Risks
Associated with Certain Discontinued Operations
Certain
of our subsidiaries were previously in industrial businesses. As a consequence,
properties that are currently owned or may have in the past been owned by these
subsidiaries may prove to have environmental issues. While we have, where we
have knowledge of such environmental issues and are in a position to make an
assessment as to our exposure, established what we believe to be appropriate
reserves, we are exposed to the risk that currently unknown problems may be
discovered. These subsidiaries are also exposed to potential claims related
to
exposure of former employees to coal dust, asbestos and other materials now
considered to be, or which in the future may be found to be, carcinogenic or
otherwise injurious to health.
Operating
Results, Financial Structure and Certain Tax Matters
This
is the first year we have generated a profit in recent
periods.
Our
earnings, as calculated for accounting purposes, have been adversely affected
in
recent years by our real estate development oriented business plan, by
litigation expenses and by competitive conditions in Puerto Rico. Our cinema
exhibition and real estate businesses generate significant depreciation.
Furthermore, a significant amount of our assets has been invested, in recent
periods, in undeveloped land or in properties under development, which do not
produce current earnings. We have now exited Puerto Rico, having sold our assets
there.
We
have negative working capital.
In
recent
years, as we have invested our cash in new acquisitions and the development
of
our existing properties, we have moved from a positive to a negative working
capital situation. This negative working capital is typical in the cinema
exhibition industry, since revenues are received in advance of our obligation
to
pay film licensing fees, rent and other costs. At the present time, we have
credit facilities in place which, if drawn upon, could be used to eliminate
this
negative working capital position - which we consider to be akin to an interest
free loan.
We
have substantial short to medium term debt.
Generally
speaking, we have financed our operations through relatively short term debt.
No
assurances can be given that we will be able to refinance this debt, or if
we
can, that the terms will be reasonable. However, as a counterbalance to this
debt, we have significant unencumbered real property assets, which could be
sold
to pay debt or encumbered to assist in the refinancing of existing debt, if
necessary. In February 2007, we issued $50.0 million in 20-year Trust Preferred
Securities, and utilized the net proceeds principally to retire short term
bank
debt in New Zealand and Australia. However, the interest rate on our Trust
Preferred Securities is only fixed for five years, and since we have used US
Dollar denominated obligations to retire debt denominated in New Zealand and
Australian Dollars, this transaction and use of net proceeds has increased
our
exposure to currency risk.
We
have substantial lease liabilities.
Most
of
our cinemas operate in leased facilities. These leases typically have cost
of
living or other rent adjustment features and require that we operate the
properties as cinemas. A down turn in our cinema exhibition business might,
depending on its severity, adversely affect the ability of our cinema operating
subsidiaries to meet these rental obligations. Even if our cinema exhibition
business remains relatively constant, cinema level cash flow will likely be
adversely affected unless we can increase our revenues sufficiently to offset
increases in our rental liabilities.
The
Internal Revenue Service has given us notice of a claimed liability of $20.9
million in back taxes, plus interest of $13.5 million.
While
we
believe that we have good defenses to this liability, the claimed exposure
is
substantial compared to our net worth, and significantly in excess of our
current or anticipated near term liquidity. This contingent liability is
discussed in greater detail under Item 3 - Legal Proceedings: Tax Audit. If
we
were to lose on this matter, we would also be confronted with a potential
additional $5.4 million in taxes to the California Franchise Tax Board, plus
interest of approximately $3.5 million.
Our
stock is thinly traded.
Our
stock
is thinly traded, with an average daily volume in 2006 of only approximately
3,700 shares. This can result in significant volatility, as demand by buyers
and
sellers can easily get out of balance.
Ownership
Structure, Corporate Governance and Change of Control Risks
The
interests of our controlling stockholder may conflict with your interests.
Mr.
James
J. Cotter beneficially owns 71.1% of our outstanding Class B Voting Common
Stock. Our Class A Non-Voting Common Stock is essentially non-voting, while
our Class B Voting Common Stock represents all of the voting power of our
Company. As a result, as of December 31, 2006, Mr. Cotter controlled 71.1%
of the voting power of all of our outstanding common stock. For as long as
Mr.
Cotter continues to own shares of common stock representing more than 50% of
the
voting power of our common stock, he will be able to elect all of the members
of
our board of directors and determine the outcome of all matters submitted to
a
vote of our stockholders, including matters involving mergers or other business
combinations, the acquisition or disposition of assets, the incurrence of
indebtedness, the issuance of any additional shares of common stock or other
equity securities and the payment of dividends on common stock. Mr. Cotter
will
also have the power to prevent or cause a change in control, and could take
other actions that might be desirable to Mr. Cotter but not to other
stockholders. In addition, Mr. Cotter and his affiliates have controlling
interests in companies in related and unrelated industries. In the future,
we
may participate in transactions with these companies (see Note 25 - Related
Parties and Transactions).
Since
we are a Controlled Company, our Directors have determined to take advantage
of
certain exemptions provide by the American Stock Exchange from the corporate
governance rules adopted by that Exchange.
Generally
speaking, the American Stock Exchange requires listed companies to meet certain
minimum corporate governance provisions. However, a Controlled Corporation,
such
as we, may elect not to be governed by certain of these provisions. Our board
of
directors has elected to exempt our Company from requirements that (i)
at
least
a
majority of our directors be independent, (ii) nominees to our board of
directors be nominated by a committee comprised entirely of independent
directors or by a majority of our Company’s independent directors, and (iii) the
compensation of our chief executive officer be determined or recommended to
our
board of directors by a compensation committee comprised entirely of independent
directors or by a majority of our Company’s independent directors.
Notwithstanding the determination by our board of directors to opt-out of these
American Stock Exchange requirements, a majority of our board of directors
is
nevertheless currently comprised of independent directors, and our compensation
committee is nevertheless currently comprised entirely of independent
directors.
Not
applicable.
Executive
and Administrative Offices
We
lease
approximately 8,000 square feet of office space in Commerce,
California
to serve
as our executive headquarters. During 2005, we purchased a 9,000 square foot
office building in Melbourne, Australia, to serve as the headquarters for our
Australia and New Zealand operations. We occupy approximately 2,000 square
feet
of our Village East leasehold property for administrative purposes.
Entertainment
Properties
Leasehold
Interests
We
lease
approximately 1.1 million square feet of completed cinema space in the United
States, Australia, and New Zealand as follows:
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Aggregate
Square Footage
|
Approximate
Range of Remaining Lease Terms (including
renewals)
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|
|
United
States
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254,000
|
5
-
42 years
|
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Australia
|
614,000
|
29
- 40 years
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|
New
Zealand
|
268,000
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5
-
10 years
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Fee
Interests
In
Australia, we own approximately 3.2 million square feet of land at eight
locations plus one strata title estate consisting of 22,000 square feet.
Substantially all of this land is located in the greater metropolitan areas
of
Brisbane, Melbourne, Perth and Sydney, including the 50.6 acre Burwood site
in
suburban Melbourne.
In
New
Zealand, we own a 190,000 square foot site, which includes an existing 245,000
square foot, nine level parking structure in the heart of Wellington, the
capital of New Zealand. All but 38,000 square feet of the Wellington site has
been developed as an ETRC which incorporates the existing parking garage. The
remaining land is currently leased and is slated for development as phase two
of
our Wellington ETRC. We own the fee interests underlying three additional
cinemas in New Zealand, which properties include approximately 12,000 square
feet of ancillary retail space.
In
the
United States, we own approximately 146,000 square feet of improved real estate
comprised of four live theater buildings which include approximately 58,000
square feet of leasable space, the fee interest in our Cinemas 1, 2 & 3 in
Manhattan, and a residential condominium unit in Los Angeles, used as executive
office and residential space by our Chairman and Chief Executive Officer.
Joint
Venture Interests
We
also
hold real estate through several unincorporated joint ventures and one
majority-owned subsidiary, as described below:
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in
Australia, we own a 66% unincorporated joint venture interest in
a leased
5-screen multiplex cinema in Melbourne, a 75% interest in a subsidiary
company that leases two cinemas with eleven screens in two Australian
country towns, and a 33% unincorporated joint venture interest in
a
16-screen leasehold cinema in a suburb of Brisbane.
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in
New Zealand we own a 50% unincorporated joint venture interest in
an
eight-screen mainstream cinema in a suburb of Auckland and we own
a 50%
unincorporated joint venture interest in five cinemas with 22 screens
in
the New Zealand cities of Auckland, Christchurch, Wellington, Dunedin
and
Hamilton.
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in
the United States, we own a 50% membership interest in Angelika Film
Center, LLC, which holds the lease to the approximately 17,000 square
foot
Angelika Film Center & Café in the Soho district of Manhattan. We also
hold the management rights with respect to this
asset.
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ETRC
Development Properties
Our
development projects are described in greater detail above in this Annual Report
under the Caption, Our
Real Estate Activities, Our
Development Projects.
The
following is intended as a summary of these projects.
Burwood,
Victoria
In
December 1995, we acquired a 50.6 acre site in Burwood, a suburban area within
the Melbourne metropolitan area, initially as a potential ETRC location. In
late
2003, that site was designated as a “major activity centre” by the Victorian
State Government and in February 2006 was rezoned to permit a broad range of
entertainment, retail, commercial and residential uses. We anticipate that
the
property will be developed in a series of phases over a reasonable period of
time, and that the final completion will not be achieved until sometime in
2015.
The rezoning plan calls for the preparation and approval by the City of separate
development plans for each of these various phases.
Wellington,
New Zealand
We
are
currently the owner operator of an approximately 160,000 square foot ETRC in
Wellington, New Zealand, known as Courtenay Central. The existing ETRC consists
of a ten screen cinema with approximately 38,000 square feet of retail space
and
a separate nine level parking structure. We have completed the design and
statutory approval phase of the development and we are seeking potential tenants
to pre-commit to the centre with respect to an approximately 155,000 square
foot
Phase II expansion to the centre, to be constructed on the approximately 38,000
square foot parcel adjacent to the existing centre. The retail market has
significantly softened in Wellington and this has delayed our ability to secure
suitable anchor tenants for the development. Accordingly, phase II is currently
in a holding pattern as we wait for the retail market to improve and consider
alternative uses for the property.
Newmarket,
Queensland
On
November 28, 2005, we opened some of the retail elements of our Newmarket ETRC,
a 100,000 square foot retail facility situated on an approximately 177,000
square foot parcel in Newmarket, a suburban of Brisbane, the remainder of the
retail areas being rented out during the first half of 2006. Plans for a
6-screen cinema as part of the project have been approved by applicable
governmental authorities, and it is anticipated that construction of this
entertainment component will commence later this year.
Moonee
Ponds, Victoria
We
own an
approximately 3.3 acre property in Moonee Ponds, a suburb of Melbourne. We
are
currently in the planning phase for a multi-use development. This site is
located within the Moonee Ponds “Principal Activity Area” as designated by the
Victorian State Government. The site represents an accumulation of three
parcels, the last of which was acquired in 2006.
Auburn,
New South Wales
We
are
currently the owner operator of an approximately 109,000 square foot ETRC known
as Red Yard, in Auburn, a suburb of Sydney. We own an approximately 93,000
square foot parcel of unimproved land adjacent to that project, which we are
holding to develop as Phase II of our Red Yard property. The area in which
our
property is located will be considered for rezoning as part of a strategy to
improve access through to Sydney. Accordingly, we are currently in a holding
pattern with respect to this property, as we wait to see how this potential
re-zoning progresses.
Other
Development or Redevelopment Properties
Australia
and New Zealand.
Landplan
Through
our Landplan Realty Partners subsidiary, we hold the following properties,
acquired for development or re-development for non-entertainment oriented uses
and held in special purpose entities:
70
Station Road, Indooroopilly, Brisbane, Australia.
This
site, acquired in September 2006, has a land area of 11,000 square feet, and
a
two-story 3,000 square foot building. We paid US$1.8 million (AUD$2.3 million)
for the land. The site is zoned for commercial purposes. We are currently
seeking approval to develop a 28,000 square foot grade A commercial office
building comprising five floors of office space and two basement levels of
parking with 33 parking spaces. We expect to spend US$8.9 million (AUD$11.3
million) in development costs. We plan to complete the project in July
2008.
Subsequent
to December 31, 2006, we entered into the following purchase
agreement:
Sails
Motor Lodge, Lake Taupo, New Zealand.
We
purchased this on February 14, 2007 for US$4.9 million (NZD$7.1 million). The
property comprises a well established 16-unit motel and a two-story residence.
We plan to divide the residence into three units and sell all of the units
to
investors or owner occupiers. We plan to sell a management right to manage
the
units.
Other
Property Interests and Investments
Domestic
Minority
Investments in Real Estate Companies
Place
57, Manhattan
We
own a
25% membership interest in the limited liability company that is developing
the
site of our former Sutton Cinema on 57th
Street
just east of 3rd
Avenue
in Manhattan, as a 100,000 square foot residential condominium tower, with
ground floor retail. 59 of the residential units have now been sold, 6
residential units are under contract of sale, and 2 of the residential units
and
the commercial unit are still available for sale. At December 31, 2006, we
had
received distributions totaling $5.9 million from this project, and we currently
anticipate that something in the area of an additional $5.6 million will be
distributed during 2007 comprising profit and return of capital
investment.
Malulani
Investments, Limited
We
own an
18.4% equity interest in Malulani Investments, Limited (“MIL”) a closely held
private company organized under the laws of the State of Hawaii. The assets
of
MIL consist principally of commercial properties in Hawaii, California and
Texas. MIL’s assets include approximately 763,000 square feet of commercial real
estate, the Guenoc Winery and approximately 23,000 acres of contiguous property
located in Northern California. Approximately 400 acres of the property in
California consists of vineyards, while the remainder is used for agricultural
purposes. The property is currently subdivided into approximately 60 separate
legal parcels. This land and commercial real estate holdings are encumbered
by
debt. To date, our requests to management for information about MIL, including
consolidated financial information, have not been honored. We have
brought litigation against MIL and certain of its directors in an
effort to improve our access to information, including consolidated financial
information. While we believe that we should prevail in our efforts
in this regard, as in all litigation matters, no assurances can be given.
In
connection with this investment we have entered into a shareholders agreement
with Magoon Acquisition and Development, LLC, a limited liability company
organized under the laws of the state of California (“Magoon LLC”). Magoon LLC
owns an approximately 12% equity interest in MIL and a 30% interest in The
Malulani Group, Limited, a closely held private Hawaiian corporation (“TMG”),
and the owner of 70% equity interest in MIL. That shareholders agreement grants
to us voting control over the MIL and TMG shares held by Magoon, LLC, and
provides for various rights of first refusal and cost sharing. In addition,
the
shareholders agreement grants to us the right to require Magoon LLC to
contribute its MIL and TMG shares into a new limited liability company, which
would also own our MIL shares, of which we would be the sole managing member.
As
the sole managing member, we would be entitled to receive 20% of any
distributions as a management fee, after return of capital to the members.
MIL
and TMG both have cumulative voting, and together with Magoon LLC, we have
elected James J. Cotter to serve as a member of the Board of Directors of MIL.
Non-operating
Properties
We
own
fee interest in 11 parcels comprising 317.6 acres. These acres consist primarily
of vacant land. We believe the value of these properties to be immaterial to
our
asset base, and while they are available for sale, we are not actively involved
in the marketing of such properties. With the exception of certain properties
located in Philadelphia (including the raised railroad bed leading to the old
Reading Railroad Station), the properties are principally located in rural
areas
of Pennsylvania and Delaware.
Additionally,
we own a condominium in the Los Angeles, California area which is used for
offsite corporate meetings and by our Chief Executive Officer when he is in
town.
Australia
Melbourne
Office Building
On
September 29, 2005, we purchased an office building in Melbourne, Australia
for
$2.0 million (AUS$2.6 million) to serve as the headquarters for our Australia
and New Zealand operations. We fully financed this property by drawing on our
Australian Credit Facility.
Tax
Audit/Litigation
The
Internal Revenue Service (the “IRS”) completed its audits of the tax return of
Reading Entertainment Inc. (RDGE) for its tax years ended December 31, 1996
through December 31, 1999 and the tax return of Craig Corporation (CRG) for
its
tax year ended June 30, 1997. With respect to both of these companies, the
principal focus of these audits was the treatment of the contribution by RDGE
to
our wholly owned subsidiary, Reading Australia, and thereafter the subsequent
repurchase by Stater Bros. Inc. from Reading Australia of certain preferred
stock in Stater Bros. Inc. (the “Stater Stock”) received by RDGE from CRG as a
part of a private placement of securities by RDGE which closed in October 1996.
A second issue involving equipment leasing transactions entered into by RDGE
(discussed below) is also involved.
By
letters dated November 9, 2001, the IRS issued reports of examination proposing
changes to the tax returns of RDGE and CRG for the years in question (the
“Examination Reports”). The Examination Report for each of RDGE and CRG proposed
that the gains on the disposition by RDGE of Stater Stock, reported as taxable
on the RDGE return, should be allocated to CRG. As reported, the gain resulted
in no additional tax to RDGE inasmuch as the gain was entirely offset by a
net
operating loss carry forward of RDGE. This proposed change would result in
an
additional tax liability for CRG of approximately $20.9 million plus interest
of
approximately $13.5 million as of December 31, 2006. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $3.5 million as of December 31, 2006. Accordingly,
this proposed change represented, as of December 31, 2006, an exposure of
approximately $43.3 million.
Moreover,
California has “amnesty” provisions imposing additional liability on taxpayers
who are determined to have materially underreported their taxable income. While
these provisions have been criticized by a number of corporate taxpayers to
the
extent that they apply to tax liabilities that are being contested in good
faith, no assurances can be given that these new provisions will be applied
in a
manner that would mitigate the impact on such taxpayers. Accordingly, these
provisions may cause an additional $4.0 million exposure to CRG, for a total
exposure of approximately $47.3 million. We have accrued $4.0 million as a
probable loss in relation to this exposure and believe that the possible total
settlement amount will be between $4.0 million and $47.3 million.
In
early
February 2005, we had a mediation conference with the IRS concerning this
proposed change. The mediation was conducted by two mediators, one of whom
was
selected by the taxpayer from the private sector and one of whom was an employee
of the IRS. In connection with this mediation, we and the IRS each prepared
written submissions to the mediators setting forth our respective cases. In
its
written submission, the IRS noted that it had offered to settle its claims
against us at 30% of the proposed change, and reiterated this offer at the
mediation. This offer constituted, in effect, an offer to settle for a payment
of $5.0 million federal tax, plus interest, for an aggregate settlement amount
of approximately $8.0 million. Based on advice of counsel given after reviewing
the materials submitted by the IRS to the mediation panel, and the oral
presentation made by the IRS to the mediation panel and the comments of the
mediators (including the IRS mediator), we determined not to accept this
offer.
Notices
of deficiency (“N/D”) dated June 29, 2006 were received with respect to each of
RDGE and CRG determining proposed deficiencies of $20.9 million for CRG and
a
total of $349,000 for RDGE for the tax years 1997, 1998 and 1999.
We
intend
to litigate aggressively these matters in the U.S. Tax Court and an appeal
was
filed with the court on September 26, 2006. While there are always risks in
litigation, we believe that a settlement at the level currently offered by
the
IRS would substantially understate the strength of our position and the
likelihood that we would prevail in a trial of these matters.
Since
these tax liabilities relate to time periods prior to the Consolidation of
CDL,
RDGE, and CRG into Reading International, Inc. and since RDGE and CRG continue
to exist as wholly owned subsidiaries of RII, it is expected that any adverse
determination would be limited in recourse to the assets of RDGE or CRG, as
the
case may be, and not to the general assets of RII. At the present time, the
assets of these subsidiaries are comprised principally of RII securities.
Accordingly, we do not anticipate, even if there were to be an adverse judgment
in favor of the IRS that the satisfaction of that judgment would interfere
with
the internal operation or result in any
levy
upon
or loss of any of our material operating assets. The satisfaction of any such
adverse judgment would, however, result in a material dilution to existing
stockholder interests.
The
N/D
issued to RDGE does not cover its tax year 1996 which will be held in abeyance
pending the resolution of the CRG case. An adjustment to 1996 taxable income
for
RDGE would result in a refund of alternative minimum tax paid that year. The
N/D
issued to RDGE eliminated the gains booked by RDGE in 1996 as a consequence
of
its acquisition certain computer equipment and sale of the anticipated income
stream from the lease of such equipment to third parties and disallowed
depreciation deductions that we took with respect to that equipment in 1997,
1998 and 1999. Such disallowance has the effect of decreasing net operating
losses but did not result in any additional regular federal income tax for
such
years. However, the depreciation disallowance would increase RDGE state tax
liability for those years by approximately $170,000 plus interest. The only
tax
liability reflected in the RDGE N/D is alternative minimum tax in the total
amount of approximately $349,000 plus interest. On September 26, 2006, we filed
an appeal on this N/D with the U.S. Tax Court.
Environmental
and Asbestos Claims
The
City
of Philadelphia (the “City”) has asserted that the North Viaduct property owned
by a subsidiary of Reading requires environmental decontamination and that
such
subsidiary’s share of any such remediation cost will aggregate approximately
$3.5 million. The City has also asserted that we should demolish certain bridges
and overpasses that comprise a portion of the North Viaduct. We have in the
recent past had discussions with the City involving a possible conveyance of
the
property. However, these discussions have not been productive of any definitive
offer or proposal from the City. We continue to believe that our recorded
remediation reserves related to the North Viaduct are adequate.
Certain
of our subsidiaries were historically involved in railroad operations, coal
mining and manufacturing. Also, certain of these subsidiaries appear in the
chain of title of properties which may suffer from pollution. Accordingly,
certain of these subsidiaries have, from time to time, been named in and may
in
the future be named in various actions brought under applicable environmental
laws. Also, we are in the real estate development business and may encounter
from time to time unanticipated environmental conditions at properties that
we
have acquired for development. These environmental conditions can increase
the
cost of such projects, and adversely affect the value and potential for profit
of such projects. We do not currently believe that our exposure under applicable
environmental laws is material in amount.
From
time
to time, we have claims brought against us relating to the exposure of former
employees of our railroad operations to asbestos and coal dust. These are
generally covered by an insurance settlement reached in September 1990 with
our
insurance carriers. However, this insurance settlement does not cover litigation
by people who were not our employees and who may claim second hand exposure
to
asbestos, coal dust and/or other chemicals or elements now recognized as
potentially causing cancer in humans.
Whitehorse
Center Litigation
On
October 30, 2000, we commenced litigation in the Supreme Court of Victoria
at
Melbourne, Commercial and Equity Division, against our joint venture partner
and
the controlling stockholders of our joint venture partner in the Whitehorse
Shopping Center. That action is entitled Reading Entertainment Australia Pty,
Ltd vs. Burstone Victoria Pty, Ltd and May Way Khor and David Frederick Burr,
and was brought to collect on a promissory note (the “K/B Promissory Note”)
evidencing a loan that we made to Ms. Khor and Mr. Burr and that was guaranteed
by Burstone Victoria Pty, Ltd (“Burstone” and collectively with Ms. Khor and Mr.
Burr, the “Burstone Parties”). This loan balance has been previously written off
and is no longer recorded on our books. The Burstone Parties asserted in defense
certain set-offs and counterclaims, alleging, in essence, that we had breached
our alleged obligations to proceed with the development of the Whitehorse
Shopping Center, causing the Burstone Parties substantial damages. Following
trial, the trial court not only affirmed the liability of the Burstone Parties
on the K/B Promissory Note but also determined that we had breached certain
obligations owed to WPG (the joint venture in which we own a 50% interest and
in
which Burstone owns the remaining 50% interest). The trial court did not,
however, find us in breach of any direct obligations to any one or more of
the
Burstone Parties.
The
trial
court has entered judgment against us and in favor of WPG in the amount of
$3.5
million (AUS$4.5 million). The trial court has also entered judgment against
the
Burstone Parties and in our favor in the amount of $3.3 million (AUS$4.2
million). Further, the trial court has found us responsible to reimburse the
Burstone Parties for 60% of their out-of-pocket legal fees. The Burstone Parties
estimate that the final costs order will be in the range of $710,000 to $867,000
(AUS$900,000 to AUS$1.1 million). Even if the Court allows the maximum of this
range, our judgment against the Burstone Parties will still exceed our net
liability under the judgment in favor of WPG. In addition, we have settled
various ancillary claims against us for an additional $315,000 (AUS$400,000),
which has now been paid to WPG.
A
provisional liquidator has been appointed for WPG, and that company is now
in
the process of being wound up. As a consequence of our 50% interest in WPG,
in
the event that we are not successful in our appeal, we currently anticipate
that
we will ultimately receive liquidating distributions from WPG in an amount
equal
to approximately $1.8 million (AUS$2.3 million). During the third quarter of
2005, the Burstone Parties paid us $237,000 (AUS$300,000) against our judgment
against them, and we have now entered into an agreement with the Burstone
Parties, pursuant to which they have agreed to pay the balance of our judgment
against them, together with ongoing interest, over time and have provided
various undertakings and a guaranty to secure that obligation. Accordingly,
we
believe that our judgment against the Burstone Parties is adequately secured
and, even if we do not prevail on appeal, we will still net in the range of
$1.3
million (AUS$1.6 million) from the litigation, less such attorney’s fees as may
be assessed against us when the final accounting for such fees is made, and
our
own costs of collection.
We
are
advised by senior Queen’s Counsel after conducting an independent review of the
evidence submitted at trial and the trial court’s opinion that, in his opinion,
the trial court erred in a number of critical aspects, and that we should have
no liability to WPG or any of the Burstone Parties. Accordingly, we have
appealed that part of the trial court’s determination. The Burstone Parties have
likewise appealed, arguing that the damages assessed in favor of WPG and against
us should be higher. The appeal has been set down for hearing on March 19,
2007.
On
June
22, 2005, consent orders were made, which included the appointment of Mr. Jim
Downey as the provisional liquidator to WPG. The provisional liquidator is
awaiting the determination of the appeal before taking further steps in relation
to WPG.
Mackie
Litigation
On
November 7, 2005, we were sued in the Supreme Court of Victoria at Melbourne
by
a former construction contractor with respect to the discontinued development
of
an ETRC at Frankston, Victoria. The action is entitled Mackie Group Pty Ltd
v.
Reading Properties Pty Ltd, and in it the former contractor seeks payment of
a
claimed fee in the amount of $788,000 (AUS$1.0 million). We do not believe
that
any such fee is owed, and are contesting the claim. Discovery has now been
completed by both parties. The next step in the litigation is likely to be
mediation.
In
a
hearing conducted on November 22 and 29, 2006, Reading successfully defended
an
application for summary judgment brought by Mackie and was awarded costs for
part of the preparation of its defense to the application. A bill of costs
has
been prepared by a cost consultant in the sum of $20,000 (AUS$25,000) (including
disbursements). A summons for taxation of costs has been issued and is set
down
for a call over on February 27, 2007 at which time a hearing will be set and
Mackie will have an opportunity to dispute the quantum of the costs claimed
by
Reading.
Other
Claims
- Credit
Card Claims
During
2006, the bank, which administers our credit card activities, asserted a claim
of potential loss suffered in relation to the use by third parties of
counterfeit credit cards and related credit card company fines. We expect the
associated claims from the bank and credit card companies for these losses
and
fines to total approximately $1.2 million. For this reason, we have expensed
an
other loss of $1.2 million during the year ending December 31, 2006. The issues
surrounding this credit card situation have now been addressed and we intend
to
seek to recoup all or substantially all of these charges.
At
our
2006 Annual Meeting of Stockholders held on May 18, 2006, the stockholders
voted
on the following proposals:
|
·
|
by
the following vote, our eight directors were reelected to serve on
the
Board of Directors until the 2007 Annual Meeting of Stockholders:
|
|
Election
of Directors
|
For
|
Withheld
|
|||||
|
James
J. Cotter
|
1,289,080
|
133,922
|
|||||
|
Eric
Barr
|
1,422,963
|
39
|
|||||
|
James
J. Cotter, Jr.
|
1,289,920
|
133,082
|
|||||
|
Margaret
Cotter
|
1,289,100
|
133,902
|
|||||
|
William
D. Gould
|
1,289,920
|
133,082
|
|||||
|
Edward
L. Kane
|
1,422,963
|
39
|
|||||
|
Gerard
P. Laheney
|
1,422,963
|
39
|
|||||
|
Alfred
Villaseñor
|
1,422,963
|
39
|
|||||
Item
5 - Market for Registrant’s Common Equity and Related Stockholder
Matters
Market
Information
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 incorporated in 1999 and, following the
consummation of a consolidation transaction on December 31, 2001 (the
“Consolidation”), is now the owner of the consolidated businesses and assets of
Reading Entertainment, Inc. (“RDGE”), Craig Corporation (“CRG”), and Citadel
Holding Corporation (“CDL”). Until the consolidation of CDL, RDGE and CRG on
December 31, 2001, our common stock was listed and quoted on the American Stock
Exchange (“AMEX”) under the symbols CDL.A and CDL.B. Following the
consolidation, we changed our name to RDI. Effective January 2, 2002, our common
stock traded on the American Stock Exchange under the symbols RDI.A and RDI.B.
In March 2004, we changed our nonvoting stock symbol from RDI.A to
RDI.
The
following table sets forth the high and low closing prices of the RDI and RDI.B
common stock for each of the quarters in 2006 and 2005 as reported by
AMEX:
|
Class
A Nonvoting
|
Class
B Voting
|
||||
|
Common
Stock
|
Common
Stock
|
||||
|
High
|
Low
|
High
|
Low
|
||
|
2006:
|
Fourth
Quarter
|
$8.53
|
$7.77
|
$8.35
|
$7.65
|
|
Third
Quarter
|
$8.18
|
$7.75
|
$8.00
|
$7.35
|
|
|
Second
Quarter
|
$8.42
|
$7.89
|
$8.35
|
$7.50
|
|
|
First
Quarter
|
$8.62
|
$7.50
|
$8.60
|
$7.30
|
|
|
|
|||||
|
2005:
|
Fourth
Quarter
|
$8.25
|
$7.52
|
$8.00
|
$7.40
|
|
Third
Quarter
|
$8.40
|
$7.18
|
$8.20
|
$7.10
|
|
|
Second
Quarter
|
$7.50
|
$6.01
|
$7.40
|
$6.05
|
|
|
First
Quarter
|
$8.19
|
$6.81
|
$8.20
|
$7.20
|
|
Holders
of Record
The
number of holders of record of our Class A and Class B Stock in 2006 was
approximately 3,500 and 300, respectively. On March 28, 2007, the closing price
per share of our Class A Stock was $8.54, and the closing price per share of
our
Class B Stock was $8.40.
Dividends
on Common Stock
We
have
never declared a cash dividend on our common stock and we have no current plans
to declare a dividend; however, we review this matter on an ongoing
basis.
The
table
below sets forth certain historical financial data regarding our Company. This
information is derived in part from, and should be read in conjunction with
our
consolidated financial statements included in Item 8 of this Annual Report
on
Form 10-K for the year ended December 31, 2006 (the “2006 Annual Report”), and
the related notes to the consolidated financial statements (dollars in
thousands, except per share amounts).
|
At
or for the Year Ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Revenue12
|
$
|
106,125
|
$
|
98,105
|
$
|
84,089
|
$
|
73,911
|
$
|
66,759
|
||||||
|
Gain
(loss) from discontinued operations
|
$
|
--
|
$
|
12,231
|
$
|
(469
|
)
|
$
|
(288
|
)
|
$
|
333
|
||||
|
Operating
income (loss)
|
$
|
2,415
|
$
|
(6,372
|
)
|
$
|
(6,322
|
)
|
$
|
(5,839
|
)
|
$
|
(6,509
|
)
|
||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
$
|
(5,928
|
)
|
$
|
(7,954
|
)
|
|||
|
Basic
earnings (loss)per share - continuing operations
|
$
|
0.17
|
$
|
(0.51
|
)
|
$
|
(0.37
|
)
|
$
|
(0.26
|
)
|
$
|
(0.34
|
)
|
||
|
Basic
earnings (loss)per share - discontinued operations
|
$
|
--
|
$
|
0.55
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|||
|
Basic
earnings (loss)per share
|
$
|
0.17
|
$
|
0.04
|
$
|
(0.39
|
)
|
$
|
(0.27
|
)
|
$
|
(0.36
|
)
|
|||
|
Diluted
earnings (loss)per share - continuing operations
|
$
|
0.17
|
$
|
(0.51
|
)
|
$
|
(0.37
|
)
|
$
|
(0.26
|
)
|
$
|
(0.34
|
)
|
||
|
Diluted
earnings (loss)per share - discontinued operations
|
$
|
--
|
$
|
0.55
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|||
|
Diluted
earnings (loss)per share
|
$
|
0.17
|
$
|
0.04
|
$
|
(0.39
|
)
|
$
|
(0.27
|
)
|
$
|
(0.36
|
)
|
|||
|
Other
Information:
|
||||||||||||||||
|
Shares
outstanding
|
22,476,355
|
22,485,948
|
21,998,239
|
21,899,290
|
21,821,154
|
|||||||||||
|
Weighted
average shares outstanding
|
22,425,941
|
22,249,967
|
21,948,065
|
21,860,222
|
21,821,236
|
|||||||||||
|
Weighted
average dilutive shares outstanding
|
22,674,818
|
22,249,967
|
21,948,065
|
21,860,222
|
21,821,236
|
|||||||||||
|
Total
assets
|
$
|
289,231
|
$
|
253,057
|
$
|
230,227
|
$
|
222,866
|
$
|
182,772
|
||||||
|
Total
debt
|
$
|
130,212
|
$
|
109,320
|
$
|
72,879
|
$
|
60,765
|
$
|
37,563
|
||||||
|
Working
capital (deficit)
|
$
|
(6,997
|
)
|
$
|
(14,282
|
)
|
$
|
(6,915
|
)
|
$
|
(154
|
)
|
$
|
124
|
||
|
Stockholders’
equity
|
$
|
107,659
|
$
|
99,404
|
$
|
102,010
|
$
|
108,491
|
$
|
91,265
|
||||||
|
EBIT
|
$
|
12,734
|
$
|
6,671
|
$
|
(4,339
|
)
|
$
|
(2,650
|
)
|
$
|
(6,208
|
)
|
|||
|
Depreciation
and amortization
|
$
|
13,212
|
$
|
12,384
|
$
|
11,823
|
$
|
10,952
|
$
|
7,835
|
||||||
|
Add:
Adjustments for discontinued operations
|
$
|
--
|
$
|
567
|
$
|
1,915
|
$
|
1,907
|
$
|
1,906
|
||||||
|
EBITDA
|
$
|
25,946
|
$
|
19,622
|
$
|
9,399
|
$
|
10,209
|
$
|
3,533
|
||||||
|
Debt
to EBITDA
|
5.02
|
5.57
|
7.75
|
5.95
|
10.63
|
|||||||||||
|
Capital
expenditure (including acquisitions)
|
$
|
16,389
|
$
|
53,954
|
$
|
33,180
|
$
|
5,809
|
$
|
10,437
|
||||||
|
Number
of employees at 12/31
|
1,451
|
1,523
|
1,677
|
1,453
|
1,304
|
|||||||||||
12
2005,
2004, 2003 and 2002 revenues have been adjusted from the amounts previously
reported. See Note 2 and Note 21 to the 2006 Consolidated Financial
Statements.
EBIT
presented above represents net income (loss) adjusted for interest expense
(calculated net of interest income) and income tax expense. EBIT is presented
for informational purposes to show the significance of depreciation and
amortization in the calculation of EBITDA. We use EBIT in our evaluation of
our
operating results since we believe that it is useful as a measure of financial
performance, particularly for us as a multinational company. We believe it
is a
useful measure of financial performance principally for the following
reasons:
|
·
|
since
we operate in multiple tax jurisdictions, we find EBIT removes the
impact
of the varying tax rates and tax regimes in the jurisdictions in
which we
operate.
|
|
·
|
in addition, we find EBIT useful as a financial measure that removes the impact from our effective tax rate of factors not directly related to our business operations, such as, whether we have acquired operating assets by purchasing those assets directly, or indirectly by purchasing the stock of a company that might hold such operating assets. |
|
·
|
the
use of EBIT as a financial measure also (i) removes the impact of
tax
timing differences which may vary from time to time and from jurisdiction
to jurisdiction, (ii) allows us to compare our performance to that
achieved by other companies, and (iii) is useful as a financial measure
that removes the impact of our historically significant net loss
carryforwards.
|
|
·
|
the
elimination of net interest expense helps us to compare our operating
performance to those companies that may have more or less debt than
do
we.
|
EBITDA
presented above is net income (loss) adjusted for interest expense (again,
calculated net of interest income), income tax expense, and in addition
depreciation and amortization expense. We use EBITDA in our evaluation of our
performance since we believe that EBITDA provides a useful measure of financial
performance and value. We believe this principally for the following
reasons:
|
·
|
we
believe that EBITDA is an industry comparative measure of financial
performance. It is, in our experience, a measure commonly used by
analysts
and financial commentators who report on the cinema exhibition and
real
estate industries and a measure used by financial institutions in
underwriting the creditworthiness of companies in these industries.
Accordingly, our management monitors this calculation as a method
of
judging our performance against our peers and market expectations
and our
creditworthiness.
|
|
·
|
also,
analysts, financial commentators and persons active in the cinema
exhibition and real estate industries typically value enterprises
engaged
in these businesses at various multiples of EBITDA. Accordingly,
we find
EBITDA valuable as an indicator of the underlying value of our
businesses.
|
We
expect
that investors may use EBITDA to judge our ability to generate cash, as a basis
of comparison to other companies engaged in the cinema exhibition and real
estate businesses and as a basis to value our company against such other
companies.
Neither
EBIT nor EBITDA is a measurement of financial performance under accounting
principles generally accepted in the United States of America and should not
be
considered in isolation or construed as a substitute for net income or other
operations data or cash flow data prepared in accordance with accounting
principles generally accepted in the United States for purposes of analyzing
our
profitability. The exclusion of various components such as interest, taxes,
depreciation and amortization necessarily limit the usefulness of these measures
when assessing our financial performance, as not all funds depicted by EBITDA
are available for management’s discretionary use. For example, a substantial
portion of such funds are subject to contractual restrictions and functional
requirements to service debt, to fund necessary capital expenditures and to
meet
other commitments from time to time as described in more detail in this Annual
Report on Form 10-K.
EBIT
and
EBITDA also fail to take into account the cost of interest and taxes. Interest
is clearly a real cost that for us is paid periodically as accrued. Taxes may
or
may not be a current cash item but are nevertheless real costs which, in most
situations, must eventually be paid. A company that realizes taxable earnings
in
high tax jurisdictions may, ultimately, be less valuable than a company that
realizes the same amount of taxable earnings in a low tax jurisdiction. EBITDA
fails to take into account the cost of depreciation and amortization and the
fact that assets will eventually wear out and have to be replaced.
EBITDA,
as calculated by us, may not be comparable to similarly titled measures reported
by other companies. A reconciliation of net income (loss) to EBIT and EBITDA
is
presented below (dollars in thousands):
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
$
|
(5,928
|
)
|
$
|
(7,954
|
)
|
|||
|
Add: Interest
expense, net
|
6,608
|
4,473
|
3,078
|
2,567
|
1,740
|
|||||||||||
|
Add: Income
tax expense
|
2,270
|
1,209
|
1,046
|
711
|
6
|
|||||||||||
|
EBIT
|
$
|
12,734
|
$
|
6,671
|
$
|
(4,339
|
)
|
$
|
(2,650
|
)
|
$
|
(6,208
|
)
|
|||
|
Add: Depreciation
and amortization
|
13,212
|
12,384
|
11,823
|
10,952
|
7,835
|
|||||||||||
|
Adjustments
for discontinued operations:
|
||||||||||||||||
|
Add: Interest
expense, net
|
--
|
310
|
839
|
856
|
1,036
|
|||||||||||
|
Add: Depreciation
and amortization
|
--
|
257
|
1,076
|
1,051
|
870
|
|||||||||||
|
EBITDA
|
$
|
25,946
|
$
|
19,622
|
$
|
9,399
|
$
|
10,209
|
$
|
3,533
|
||||||
Item
7 - Management’s Discussions and Analysis of Financial
Condition and Results of Operations
The
following review should be read in conjunction with the consolidated financial
statements and related notes included in our 2006 Annual Report. Historical
results and percentage relationships do not necessarily indicate operating
results for any future periods.
Overview
Today,
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 (“ETRCs”) in Australia and New Zealand
and live theater assets in Manhattan and Chicago in the United
States.
|
We
manage
our worldwide cinema businesses under various different brands:
|
·
|
in
the US, under the Reading, Angelika Film Center and City Cinemas
brands;
|
|
·
|
in
Australia, under the Reading brand;
and
|
|
·
|
in
New Zealand, under the Reading, Berkeley Cinemas and Rialto brands.
|
While
we
do not believe the cinema exhibition business to be a growth business at this
time, we do believe it 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. However, since we believe the cinema
exhibition business to be a mature business with most markets either adequately
screened or over-screened, we see our future asset growth coming more from
our
real estate development activities than from the acquisition or development
of
additional cinemas. While we intend to be opportunistic in adding to our
existing cinema portfolio (and to continue to work to expand our art cinema
operations), we believe it likely that, going forward, we will be reinvesting
our free cash flow more in our general real estate development activities than
in the acquisition or development of additional cinemas. Over time, we
anticipate that our cinema operations will become increasing a source of cash
flow to support our real estate oriented activities and that our real estate
activities will become the principal thrust of our business.
In
short,
while we do have operating company attributes, we see ourselves principally
as a
hard asset company that will add to shareholder value by building the value
of
our portfolio of tangible assets.
Business
Climate
Cinema
Exhibition - General
There
is
considerable uncertainty in the film industry as to the future of digital
exhibition and in-the-home entertainment alternatives. In the case of digital
exhibition, there is currently considerable discussion within the industry
as to
the benefits and detriments of moving from conventional film projection to
digital projection technology. There are issues as to when it will be available
on an economically attractive basis, as to who will pay for the conversion
from
conventional to digital technology between exhibitors and distributors, as
to
what the impact will be on film licensing expense, and as to how to deal with
security and potential pirating issues if film is distributed in a digital
format. In the case of in-the-home entertainment alternatives, the industry
is
faced with the significant leaps achieved in recent periods in both the quality
and affordability of in-the-home entertainment systems and in the accessibility
to entertainment programming through cable, satellite and DVD distribution
channels. These are issues common to both our domestic and international cinema
operations.
Cinema
Exhibition - Australia / New Zealand
The
film
exhibition industry in Australia and New Zealand is highly concentrated and
somewhat vertically integrated in that one of the Major Exhibitors, Roadshow
Film Distributors, also serves as a distributor of film in Australia and New
Zealand for Warner Bros. and New Line. Films produced or distributed by the
majority of the local international independent producers are also distributed
by Roadshow. Typically, the Major Exhibitors own the newer multiplex and
mega-plex cinemas, while the independent exhibitors typically have older and
smaller cinemas. Accordingly, we believe it likely that the Major Exhibitors
may
control upwards of 65% of the total cinema box office in Australia and New
Zealand. Also, the Major Exhibitors have in recent periods built a number of
new
multiplexes as joint venture partners or under-shared facility arrangements,
and
have historically not engaged in head-to-head competition, except in the
downtown areas of Sydney and Melbourne.
Cinema
Exhibition - North America
In
North
America, distributors may find it more commercially appealing to deal with
major
exhibitors, rather than to deal with independents like us, which tends to
suppress supply screens in a very limited number of markets. This competitive
disadvantage has increased significantly in recent periods with the development
of mega circuits like Regal and AMC, who are able to offer distributors access
to screens on a truly nationwide basis, or on the other hand, to deny access
if
their desires with respect to film supply are not satisfied.
With
the
restructuring and consolidation recently undertaken in the industry, and the
emergence of increasingly attractive in-home entertainment alternatives, it
is
unclear what the competitive future holds for our North American operations.
These consolidations have adversely affected our ability to get film in certain
domestic markets where we compete against major exhibitors.
Real
Estate - Australia and New Zealand
Commercial
and retail property values have remained high in Australia and New Zealand
due
to sound economic growth and controlled interest rates. New Zealand has enjoyed
consistent growth in rentals and values with some signs in early 2006 that
this
has plateaued in the short term. Project commencements have declined with
indications that construction prices will tighten this year. There are signs
that Australian based large funds are actively seeking out opportunities in
New
Zealand.
The
Australian commercial sector of the real estate market has remained buoyant
in
Australia during 2006. The large institutional funds are still seeking out
prime
assets with premium prices being paid for good retail and commercial investments
and development opportunities. Leasing interest in growth areas such as Brisbane
is driving positive returns. Many large residential unit developments in
Sydney
and Melbourne have however resulted in some oversupply and this sector has
softening values.
Real
Estate - North America
In
the
U.S., our real estate interests are predominantly centered on our live theatre
rental operations, with the exception of one property relating to a cinema
asset
that we operate. In addition our geographic focus of real estate holdings is
narrowed to New York and Illinois, and there specifically Manhattan and
Chicago.
The
four
properties that we own relative to our live theatre operations are therefore
affected by i) our ability to secure the right live production and ii) the
potential for redevelopment of any one site. Any ancillary rental stream, which
would be affected by the general state of the US property market, is minor
compared to that. Likewise, the rental stream of the one cinema that we own
depends solely on our cinema operation, and its value to us depends on this
and
its redevelopment potential.
The
market for redevelopment sites in Manhattan and Chicago will likely stabilize
from the rapid rise in appreciation values over the past few years.
Business
Segments
As
indicated above, our two primary business segments are cinema exhibition and
the
holding and development of real estate. These segments are summarized as
follows:
Cinema
Exhibition
One
of
our primary businesses consists of the ownership and operation of cinemas.
At
December 31, 2006 we:
|
·
|
directly
operated 35 cinemas with 231
screens;
|
|
·
|
had
interests in certain unconsolidated joint ventures in which we have
varying interests, which own an additional 7 cinemas with 46
screens;
|
|
·
|
managed
2 cinemas with 9 screens;
|
|
·
|
had
entered into an agreement for lease with respect to a new 8-screen
cinema
currently under development in a regional shopping center located
in a
fast growing suburban area in Australia. It is anticipated that this
cinema will open in March 2008; and
|
|
·
|
had
obtained the final governmental approvals required for the construction
of
the approximately 33,000 square foot cinema component of our Newmarket
ETRC.
|
Our
cinema revenue consists of admissions, concessions and advertising. The cinema
operating expense consists of the costs directly attributable to the operation
of the cinemas including employee-related, occupancy and operating costs and
film rent expense. Cinema revenue and expense fluctuates with the availability
of quality first-run films and the numbers of weeks the first-run films stay
in
the market.
Rental
Real Estate Holdings
For
fiscal 2006, our rental generating real estate holdings consisted of the
following properties:
|
·
|
our
Belmont, Western Australia ETRC, our Auburn, New South Wales ETRC
and our
Wellington, New Zealand ETRC;
|
|
·
|
our
Newmarket shopping center in Newmarket, Queensland, a suburb of Brisbane.
The center is ultimately intended to be an ETRC, and we recently
obtained
final government approvals for the construction of an approximately
33,000
square foot cinema as a part of the
complex;
|
|
·
|
three
single auditorium live theaters in Manhattan (Minetta Lane, Orpheum,
and
Union Square) and a four auditorium live theater 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;
and
|
|
·
|
the
ancillary retail and commercial tenants at some of our non-ETRC cinema
properties.
|
In
addition, we have approximately 2.5 million square feet of unimproved real
estate held for development in Australia and New Zealand, discussed in greater
detail below, and certain unimproved land in the United States that was used
in
our historic activities. We also own an 8,783 square foot commercial building
in
Melbourne, which serves as our administrative headquarters for Australia and
New
Zealand.
In
2006,
we acquired the following interests:
|
·
|
Indooroopilly
Land. On
September 18, 2006, we purchased a 0.3 acre property for $1.8 million
(AUS$2.3 million) as part of our newly established Landplan Property
Partners initiative. It is currently anticipated that the property
will be
redeveloped for commercial
purposes.
|
|
·
|
Moonee
Ponds Land. On
September 1, 2006, we purchased two parcels of land aggregating 0.4
acres
adjacent to our Moonee Ponds property for $2.5 million (AUS$3.3 million).
This acquisition increases our holdings at Moonee Ponds to 3.1 acres
and
gives us frontage facing the principal transit station servicing
the area.
We are currently working to finalize plans for the development of
this
property into a mixed use entertainment based retail and commercial
complex.
|
|
·
|
Malulani
Investments.
On June 28, 2006, we acquired for $1.8 million, an 18.4% equity interest
in Malulani Investments, Limited (“MIL”), a closely held Hawaiian company
which currently owns approximately 763,000 square feet of developed
commercial real estate principally in California, Hawaii and Texas,
and
approximately 22,000 acres of agricultural land in Northern California.
Included among
|
|
·
|
MIL’s
assets is the Guenoc Winery, consisting of approximately 400
acres of
vineyard land and a winery equipped to bottle up to 120,000 cases
of wine
annually. This land and commercial real estate holdings are encumbered
by
debt.
|
In
2005,
we acquired the following real property interests:
|
·
|
the
8,783 square foot commercial building in Melbourne, Australia which
we use
as the administrative headquarters for our operations in Australia
and New
Zealand;
|
|
·
|
the
fee interest and the lessor’s interest in the ground lease underlying our
Cinemas 1, 2 & 3 property in Manhattan;
and
|
|
·
|
the
lessee’s interest in the Cinemas 1, 2 & 3 ground
lease.
|
Property
Held For or Under Development
For
fiscal 2006, our investments in property held for or under development consisted
of:
|
·
|
an
approximately 50.6 acre property located in the Burwood area of Melbourne,
Australia, recently rezoned from an essentially industrial zone to
a
priority zone allowing a variety of retail, entertainment, commercial
and
residential uses and currently in the planning stages of
development;
|
|
·
|
an
approximately 3.1 acre property located in the Moonee Ponds area
of
Melbourne, Australia. We are currently working to finalize plans
for the
development of this property into a mixed use entertainment based
retail
and commercial complex;
|
|
·
|
an
approximately 2.1 acre property located next to our Auburn ETRC in
the
Auburn area of Sydney, Australia. This property is in an area adjacent
to
the 2000 Olympic Village in Sydney and is currently being considered
by
local governmental authorities for significant up-zoning;
|
|
·
|
an
approximately 0.9 acre property located adjacent to the Courtenay
Central
ETRC in Wellington, New Zealand. We have received all necessary
governmental approvals to develop the site for retail, commercial
and
entertainment purposes as Phase II of our existing ETRC. We anticipate
the
construction of an approximately 155,000 square foot retail project
which,
when completed, will be integrated into the common areas of our existing
ETRC;
|
|
·
|
a
25% interest, representing an investment of $3.0 million, in the
company
redeveloping the site of our old Sutton Cinema site in Manhattan,
New
York. The property is being redeveloped as an approximately 100,000
square
foot residential condominium project with ground floor retail and
is being
marketed under the name “Place
57.”
The
partnership has closed on the sale of 59 condominiums during 2006,
resulting in gross sales of $117.7 million and equity earnings from
unconsolidated joint venture to us of $8.3 million. At December 31,
2006,
6
residential units were under contract of sale
and scheduled to close in 2007 while
2 of the residential units and the commercial unit were still available
for sale; and
|
|
·
|
a
0.3 acre property with a two-story 3,464 square foot building
Indooroopilly, Brisbane, Australia. The site is zoned for commercial
purposes. We are currently seeking approval to develop a 27,868 square
foot grade A commercial office building comprising five floors of
office
space and two basement levels of parking with 38 parking spaces.
We plan
to complete this project in July
2008.
|
Recent
Business Developments
We
look
to take advantage of those opportunities that may present themselves to expand
strategically our existing cinema circuits. However, we do not intend to reach
out for cinema assets or to grow simply for the sake of growing. Rather, we
intend to be disciplined in our approach to acquiring and developing cinema
assets.
We
have,
in the past, and may, in the future, dispose of, or put to alternative use
some
or all of our interests in various operating assets, in order to maximize the
values of such assets. Generally speaking, since the Consolidation, we have
disposed of our non-cinema and non-real estate related assets so as to focus
on
our principal two businesses.
During
the past 24 months, we have engaged in the following transactions which we
believe are consistent with our business plan:
|
·
|
Place
57, Manhattan. We
own a 25% membership interest in the limited liability company that
is
developing the site of our former Sutton Cinema on 57th
Street just east of 3rd
Avenue in Manhattan, as a 100,000 square foot residential condominium
tower, with ground floor retail. 59 of the residential units have
now been
sold, 6 residential units are under contract of sale, and 2 of the
residential units and the commercial unit are still available for
sale. At
December 31, 2006, we had received distributions totaling $5.9 million
from this project, and we currently anticipate that something in
the area
of an additional $5.6 million will be distributed during 2007 comprising
profit and return of capital
investment.
|
|
·
|
Indooroopilly
Land. On
September 18, 2006, we purchased a 0.3 acre property for $1.8 million
(AUS$2.3 million) as part of our newly established Landplan Property
Partners initiative. It is currently anticipated that the property
will be
redeveloped for commercial
purposes.
|
|
·
|
Moonee
Ponds Land. On
September 1, 2006, we purchased two parcels of land aggregating 0.4
acres
adjacent to our Moonee Ponds property for $2.5 million (AUS$3.3 million).
This acquisition increases our holdings at Moonee Ponds to 3.1 acres
and
gives us frontage facing the principal transit station servicing
the area.
We are now in the process of developing the entire site and anticipate
completion of this project in 2008.
|
|
·
|
Berkeley
Cinemas.
On August 28, 2006, we sold to our joint venture partner our interest
in
the cinemas at Whangaparaoa, Takapuna and Mission Bay, New Zealand,
the
Berkeley Cinema Group, for $4.6 million (NZ$7.2 million) in cash
and the
assumption of $1.6 million (NZ$2.5 million) in debt. The sale resulted
in
a gain on sale of unconsolidated joint venture in 2006 of $3.4 million
(NZ$5.4 million). See Note 11 - Investments
in and Advances to Unconsolidated Joint Ventures and
Entities
for the Berkeley Cinema Group Condensed Balance Sheet and Statement
of
Operations.
|
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6 million). This
8-screen, leasehold cinema had previously been included in our Berkeley Cinemas
Joint Venture investment and was not previously consolidated for accounting
purposes. Subsequent to April 1, 2006, we have consolidated this entity into
our
financial statements.
As
a
result of these transactions, the only cinema owned by this joint venture is
the
Botany Downs cinema, located in suburban Auckland.
|
·
|
Malulani
Investments, Ltd. On
June 26, 2006, we acquired for $1.8 million, an 18.4% interest in
a
private real estate company with holdings principally in California,
Texas
and Hawaii including, the Guenoc Winery located on approximately
22,000
acres of land located in Northern California. This land and commercial
real estate holdings are encumbered by
debt.
|
|
·
|
Queenstown
Cinema.
Effective February 23, 2006, we purchased a 3-screen leasehold cinema
in
Queenstown, New Zealand for $939,000 (NZ$1.4 million). We funded
this
acquisition through internal
sources.
|
|
·
|
Newmarket
Property:
At the end of 2005 and during the first few months of 2006, we opened
the
retail elements of our Newmarket ETRC, a 100,373 square foot retail
facility situated on an approximately 177,497 square foot parcel
in
Newmarket, a suburban of Brisbane. The total construction costs for
the
site were $26.7 million (AUS$34.2 million) including $1.4 million
(AUS$1.9
million) of capitalized interest. This project was funded through
our
$78.8 million (AUS$100.0 million) Australian Corporate Credit Facility
with the Bank of Western Australia,
Ltd.
|
|
·
|
Elizabeth
Cinema:
We opened on October 20, 2005 our 8-screen leasehold cinema in Adelaide,
Australia. The cost to us of the fit-out of this cinema was $2.2
million
(AUS$2.9 million) and was funded from internal
sources.
|
|
·
|
Rialto
Entertainment:
Effective October 1, 2005, we purchased, indirectly, beneficial ownership
of 100% of the stock of Rialto Entertainment for $4.8 million (NZ$6.9
million). Rialto Entertainment is a 50% joint venture partner with
Village
Roadshow Ltd (“Village”) and SkyCity Leisure Ltd (“Sky”) in Rialto
Cinemas, the largest art cinema circuit in New Zealand. The joint
venture
owns or manages five leasehold cinemas with 22 screens in the New
Zealand
cities of Auckland, Christchurch, Wellington, Dunedin and
Hamilton.
|
|
·
|
Rialto
Distribution:
Effective October 1, 2005, we purchased for $694,000 (NZ$1.0 million)
a
1/3 interest in Rialto Distribution. Rialto Distribution, an
unincorporated joint venture, is engaged in the business of distributing
art film in New Zealand and
Australia.
|
|
·
|
Melbourne
Office Building:
On September 29, 2005, we purchased an office building in Melbourne,
Australia for $2.0 million (AUS$2.6 million) to serve as our Australia
headquarters, eliminating the need for leasehold administrative facilities
in Australia, and reducing our general and administrative expenses
by
approximately $165,000 (AUS$226,000) per
year.
|
|
·
|
Wilmington
and Northern Property:
On September 26, 2005, we sold the railroad right of way previously
servicing the Wilmington and Northern Railroad for cash totaling
$515,000.
This property was one of several remaining tracks of railroad land,
all of
which are considered non-core assets under our current business plan.
The
sale resulted in a negligible loss during the third quarter and the
property produced a nominal income per
year.
|
|
·
|
Cinemas
1, 2 & 3:
On
September 19, 2005, we acquired the tenant’s interest in the ground lease
estate that lay between (i) our fee ownership of the underlying land
and
(ii) our possessory interest as the tenant in the building and
improvements constituting the Cinemas 1, 2 & 3 in Manhattan. This
tenant’s ground lease interest was purchased from Sutton Hill Capital LLC
(“SHC”) in exchange for a $9.0 million promissory note, bearing interest
at a fixed rate of 8.25% and maturing on December 31, 2010. As SHC
is a
related party to our corporation, our Board’s Audit and Conflicts
Committee, comprised entirely of outside independent directors, and
subsequently our entire Board of Directors unanimously approved the
purchase of the tenant’s ground lease interest. The Cinemas 1, 2 & 3
is located on 3rd
Avenue between 59th
and 60th
Streets.
|
The
acquisition of the tenant’s ground lease interest finalizes the acquisition side
of a tax deferred exchange under Section 1031 of the Internal Revenue Code
designed to exchange our interest in our only non-entertainment oriented fee
property in the United States for the fee interest underlying our leasehold
estate in the Cinemas 1, 2 & 3. The acquisition of this tenant’s ground
lease interest and the Cinemas 1, 2 & 3 Fee Interest described below has
resulted in a book value of approximately $23.9 million and a tax basis of
$10.4
million (which includes $1.3 million of option fees paid in 2000 as part of
the
City Cinemas Master Lease Agreement, see Note 10 - Goodwill
and Intangible Assets).
On
June
1, 2005, we acquired for $12.6 million the fee interest and the landlord’s
ground lease interest underlying our Cinemas 1, 2 & 3 property in Manhattan,
as a part of a tax deferred exchange under Section 1031 of the Internal Revenue
Code. The funds used for the acquisition came primarily from the sale proceeds
of our Glendale, California office building. As a result of the acquisition
of
the fee interest, the landlord’s interest in the ground lease and the tenant’s
interest in the ground lease, our effective rental expense with respect to
the
Cinemas 1, 2 & 3 and the Village East cinema and of the building and
equipment constituting the Cinemas 1, 2 & 3 has decreased by approximately
$1.0 million annually beginning September 30, 2005 to $945,000 per annum,
virtually all of which is allocated to the rental of the Village East
cinema.
As
part
of the purchase of this ground lease interest, we have agreed in principal,
as a
part of our negotiations to acquire the land and the SHC interests in the
Cinemas 1, 2 & 3, to grant an option to Sutton Hill Capital, LLC, a limited
liability company beneficially owned in equal 50/50 shares by Messrs. James
J.
Cotter
and Michael Forman to acquire, at cost, up to a 25% non-managing membership
interest in the limited liability company that we formed to acquire these
interests. In relation to this option, we have recorded a $3.7 million call
option liability in our other liabilities at December 31, 2006. Mr. Cotter
is
our Chairman, Chief Executive Officer and controlling stockholder. Mr. Forman
is
a major holder of our Class A Stock.
|
·
|
Puerto
Rico Cinema Operations:
On
June 8, 2005, we sold our assets and certain liabilities associated
with
our Puerto Rico cinema operations for $2.3 million resulting in a
$1.6
million gain. Net losses of $1.8 million and $688,000 were included
in the
loss from discontinued operations for the years ending 2005 and 2004,
respectively, relating to these operations. No material income tax
provision arises from this
transaction.
|
|
·
|
Glendale
Building: On
May 17, 2005, we sold our Glendale office building in Glendale, California
for $10.3 million cash and $10.1 million of assumed debt resulting
in a
$12.0 million gain. All the cash proceeds from the sale were used
in the
purchase for $12.6 million of the Cinemas 1, 2 & 3 fee interest and of
the landlord’s interest in the ground lease, encumbering that land, as
part of a tax-deferred exchange under Section 1031 of the Internal
Revenue
Code.
|
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. 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.
|
We
review
long-lived assets, including goodwill and intangibles, for impairment as part
of
our annual budgeting process, in the fourth quarter, and whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not
be fully recoverable. We review internal management reports on a monthly basis
as well as monitor current and potential future competition in film markets
for
indications of potential impairment. We evaluate our long-lived assets using
historical and projected data of cash flow as our primary indicator of potential
impairment and we take into consideration, the seasonality of our business.
If
the sum of the estimated future cash flows, undiscounted, were to be less than
the carrying amount of the asset, then an impairment would be recognized for
the
amount by which the carrying value of the asset exceeds its estimated fair
value
based on a discounted cash flow calculation. Goodwill and intangible assets
are
evaluated on a reporting unit basis. The impairment evaluation is based on
the
present value of estimated future cash flows of the segment plus the expected
terminal value. There are significant assumptions and estimates used in
determining the future cash flows and terminal value. Accordingly, actual
results could vary materially from such estimates. We had no impairment losses
indicated or recorded for the year ended December 31, 2006.
We
record
our estimated future tax benefits and liabilities arising from the temporary
differences between the tax bases of assets and liabilities and amounts reported
in the accompanying consolidated balance sheets, as well as operating loss
carry
forwards. We estimate the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required. As of December
31, 2006, we had recorded approximately $56.2 million of deferred tax assets
related to the temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss carry forwards and tax credit carry forwards.
These deferred tax assets were fully offset by a valuation allowance in the
same
amount, resulting in a net deferred tax asset of zero. The recoverability of
deferred tax assets is dependent upon our ability to generate future taxable
income. There is no assurance that sufficient future taxable income will be
generated to benefit from our tax loss carry forwards and tax credit carry
forwards.
Due
to
our historical involvement in the railroad industry under RDGE, we have a number
of former employees of RDGE claiming monetary compensation for hearing loss,
black lung and other asbestos related illness suffered as a result of their
past
employment with RDGE. With respect to the personal injury claims, our insurance
carrier generally pays approximately 98% of the claims and we do not believe
that we have a significant exposure.
However,
we can give no assurance that such reimbursement will continue. In addition,
we
have an environmental contamination dispute with the City of Philadelphia that
has been on going for some time. We intend to defend vigorously our position,
as
we believe a complete disclosure about the property was made at the time we
sold
the property: however, no assurances can be given that we will prevail.
From
time
to time, we are involved with claims and lawsuits arising in the ordinary course
of our business which may include contractual obligations; insurance claims;
IRS
claims; employment matters; and anti-trust issues, among other
matters.
Results
of Operations
We
currently operate two operating segments: Cinema and Real Estate. Our cinema
segment includes the operations of our consolidated cinemas. Our real estate
segment includes the operating results of our commercial real estate holdings,
cinema real estate, live theater real estate and ETRCs. Effective the fourth
quarter of 2006, we have changed the presentation of our segment reporting
such
that our intersegment revenues and expenses are reported separately from our
segments’ operating activity. The effect of this change is to include
intercompany rent revenues and rent expenses into their respective cinema and
real estate business segments. The revenues and expenses for 2005 and 2004
have
been adjusted to conform to the current year presentation. We believe that
this
presentation more accurately portrays how our operating decision makers’ view
the operations, how they assess segment performance, and how they make decisions
about allocating resources to the segments.
The
tables below summarize the results of operations for our principal business
segments for the years ended December 31, 2006, 2005 and 2004 (dollars in
thousands).
|
Year
Ended December 31, 2006
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
|||||||||
|
Revenue
|
$
|
94,048
|
$
|
17,285
|
$
|
(5,208
|
)
|
$
|
106,125
|
||||
|
Operating
expense
|
75,350
|
7,365
|
(5,208
|
)
|
77,507
|
||||||||
|
Depreciation
& amortization
|
8,648
|
4,080
|
--
|
12,728
|
|||||||||
|
General
& administrative expense
|
3,658
|
782
|
--
|
4,440
|
|||||||||
|
Segment
operating income
|
$
|
6,392
|
$
|
5,058
|
$
|
--
|
$
|
11,450
|
|||||
|
Year
Ended December 31, 2005
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
|||||||||
|
Revenue13
|
$
|
86,760
|
$
|
16,523
|
$
|
(5,178
|
)
|
$
|
98,105
|
||||
|
Operating
expense13
|
72,665
|
7,359
|
(5,178
|
)
|
74,846
|
||||||||
|
Depreciation
& amortization
|
8,323
|
3,674
|
--
|
11,997
|
|||||||||
|
General
& administrative expense
|
6,802
|
328
|
--
|
7,130
|
|||||||||
|
Segment
operating income (loss)
|
$
|
(1,030
|
)
|
$
|
5,162
|
$
|
--
|
$
|
4,132
|
||||
|
Year
Ended December 31, 2004
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
|||||||||
|
Revenue13
|
$
|
74,324
|
$
|
14,990
|
$
|
(5,225
|
)
|
$
|
84,089
|
||||
|
Operating
expense13
|
62,041
|
6,948
|
(5,225
|
)
|
63,764
|
||||||||
|
Depreciation
& amortization
|
8,093
|
3,630
|
--
|
11,723
|
|||||||||
|
General
& administrative expense
|
5,868
|
489
|
--
|
6,357
|
|||||||||
|
Segment
operating income (loss)
|
$
|
(1,678
|
)
|
$
|
3,923
|
$
|
--
|
$
|
2,245
|
||||
13
2005 and
2004 real estate revenues and cinema operating expenses have been adjusted
from
the amounts previously reported. See Note 2 and Note 21 to the 2006 Consolidated
Financial Statements.
|
Reconciliation
to net income:
|
2006
|
2005
|
2004
|
|||||||
|
Total
segment operating income
|
$
|
11,450
|
$
|
4,132
|
$
|
2,245
|
||||
|
Non-segment:
|
||||||||||
|
Depreciation
and amortization expense
|
484
|
387
|
100
|
|||||||
|
General
and administrative expense
|
8,551
|
10,117
|
8,467
|
|||||||
|
Operating
income (loss)
|
2,415
|
(6,372
|
)
|
(6,322
|
)
|
|||||
|
Interest
expense, net
|
(6,608
|
)
|
(4,473
|
)
|
(3,078
|
)
|
||||
|
Other
income (expense)
|
(1,998
|
)
|
19
|
884
|
||||||
|
Minority
interest
|
(672
|
)
|
(579
|
)
|
(112
|
)
|
||||
|
Gain
on disposal of discontinued operations14
|
--
|
13,610
|
--
|
|||||||
|
Income
(loss) from discontinued operations
|
--
|
(1,379
|
)
|
(469
|
)
|
|||||
|
Income
tax expense
|
(2,270
|
)
|
(1,209
|
)
|
(1,046
|
)
|
||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
9,547
|
1,372
|
1,680
|
|||||||
|
Gain
on sale of unconsolidated joint venture
|
3,442
|
--
|
--
|
|||||||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
|||
14
Comprised
of $12.0 million from the sale of our Glendale office building and $1.6 million
from the sale of our Puerto Rico cinema operations.
Cinema
Segment
Effective
the fourth quarter of 2006, we have changed the presentation of our segment
reporting such that our intersegment revenues and expenses are reported
separately from our segments’ operating activity. The effect of this change is
to include intercompany rent revenues and rent expenses into their respective
cinema and real estate business segments. The revenues and expenses for 2005
and
2004 have been adjusted to conform to the current year presentation.
The
following tables and discussion which follows detail our operating results
for
our 2006, 2005 and 2004 cinema segment, adjusted to reflect the discontinuation,
in June 2005, of our Puerto Rico cinema operations, respectively (dollars in
thousands):
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
|||||||||
|
Admissions
revenue
|
$
|
18,891
|
$
|
36,564
|
$
|
13,109
|
$
|
68,564
|
|||||
|
Concessions
revenue
|
5,472
|
11,288
|
4,001
|
20,761
|
|||||||||
|
Advertising
and other revenues
|
1,710
|
2,098
|
915
|
4,723
|
|||||||||
|
Total
revenues
|
26,073
|
49,950
|
18,025
|
94,048
|
|||||||||
|
Cinema
costs
|
18,176
|
38,743
|
13,763
|
70,682
|
|||||||||
|
Concession
costs
|
1,047
|
2,584
|
1,037
|
4,668
|
|||||||||
|
Total
operating expense
|
19,223
|
41,327
|
14,800
|
75,350
|
|||||||||
|
Depreciation
and amortization
|
1,890
|
5,445
|
1,313
|
8,648
|
|||||||||
|
General
& administrative expense
|
2,614
|
1,027
|
17
|
3,658
|
|||||||||
|
Segment
operating income
|
$
|
2,346
|
$
|
2,151
|
$
|
1,895
|
$
|
6,392
|
|||||
|
Year
Ended December 31, 2005
|
United
States
|
Australia
|
New
Zealand
|
Total
|
|||||||||
|
Admissions
revenue
|
$
|
17,802
|
$
|
33,142
|
$
|
11,926
|
$
|
62,870
|
|||||
|
Concessions
revenue
|
4,979
|
10,505
|
3,618
|
19,102
|
|||||||||
|
Advertising
and other revenues
|
1,646
|
2,233
|
909
|
4,788
|
|||||||||
|
Total
revenues
|
24,427
|
45,880
|
16,453
|
86,760
|
|||||||||
|
Cinema
costs15
|
17,869
|
38,045
|
12,157
|
68,071
|
|||||||||
|
Concession
costs
|
1,054
|
2,448
|
1,092
|
4,594
|
|||||||||
|
Total
operating expense
|
18,923
|
40,493
|
13,249
|
72,665
|
|||||||||
|
Depreciation
and amortization
|
1,822
|
5,537
|
964
|
8,323
|
|||||||||
|
General
& administrative expense
|
5,839
|
982
|
(19
|
)
|
6,802
|
||||||||
|
Segment
operating income (loss)
|
$
|
(2,157
|
)
|
$
|
(1,132
|
)
|
$
|
2,259
|
$
|
(1,030
|
)
|
||
|
Year
Ended December 31, 2004
|
United
States
|
Australia
|
New
Zealand
|
Total
|
|||||||||
|
Admissions
revenue
|
$
|
15,584
|
$
|
31,385
|
$
|
7,908
|
$
|
54,877
|
|||||
|
Concessions
revenue
|
4,338
|
9,451
|
2,293
|
16,082
|
|||||||||
|
Advertising
and other revenues
|
1,374
|
1,600
|
391
|
3,365
|
|||||||||
|
Total
revenues
|
21,296
|
42,436
|
10,592
|
74,324
|
|||||||||
|
Cinema
costs 16
|
16,734
|
33,577
|
7,865
|
58,176
|
|||||||||
|
Concession
costs
|
904
|
2,213
|
748
|
3,865
|
|||||||||
|
Total
operating expense
|
17,638
|
35,790
|
8,613
|
62,041
|
|||||||||
|
Depreciation
and amortization
|
2,081
|
5,292
|
720
|
8,093
|
|||||||||
|
General
& administrative expense
|
3,987
|
1,561
|
320
|
5,868
|
|||||||||
|
Segment
operating income (loss)
|
$
|
(2,410
|
)
|
$
|
(207
|
)
|
$
|
939
|
$
|
(1,678
|
)
|
||
15
2005
cinema costs have been adjusted from the amounts previously reported. See Note
2
and Note 21 to the 2006 Consolidated Financial Statements.
16
2004 cinema costs have been adjusted from the amounts previously reported.
See
Note 2 and Note 21 to the 2006 Consolidated Financial Statements.
Cinema
Results for 2006 Compared to 2005
|
·
|
cinema
revenue increased in 2006 by $7.3 million or 8.4% compared to 2005.
The
geographic activity of our revenues can be summarized as
follows:
|
|
o
|
United
States - Revenues in the United States increased by $1.6 million
or 6.7%.
This increase in revenues was attributable to an increase in admissions
revenues by $1.1 million, concessions revenues by $493,000, and
advertising and other revenues by $64,000. The significant increase
in
admissions revenues resulted from higher admissions related in part
to
more appealing film product in 2006 compared to the film offerings
in
2005.
|
|
o
|
Australia
- Revenues in Australia increased by $4.1 million or 8.9%. This increase
in revenues was attributable to an increase in admissions revenues
by $3.4
million, concessions revenues by $783,000, and advertising offset
by a
decrease in other revenues of $135,000. This increase in revenues
was
primarily related to more appealing film product in 2006 compared
to the
film offerings in 2005.
|
|
o
|
New
Zealand - Revenues in New Zealand increased by $1.6 million or 9.6%.
This
increase in revenues was attributable to an increase in admissions
revenues by $1.2 million, concessions revenues by $383,000, and
advertising and other revenues by $6,000. This increase in revenues
was
primarily related to the acquisition of the Queenstown cinema in
February
2006 and the inclusion of 100% of the revenues from the Palms cinema
after
our purchase of the remaining 50% which we did not already own, at
the
beginning of the second quarter of
2006.
|
|
·
|
operating
expense increased in 2006 by $2.7 million or 3.7% compared to 2005.
|
|
o
|
United
States - Operating expenses in the United States increased by only
$300,000 or 1.6%. This small increase was due to efforts to hold
operating
costs steady even with increased
admissions.
|
|
o
|
Australia
- Operating expenses in Australia increased by only $834,000 or 2.1%.
This
small increase was due to efforts to hold operating costs steady
even with
increased admissions.
|
|
o
|
New
Zealand - Operating expenses in New Zealand increased by $1.6 million
or
11.7%. This increase was due to higher admissions and concessions
predominately resulting from the addition of the Queenstown and Palms
cinemas in 2006.
|
|
·
|
depreciation
expense increased in 2006 by $325,000 or 3.9% compared to 2005. The
increase was primarily from our 2006 acquisitions in New Zealand
of the
Queenstown Cinema in February 2006 and the Palms Cinema in early
April
2006.
|
|
·
|
general
and administrative expense decreased in 2006 by $3.1 million or 46.2%
compared to 2005. The change was primarily related to a decrease
in legal
costs associated with our anti-trust claims against Regal and certain
distributors.
|
|
·
|
cinema
segment operating income increased in 2006 by $7.4 million compared
to
2005 primarily resulting from our improved cinema operations in each
region, our increased admissions from better film product, and a
dramatic
reduction in general and administrative expense, driven by a reduction
in
legal expenses.
|
Cinema
Results for 2005 Compared to 2004
|
·
|
cinema
revenue increased in 2005 by $12.4 million or 16.7% compared to 2004.
The
geographic activity of our revenues can be summarized as
follows:
|
|
o
|
United
States - Revenues in the United States increased by $3.1 million
or 14.7%.
This increase in revenues was attributable to an increase in admissions
revenues by $2.2 million, concessions revenues by $641,000, and
advertising and other revenues by $272,000. The significant increase
in
admissions revenues resulted from higher admissions related to improved
access to film product subsequent to our settlement with Universal
and Fox
of our Village East litigation.
|
|
o
|
Australia
- Revenues in Australia increased by $3.4 million or 8.1%. This increase
in revenues was attributable to an increase in admissions revenues
by $1.7
million, concessions revenues by $1.1 million, and advertising and
other
revenues by $633,000. We achieved a $7.1 million increase in revenues
as a
result of our purchase of the Anderson Circuit and the opening of
our West
Lakes and Rhodes cinemas in 2004 and the opening of our Elizabeth
cinema
in October 2005. However, this increase in revenues was offset by
lower
revenues from our existing cinemas as we noted an overall decrease
in
annual admissions which we believe to be primarily the product of
generally less appealing film offerings in
2005.
|
|
o
|
New
Zealand - Revenues in New Zealand increased by $5.9 million or 55.3%.
This
increase in revenues was attributable to an increase in admissions
revenues by $4.0 million, concessions revenues by $1.3 million, and
advertising and other revenues by $518,000. We achieved a $5.6 million
increase in revenues as a result of our purchase of the Movieland
Circuit
in 2004, offset by the generally less appealing film offerings in
2005.
|
|
·
|
Operating
expense increased in 2005 by $10.6 million or 17.1% compared to 2004.
|
|
o
|
United
States - Operating expenses in the United States increased by $1.3
million
or 7.3% resulting from higher admissions and concession
sales.
|
|
o
|
Australia
- Operating expenses in Australia increased by $4.7 million or 13.1%.
This
increase was mainly due to higher admissions and concessions resulting
from the addition of six new theaters. In addition, we noted that
our
previously existing sites recorded higher operating expenses as a
percentage of revenues from fixed costs including rent and other
operating
expenses.
|
|
o
|
New
Zealand - Operating expenses in New Zealand increased by $4.6 million
or
53.8%. This increase was due to higher admissions and concessions
resulting from the addition of six new theaters, coupled with the
fixed
cost effect on lower revenue from our previously existing Wellington
location, similar to that experienced in our Australian
circuit.
|
|
·
|
depreciation
expense increased in 2005 by $230,000 or 2.8% compared to 2004.
The
increase was primarily from our late-year 2004 acquisitions of
the
Anderson and Movieland Circuits and the addition of two new leasehold
cinemas in December 2004.
|
|
·
|
general
and administrative expense increased in 2005 by $934,000 or 15.9%
compared
to 2004. The increase was primarily related to legal services for
our
continuing anti-trust litigation with respect to the access of our
Village
East cinema to first run commercial film products.
|
|
·
|
cinema
segment operating income increased in 2005 by $648,000 compared to
2004
primarily resulting from our new operations in Australia and New
Zealand
and our increased admissions at our existing cinemas in the United
States.
|
Real
Estate Segment
As
discussed above, our other major business segment is the development and
management of real estate. These holdings include our rental live theaters,
certain fee owned properties used in our cinema business, and unimproved real
estate held for development. Effective the fourth quarter of 2006, we have
changed the presentation of our segment reporting such that our intersegment
revenues and expenses are reported separately from our segments’ operating
activity. The effect of this change is to include intercompany rent revenues
and
rent expenses into their respective cinema and real estate business segments.
The revenues and expenses for 2005 and 2004 have been adjusted to conform to
the
current year presentation. The tables and discussion which follow detail our
operating results for our 2006, 2005 and 2004 real estate segment adjusted
to
reflect the sale of our Glendale property in May 2005 (dollars in
thousands):
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
|||||||||
|
Live
theater rental and ancillary income
|
$
|
3,667
|
$
|
--
|
$
|
--
|
$
|
3,667
|
|||||
|
Property
rental income
|
1,720
|
6,334
|
5,564
|
13,618
|
|||||||||
|
Total
revenues
|
5,387
|
6,334
|
5,564
|
17,285
|
|||||||||
|
Live
theater costs
|
2,193
|
--
|
--
|
2,193
|
|||||||||
|
Property
rental cost
|
1,164
|
2,658
|
1,350
|
5,172
|
|||||||||
|
Total
operating expense
|
3,357
|
2,658
|
1,350
|
7,365
|
|||||||||
|
Depreciation
and amortization
|
427
|
2,129
|
1,524
|
4,080
|
|||||||||
|
General
& administrative expense
|
--
|
782
|
--
|
782
|
|||||||||
|
Segment
operating income
|
$
|
1,603
|
$
|
765
|
$
|
2,690
|
$
|
5,058
|
|||||
|
Year
Ended December 31, 2005
|
United
States
|
Australia
|
New
Zealand
|
Total
|
|||||||||
|
Live
theater rental and ancillary income
|
$
|
5,199
|
$
|
--
|
$
|
--
|
$
|
5,199
|
|||||
|
Property
rental income17
|
1,118
|
4,266
|
5,940
|
11,324
|
|||||||||
|
Total
revenues
|
6,317
|
4,266
|
5,940
|
16,523
|
|||||||||
|
Live
theater costs
|
2,925
|
--
|
--
|
2,925
|
|||||||||
|
Property
rental cost
|
692
|
2,118
|
1,624
|
4,434
|
|||||||||
|
Total
operating expense
|
3,617
|
2,118
|
1,624
|
7,359
|
|||||||||
|
Depreciation
and amortization
|
296
|
1,588
|
1,790
|
3,674
|
|||||||||
|
General
& administrative expense
|
29
|
298
|
1
|
328
|
|||||||||
|
Segment
operating income
|
$
|
2,375
|
$
|
262
|
$
|
2,525
|
$
|
5,162
|
|||||
17
2005 property rental income has been adjusted from the amounts previously
reported. See Note 2 and Note 21 to the 2006 Consolidated Financial
Statements.
|
Year
Ended December 31, 2004
|
United
States
|
Australia
|
New
Zealand
|
Total
|
|||||||||
|
Live
theater rental and ancillary income
|
$
|
4,557
|
$
|
--
|
$
|
--
|
$
|
4,557
|
|||||
|
Property
rental income18
|
1,039
|
4,542
|
4,852
|
10,433
|
|||||||||
|
Total
revenues
|
5,596
|
4,542
|
4,852
|
14,990
|
|||||||||
|
Live
theater costs
|
2,477
|
--
|
--
|
2,477
|
|||||||||
|
Property
rental cost
|
633
|
2,225
|
1,613
|
4,471
|
|||||||||
|
Total
operating expense
|
3,110
|
2,225
|
1,613
|
6,948
|
|||||||||
|
Depreciation
and amortization
|
479
|
1,471
|
1,680
|
3,630
|
|||||||||
|
General
& administrative expense
|
22
|
466
|
1
|
489
|
|||||||||
|
Segment
operating income
|
$
|
1,985
|
$
|
380
|
$
|
1,558
|
$
|
3,923
|
|||||
18
2004
property rental income has been adjusted from the amounts previously reported.
See Note 2 and Note 21 to the 2006 Consolidated Financial
Statements.
Real
Estate Results for 2006 Compared to 2005
For
2006,
we achieved the following results in our real estate segment:
|
·
|
revenue
increased by $762,000 or 4.6% when compared 2005. Of this increase,
approximately $2.1 million was primarily attributable to an increase
in
rent from our Newmarket shopping centre that opened in late 2005.
This
increase in rents was offset in part by decreased rents from our
domestic
live theatres due to fewer shows in 2006 compared to
2005.
|
|
·
|
operating
expense increased by $6,000 or 0.1% when compared to 2005. This decrease
primarily relates to a decrease in costs associated with our live
theater
facilities offset in part by increased costs from our newly opened
Newmarket shopping centre.
|
|
·
|
depreciation
expense increased by $406,000 or 11.1% when compared to 2005. The
majority
of this increase was attributable to our newly opened Newmarket shopping
centre in Australia.
|
|
·
|
general
and administrative expense increased by $454,000 when compared to
2005
primarily due to increased property activities related to our Australia
properties.
|
|
·
|
real
estate segment operating income decreased by $104,000 when compared
to
2005 mostly related to an increase in revenues in Australia from
our
Newmarket shopping centre offset by a decrease in domestic live theater
income.
|
Real
Estate Results for 2005 Compared to 2004
For
2005,
we achieved the following results in our real estate segment:
|
·
|
revenue
increased by $1.5 million or 10.2% when compared 2004. Of this increase,
approximately $642,000 was attributable to an increase in rent from
our
domestic live theaters and $1.2 million was from higher rental revenue
and
higher occupancy rates from our New Zealand ETRC and domestic properties.
These increases were somewhat offset by a $276,000 decrease in rental
revenue related to a reduction in the percentage rent generated by
our
Australian properties.
|
|
·
|
operating
expense increased by $411,000 or 5.9% when compared to 2004. This
increase
mostly relates to an increase in variable costs associated with our
live
theater facilities.
|
|
·
|
depreciation
expense increased by $44,000 or 1.2% when compared to 2004. The majority
of this increase was attributed to the newly acquired properties
in
Australia and New Zealand.
|
|
·
|
general
and administrative expense decreased by $161,000 when compared to
2004
primarily from our Australia
properties.
|
|
·
|
real
estate segment operating income increased by $1.2 million compared
to 2004
mostly related to our overall increase in revenues while holding
total
costs at approximately the same amount as in the prior year.
|
|
·
|
in May 2005, we sold our interest in our Glendale office building for $20.4 million. However, as the sale of this property is treated for accounting purposes as a discontinued operation, its operating results have been removed from our results for 2005 and 2004. Our Glendale office building contributed $750,000 and $1.7 million in EBITDA to our Company annually in 2005 and 2004, respectively. |
Non-Segment
Activity
2006
Compared to 2005
Non-segment expense/income
includes expense and/or income that is not directly attributable to our other
operating segments.
During
2006, the decrease of $1.6 million in corporate General and Administrative
expense was primarily made up of:
|
·
|
$1.1
million from an additional bonus accrual for our Chief Executive
Officer’s
new employment contract in 2005 not reoccurring in 2006;
and
|
|
·
|
$565,000
decrease in Australia legal fees in part related to fewer fees for
our
Whitehorse lawsuit.
|
During
2006:
|
·
|
our
net interest expense increased by $2.1 million primarily related
to a
higher outstanding loan balance in Australia and due to the effective
completion of construction of our Newmarket Shopping Centre in early
2006
which decreased the amount of interest being capitalized. This interest
increase was offset by a decrease in interest expense related to
the
mark-to-market adjustment of our interest rate swaps compared to
the
adjustment in 2005;
|
|
·
|
our
other expense increased by $2.0 million primarily due to a $1.6 million
mark-to-market charge relating to an option liability held by Sutton
Hill
Capital LLC to acquire a 25% non-managing membership interest in
our
Cinemas 1, 2 & 3 property;
|
|
·
|
our
minority interest expense increased by $93,000 compared to 2005 due
to an
improvement in cinema admission sales particularly in our Australia
cinemas;
|
|
·
|
income
tax expense increased by $1.1 million primarily related to the tax
expense
incurred for our equity earnings from our investment in 205-209
East 57th Street Associates, LLC;
|
|
·
|
equity
earnings from unconsolidated joint ventures and entities increased
by $8.2
million primarily from our investment in 205-209
East 57th Street Associates, LLC,
that has been developing a residential condominium complex in midtown
Manhattan, called Place
57.
The partnership closed on the sale of 59 condominiums during 2006,
resulting in gross sales of $117.7 million and equity earnings from
unconsolidated joint ventures and entities to us of $8.3 million;
and
|
|
·
|
in
addition to the aforementioned equity earnings, we recorded a gain
on sale
of an unconsolidated joint venture of $3.4 million (NZ$5.4 million),
from
the sale of our 50% interest in the cinemas at Whangaparaoa, Takapuna
and
Mission Bay, New Zealand.
|
2005
Compared to 2004
Corporate
expense/income includes expense and/or income that is not directly attributable
to our other operating segments.
During
2005, the increase of $1.6 million in corporate General and Administrative
expense was primarily made up of:
|
·
|
$1.1
million from an additional bonus accrual for our Chief Executive
Officer’s
new employment contract; and
|
|
·
|
higher
legal fees primarily from our Whitehorse litigation in
Australia.
|
During
2005:
|
·
|
our
net interest expense increased by $1.4 million primarily due to increased
borrowings related to our 2005 and 2004 acquisitions in the U.S.,
Australia, and New Zealand;
|
|
·
|
our
other income decreased by $865,000 primarily due to fewer foreign
exchange
gains compared to 2004;
|
|
·
|
our
minority interest expense increased by $467,000 compared to 2004
due to an
improvement in cinema admission sales particularly in our Angelika
New
York cinema;
|
|
·
|
we
recorded a net gain of $13.6 million on sales of discontinued operations
from the sale of our Glendale Building and our Puerto Rico cinema
operations;
|
|
·
|
our
losses from discontinued operations increased by $910,000 due to
reduced
operating income from our Puerto Rico operations and due to the fact
we
sold the Puerto Rico operations just prior to the summer when we
historically record the majority of our annual admission
sales;
|
|
·
|
income
tax expense increased by $163,000;
and
|
|
·
|
equity
earnings from unconsolidated joint ventures and entities decreased
by
$308,000 due to lower admissions at our joint venture cinemas compared
to
2004.
|
Income
taxes
We
are
subject to income taxation in several jurisdictions throughout the world. Our
effective tax rate and income tax liabilities will be affected by a number
of
factors, such as:
|
·
|
the
amount of taxable income in particular
jurisdictions;
|
|
·
|
the
tax rates in particular
jurisdictions;
|
|
·
|
tax
treaties between jurisdictions;
|
|
·
|
the
extent to which income is repatriated;
and
|
|
·
|
future
changes in law.
|
Generally,
we file consolidated or combined tax returns in jurisdictions that permit or
require such filings. For jurisdictions which do not permit such a filing,
we
may owe income, franchise, or capital taxes even though, on an overall basis,
we
may have incurred a net loss for the tax year.
Consolidated
net income (loss)
For
2006
and 2005, we have achieved net income of $3.9 million and $989,000,
respectively. However, over the past several prior years we have consistently
experienced net losses. Our shift to a net income from a net loss position
is
primarily attributable to $8.3 million of equity earnings in 2006 from our
investment in Place
57
and a
$12.0 million gain booked in 2005 related to our sale our Glendale, California
office building. This trend follows our focus on acquisitions and development
of
real estate which results in high depreciation and amortization expense and
which during the holding and development stages produce little or no operating
income for our company. However, as explained in the Cinema and Real Estate
segment sections above, we have noted improvements in our operating income
such
that we have a positive operating income this year which in years past has
typically been negative. Although we cannot assure that this trend will
continue, we are committed to the overall improvement of earnings through good
fiscal management.
Business
Plan, Liquidity and Capital Resources of the Company
Business
Plan
Our
business plan has evolved from a belief that while cinema exhibition is not
a
growth business at this time, we do believe it 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.
However, since we believe the cinema exhibition business to be a mature business
with most markets either adequately screened or over-screened, we see our future
asset growth coming more from our real estate development activities than from
the acquisition or development of additional cinemas. While we intend to be
opportunistic in adding to our existing cinema portfolio, we believe it likely
that, going forward, we will be reinvesting our free cash flow more in our
general real estate development activities than in the acquisition or
development of additional cinemas. Over time, we anticipate that our cinema
operations will become increasingly a source of cash flow to support our real
estate oriented activities, rather than a focus of growth, and that our real
estate activities will become the principal thrust of our business.
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. Therefore, while we intend to maintain
our
entertainment focus, we may from time to time acquire interests in
non-entertainment real estate, for example:
|
·
|
we
invested in the limited liability company that is developing our
former
Sutton cinema site in Manhattan into an approximately 100,000 square
foot
condominium known as Place
57;
|
|
·
|
we
formed Landplan Property Partners, Ltd (“Landplan”) to identify, acquire
and develop or redevelop properties in Australia and New Zealand
on an
opportunistic basis; and
|
|
·
|
we
acquired an 18.4% equity interest in Malulani Investments, Limited
(“MIL”), a closely held Hawaiian company which currently owns interests
in
agricultural and developed commercial real estate in California,
Hawaii
and Texas.
|
In
February 2006, we completed the process of rezoning our 50.6 acre site in
suburban Melbourne from an essentially industrial zone into a priority zone
permitting a wide variety of retail, entertainment, commercial and residential
uses. The full development of this property is currently anticipated to require
approximately 9 years and funding of approximately $500.0 million. This project
is, accordingly, anticipated to be a major focus of our efforts in the years
to
come. As
the
property was previously operated by its prior owner as a brickworks, it will
be
necessary to remove the contaminated soil that resulted from those operations
before we can take advantage of this new zoning. We are currently updating
our
estimates with respect to this phase of our overall development
project.
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 or in order
to
meet our debt servicing requirements.
Currently,
our liquidity needs continue to arise mainly from:
|
·
|
working
capital requirements;
|
|
·
|
capital
expenditures including the acquisition, holding and development of
real
property assets; and
|
|
·
|
debt
servicing requirements.
|
Discussion
of Our Statement of Cash Flows
The
following discussion compares the changes in our cash flows over the past three
years.
Operating
Activities
2006
Compared to 2005.
Cash
provided by operations was $11.9 million in the 2006 compared to $2.6 million
in
2005. The increase in cash provided by operations of $9.3 million was primarily
related to
|
·
|
cash
distributions from our investments in unconsolidated joint ventures
and
entities of $6.6 million, including $5.9 million received as a return
on
investment on our $3.0 million investment in Place
57;
|
|
·
|
increased
cinema operational cash flow from our Australia operations due primarily
to increased cinema admissions and improved operational costs;
and
|
|
·
|
improved
cash flow from our U.S. cinemas during 2006 resulting from the sale
of our
formerly underperforming Puerto Rico operations in June
2005.
|
2005
Compared to 2004.
Cash
provided by operations was $2.6 million compared to $783,000 in 2004. The
increase in cash provided by operations of $1.8 million was due primarily
to:
|
·
|
a
$592,000 increase of cash provided by our cinema operations notably
$1.8
million from our new cinemas in New Zealand offset by a $1.2 million
decrease cash provided by our Australia cinema operations resulting
from
lower admissions, driving lower revenues, which, coupled with non-revenue
dependent costs from our previously existing cinema sites could not
be
fully offset by the cash flow from our cinema sites acquired or opened
during the latter half of 2004 and during
2005;
|
|
·
|
an
$806,000 increase in cash provided by our real estate operations
primarily
due to increased cash flow coming from the New Zealand properties
that we
purchased in 2004;
|
|
·
|
approximately
$494,000 of cash received in payment of certain legal claims in 2005;
and
|
|
·
|
the
non-recurrence of $165,000 in cash paid in 2004 for costs related
to
negotiations with a borrower with whom we ultimately did not consummate
a
credit facility.
|
Investing
Activities
Cash
used
in investing activities for 2006 was $23.4 million compared to $36.8 million
in
2005, and $17.3 million in 2004. The following summarizes our investing
activities for each of the three years ending December 31, 2006:
The
$23.4 million cash used in 2006 was primarily related to:
|
·
|
$8.1
million in acquisitions including:
|
|
o
|
$939,000
in cash used to purchase the Queenstown Cinema in New
Zealand,
|
|
o
|
$2.6
million in cash used to purchase the 50% share that we did not already
own
of the Palms cinema located in Christchurch, New
Zealand,
|
|
o
|
$1.8
million for the Australia Indooroopilly property,
and
|
|
o
|
$2.5
million for the adjacent parcel to our Moonee Ponds
property;
|
|
·
|
$8.3
million in cash used to complete the Newmarket property and for property
enhancements to our Australia, New Zealand and U.S. properties;
|
|
·
|
$2.7
million in cash used to invest in unconsolidated joint ventures and
entities including $1.8 million paid for Malulani Investments, Ltd.
stock
and $876,000 additional cash invested in Rialto Cinemas used to pay
off
their bank debt;
|
|
·
|
$844,000
increase in restricted cash related to potential claims by our credit
card
companies; and
|
|
·
|
$8.1
million in cash used to purchase marketable
securities.
|
offset
by
|
·
|
$4.6
million cash received from the sale
of our
interest the cinemas at Whangaparaoa, Takapuna and Mission Bay, New
Zealand.
|
The
$36.8 million cash used in 2005 was primarily related to:
|
·
|
$12.6
million in net proceeds from the sales of our Glendale office building
and
Puerto Rico operations;
|
|
·
|
$1.0
million cash provided by a decrease in restricted cash;
and
|
|
·
|
$515,000
in cash proceeds from the sale of certain surplus properties used
in
connection with our historic railroad activities;
|
offset
by
|
·
|
$13.7
million paid for acquisitions including $11.8 million for the acquisition
of the fee interest lessor’s ground lease interest and lessee’s ground
lease interest of the Cinemas 1, 2 & 3 property in New York City and
$2.0 million (AUS$2.6 million) paid for our new Melbourne office
building;
|
|
·
|
$6.5
million primarily paid to invest in or add capital to our unconsolidated
joint ventures and entities including $4.8 million (NZ$6.9 million)
to
purchase 100% of the stock of Rialto Entertainment, $694,000 (NZ$1.0
million) to purchase a 1/3 interest in Rialto Distribution, and $719,000
paid as additional capital contributions with respect to our joint
venture
investment in Place 57;
|
|
·
|
$30.5
million in purchases of equipment and development of property. In
Australia, $28.4 million related primarily to the construction work
on our
Newmarket development in a suburb of Brisbane and the fit-out of
our
8-screen Adelaide cinema which opened on October 20, 2005. $2.1 million
in
purchases of equipment primarily related to the renovation of our
U.S. and
New Zealand cinemas; and
|
|
·
|
$376,000
paid to purchase certain marketable
securities.
|
The
$17.3 million cash used in 2004 was primarily related to:
|
·
|
$20.0
million of business acquisition costs related to the Anderson Circuit
acquisition for $5.7 million (AUS$8.0 million), the purchase of certain
land adjacent to our Newmarket (Queensland) site for $1.0 million
(AUS$1.4
million), and the Movieland Circuit acquisition for $13.3 million
(NZ$19.8
million);
|
|
·
|
$3.8
million (AUS$5.0 million) related to the fit-outs to our Westlake
and
Rhodes leasehold cinemas (development opportunities acquired as a
part of
the Anderson Circuit);
|
|
·
|
$1.4
million expended on the Newmarket development project (an approximately
100,373 square foot shopping center located in a suburb of Brisbane,
Australia);
|
|
·
|
$2.3
million paid to acquire a 25% membership interest in 205-209 E.
57th
Street Associates, LLC, the limited liability company developing
our old
Sutton Cinema site in Manhattan;
|
offset
by
|
·
|
$13.0
million receivable payment on the Sutton Promissory Note, issued
to us in
partial consideration for the sale to Place 57 of our interest in
the
Sutton Cinema site.
|
Financing
Activities
2006
Compared to 2005.
Cash
provided by financing activities for 2006 decreased by $16.4 million to $13.9
million from $30.4 million compared to 2005. The $13.9 million in cash provided
in 2006 was primarily related to:
|
·
|
$19.1
million of net borrowings which includes $11.8 million from our existing
Australian Corporate Credit Facility and $7.3 million of net proceeds
from
a renegotiated mortgage on our Union Square Property;
and
|
|
·
|
$3.0
million of a deposit received from Sutton Hill Capital, LLC for the
option
to purchase a 25% non-managing membership interest in the limited
liability company that owns the Cinemas 1, 2 & 3;
|
offset
by
|
·
|
$6.2
million of cash used to pay down long-term debt which was primarily
related to the payoff of $3.2 million on the mortgage on our Union
Square
Property as part of a renegotiation of the loan; the payoff of our
Movieland purchase note payable of approximately $512,000; the payoff of
the Palms - Christchurch Cinema bank debt of approximately $1.9 million;
and on
the pay down of our
Australian Corporate Credit Facility
by
$280,000;
|
|
·
|
$791,000
of cash used to repurchase the Class A Nonvoting Common Stock (these
shares were previously issued to the Movieland sellers who exercised
their
put option during 2006 to sell back to us the shares they had received
in
partial consideration for the sale of the Movieland cinemas);
and
|
|
·
|
$1.2
million in distributions to minority
interests.
|
2005
Compared to 2004.
Cash
provided by financing activities was $30.4 million in 2005 compared to $6.8
million in 2004. This increase is attributable to our increase in borrowings
of
approximately $31.7 million. These borrowings came from draws of approximately
$9.2 million (AUS$11.9 million) and $22.5 million (AUS$29.6 million) from our
Australian Corporate Credit Facility and our Newmarket Construction Loan,
respectively.
2006
Summary
Our
cash
position at December 31, 2006 was $11.0 million compared to $8.5 million at
December 31, 2005. The majority of the $2.5 million increase related to the
following transactions:
|
·
|
$11.9
million net cash provided by operating
activities;
|
|
·
|
$11.8
million of new borrowings on our Australian Corporate Credit
Facility;
|
|
·
|
$7.3
million of a recently renegotiated mortgage loan on our Union Square
property;
|
|
·
|
$4.6
million cash received from the sale
of our
interest the cinemas at Whangaparaoa, Takapuna and Mission Bay, New
Zealand; and
|
|
·
|
$3.0
million of a deposit paid by Sutton Hill Capital, LLC relating to
its
option to purchase a 25% non-managing membership interest in the
limited
liability company that owns the Cinemas 1, 2, & 3;
|
offset
by
|
·
|
$8.1
million for the acquisition of the Queenstown and Palms cinemas in
New
Zealand and Indooroopilly and Moonee Ponds properties in
Australia;
|
|
·
|
$8.3
million in cash used to complete the Newmarket property and for property
enhancements to our Australia, New Zealand and U.S.
properties;
|
|
·
|
$6.2
million of cash used to pay down long-term debt which was primarily
related to
|
|
o
|
the
payoff of the Movieland purchase note payable of approximately $520,000,
|
|
o
|
the
payoff of the Palms - Christchurch Cinema bank debt of approximately
$1.9
million,
|
|
o
|
the
payoff of our Union Square mortgage of $3.2 million with a newly
negotiated loan, and
|
|
o
|
the
pay down of our
Australian Corporate Credit Facility
by
$280,000;
|
|
·
|
$791,000
of cash used to repurchase the Class A Nonvoting Common Stock (these
shares were previously issued to the Movieland sellers who exercised
their
put option during 2006 to sell back to us the shares they had received
in
partial consideration for the sale of the Movieland
cinemas);
|
|
·
|
$2.7
million in cash used to invest in unconsolidated joint ventures and
entities including $1.8 million paid for Malulani Investments, Limited
stock and $876,000 additional cash invested in Rialto Cinemas;
|
|
·
|
$8.1
million in cash used to purchase marketable
securities;
|
|
·
|
$844,000
increase in restricted cash for potential claims related to the use
by
third parties of counterfeit credit cards;
and
|
|
·
|
$1.2
million in distributions to minority
interests.
|
2005
Summary
Our
cash
position at December 31, 2005 was $8.5 million compared to $12.3 million at
December 31, 2004. The majority of the $3.8 million change related to the
following transactions:
|
·
|
$13.1
million of cash provided by the sale of our Glendale Building, our
Puerto
Rico cinema operation, and certain surplus property;
|
|
·
|
$1.0
million of cash provided by a decrease in restricted
cash;
|
|
·
|
$2.1
million of cash provided by operations from our new cinema locations
in
Australia and New Zealand and settlements related to certain litigation
claims; and
|
|
·
|
$31.7
million of net borrowings in 2005;
|
offset
by
|
·
|
$30.5
million of cash used in the purchases of or additions to property
and
equipment primarily related to the development of our Newmarket ETRC,
fit-out of our Adelaide, Australia cinema, and renovations to certain
U.S.
and New Zealand cinemas;
|
|
·
|
$13.7
million of cash used in acquisition purchases related to our purchase
of
the Cinemas 1, 2, & 3 fee and ground lease interests and our new
Melbourne Office Building;
|
|
·
|
$6.5
million paid to invest in or add capital to our unconsolidated joint
ventures and entities; and
|
|
·
|
$376,000
paid to purchase certain marketable
securities.
|
2004
Summary
Our
cash
position at December 31, 2004 was $12.3 million compared to $21.7 million at
December 31, 2003. The majority of the $9.4 million difference relates to the
following transactions:
|
·
|
cash
used in the purchase of the Anderson Circuit for $5.7 million (AUS$8.0
million) and the related fit-out costs of two new cinemas $3.8 million
(AUS$5.0 million) totaling $9.5 million (AUS$13.0
million);
|
|
·
|
cash
used in the purchase of the Movieland circuit and related fee interests
of
$13.3 million (NZ$19.8 million);
|
|
·
|
cash
of $1.0 million (AUS$1.4 million) paid for the acquisition of land
adjacent to our Newmarket property in a suburb of Brisbane,
Australia;
|
|
·
|
cash
of $1.4 million expended on the Newmarket development project (an
approximately 100,373 square foot shopping center located in a suburb
of
Brisbane, Australia);
|
|
·
|
cash
of $800,000 deposited in connection with our acquisition of the Cinemas
1,
2 and 3 fee interest in Manhattan;
and
|
|
·
|
cash
of $2.3 million paid as our 25% ownership equity in the redevelopment
of
the property located on 57th
Street just below 3rd
Avenue in Manhattan as an approximately 100,000 square foot condominium
complex;
|
offset
by
|
·
|
net
borrowings increase of $21.2 million primarily from increased borrowings
in Australia and New Zealand.
|
Future
Liquidity and Capital Resources
We
believe that we have sufficient borrowing capacity to meet our short-term
working capital requirements (see discussion below regarding our Trust Preferred
Securities).
During
the past 24 months, we have put into place several measures that have already
had a positive effect on our overall liquidity, including:
|
·
|
on
December 15, 2006, our New Zealand Corporate Credit Facility with
the
Westpac Banking Corporation was increased from $35.2 million (NZ$50.0
million) to $42.3 million (NZ$60.0 million) and the facility’s related
principal payments were deferred to begin until February 2009. At
December
31, 2006, we were in the process of issuing $50.0 million in Trust
Preferred Securities through our wholly owned trust subsidiary. This
transaction closed on February 5, 2007 and we used the funds principally
to payoff our bank indebtedness in New Zealand by $34.4 million (AUS$50.0
million) and to pay down our indebtedness in Australia by $5.8 million
(AUS$7.4 million).
|
|
·
|
on
December 4, 2006, we renegotiated our loan agreement with a financial
institution secured by our Union Square Theatre in Manhattan from
a $3.2
million loan to a $7.5 million loan.
|
|
·
|
in
2005, our Australian Corporate Credit Facility with the Bank of
Western
Australia, Ltd through our Australian subsidiary, Reading Entertainment
Australia Pty Ltd (the “Australia Credit Facility”) was increased from
$64.2 million (AUS$87.7 million) to $73.3 million (AUS$100.0 million).
This additional liquidity will allow us to continue to expand our
operations in Australia. Effective September 30, 2006, we renegotiated
our
Australian Corporate Credit Facility. Under the new terms, it is
unlikely
that we will be required to make any further principal payments
on the
loan until the facility comes to term on January 1,
2009.
|
|
·
|
on
September 19, 2005, we issued a $9.0 million promissory note in exchange
for the tenant’s interest in the ground lease estate that is currently
between (i) our fee ownership of the underlying land and (ii) our
current
possessory interest as the tenant in the building and improvements
constituting the Cinemas 1, 2 & 3 in Manhattan. This tenant’s ground
lease interest was purchased from Sutton Hill Capital LLC
(“SHC”).
|
|
·
|
on
June 8, 2005, we sold the assets and certain liabilities associated
with
our Puerto Rico cinema operations for $2.3 million resulting in a
$1.6
million gain. Net operating losses of $1.8 million and $688,000 were
included in the loss from discontinued operations for the years ending
2005 and 2004, respectively, relating to these operations. No material
income tax provision arose from this
transaction.
|
|
·
|
in
May 2005, we moved our Los Angeles corporate headquarters out of
downtown
to the City of Commerce, California, a suburb of Los Angeles, resulting
in
an annual savings of approximately
$100,000.
|
Potential
uses for funds during 2007 that would reduce our liquidity, other than those
relating to working capital needs and debt service requirements include:
|
·
|
the
development of our currently held for development
projects;
|
|
·
|
the
acquisition of additional properties currently under consideration;
and
|
|
·
|
the
possible further investments in
securities.
|
Based
upon the current levels of the consolidated operations, further anticipated
cost
savings and future growth, we believe our cash flow from operations, together
with both the existing and anticipated lines-of-credit and other sources of
liquidity (including future potential asset sales) will be adequate to meet
our
anticipated requirements for interest payments and other debt service
obligations, working capital, capital expenditures and other operating needs.
Estimated
at approximately $500.0 million (AUS$635.0 million), our development in Burwood,
Australia will clearly not be funded from normal working capital even in a
phased approach. We have approached several financing sources who have already
given a high-level, favorable response to this funding. However, we continue
to
investigate all options available to us including debt financing, equity
financing, and joint venture partnering to achieve the optimal financing
structure for this most significant development.
In
late
February 2007, it became apparent that our cost estimates with respect to
the
Burwood site preparation were low, as the extent of the contaminated soil
present at the site - a former brickworks - was greater than we had originally
believed. The $500 million cost included the approximately $1.4 million (AUS$1.8
million) of estimated cost to remove the contaminated soil. We are currently
evaluating the additional site preparation costs likely to be associated
with
the removal of this contaminated soil.
There
can
be no assurance, however, that the business will continue to generate cash
flow
at or above current levels or that estimated cost savings or growth can be
achieved. Future operating performance and our ability to service or refinance
existing indebtedness will be subject to future economic conditions and to
financial and other factors, such as access to first-run films, many of which
are beyond our control. If our cash flow from operations and/or proceeds from
anticipated borrowings should prove to be insufficient to meet our funding
needs, our current intention is either:
|
·
|
to
defer construction of projects currently slated for land presently
owned
by us;
|
|
·
|
to
take on joint venture partners with respect to such development projects;
and/or
|
|
·
|
to
sell assets.
|
Contractual
Obligations
The
following table provides information with respect to the maturities and
scheduled principal repayments of our secured debt and lease obligations at
December 31, 2006 (in thousands):
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
||||||||||||||
|
Long-term
debt
|
$
|
2,237
|
$
|
363
|
$
|
106,123
|
$
|
7,055
|
$
|
158
|
$
|
276
|
|||||||
|
Long-term
debt to related parties
|
5,000
|
--
|
--
|
9,000
|
--
|
--
|
|||||||||||||
|
Lease
obligations
|
11,482
|
10,840
|
10,833
|
10,609
|
9,928
|
65,290
|
|||||||||||||
|
Interest
on long-term debt
|
9,990
|
9,572
|
4,069
|
743
|
--
|
--
|
|||||||||||||
|
Total
|
$
|
28,709
|
$
|
20,775
|
$
|
121,025
|
$
|
27,407
|
$
|
10,086
|
$
|
65,566
|
|||||||
Unconsolidated
Joint Venture Debt
Total
debt of unconsolidated joint ventures was $4.8 million and $69.5 million as
of
December 31, 2006 and December 31, 2005, respectively. Our share of
unconsolidated debt, based on our ownership percentage, was $2.2 million and
$20.1 million as of December 31, 2006 and December 31, 2005, respectively.
Each
loan is without recourse to any assets other than our interests in the
individual joint venture.
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.
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.
In
2006,
we determined that it would be beneficial to have a layer of long term fully
subordinated debt financing to help support our long term real estate assets.
On
February 5, 2007 we issued $50.0 million in 20-year fully subordinated notes,
interest fixed for five years at 9.22%, to a trust which we control, and which
in turn issued $50.0 million in trust preferred securities in a private
placement. There are no principal payments until maturity in 2027 when the
notes
are paid in full. The trust is essentially a pass through, and the transaction
is accounted for on our books as the issuance of fully subordinated notes.
The
placement generated $48.4 million in net proceeds, which were used principally
to retire all of our bank indebtedness in New Zealand $34.4 million (NZ$50.0
million) and to retire a portion of our bank indebtedness in Australia $5.8
million (AUS$7.4 million).
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. Historically, we managed our currency exposure by creating
natural hedges in Australia and New Zealand. This involves local country
sourcing of goods and services as well as borrowing in local currencies.
However, by paying off our New Zealand debt and paying down on our Australia
debt with the proceeds of our Trust Preferred Securities, we have added an
increased element of currency risk to our Company. We believe that this currency
risk is mitigated by the comparatively favorable interest rate and the long-term
nature of the fully subordinated notes.
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 fixed rate into a variable
rate and vice versa. Our internal procedures allow us to enter into derivative
contracts on certain borrowing transactions to achieve this goal. Our Australian
Credit Facility provides for floating interest rates based on the Bank Bill
Swap
Bid Rate (BBSY bid rate), but requires that not less than 70% of the loan be
swapped into fixed rate obligations.
In
accordance with SFAS No. 133, we marked our Australian interest rate swap
instruments to market resulting in an $845,000 (AUS$1.1 million) decrease,
$171,000 (AUS$180,000) increase, and a $91,000 (AUS$118,000) increase to
interest expense during 2006, 2005 and 2004, respectively.
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.
Recent
Accounting Pronouncements
Statement
of Financial Accounting Standards No. 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair
Value Measurement
(SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with Generally Accepted Accounting Principles (GAAP), and
expands disclosures about fair value measurements. The provisions of SFAS 157
are effective for fiscal years beginning after November 15, 2007. We do not
anticipate the application of this pronouncement will have a material impact
on
our results of operations or financial condition.
Financial
Interpretation No. 48
In
June
2006, the FASB issued Financial Interpretation No. 48 Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109.
This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes
a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The benefit of a tax position may be recognized if there is a more
likely than not probability that the position will be sustained on its merits
when examined by the taxing authorities. If a benefit is thus recognized, the
amount of benefit is measured as the largest tax benefit that is more than
50
percent probable of being secured upon ultimate settlement.
The
provisions of FIN 48 are effective for years beginning after December 15, 2006.
We estimate the application of FIN 48 will result in a cumulative charge to
retained earnings as of January 1. 2007 between $400,000 and
$900,000.
Staff
Accounting Bulletin (SAB) 108
In
September 2006, the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”)
to address diversity in practice regarding consideration of the effects of
prior
year errors when quantifying misstatements in current year financial statements.
The SEC staff concluded that registrants should quantify financial statement
errors using both a balance sheet approach and an income statement approach
and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 states that if correcting an error in the current year
materially affects the current year’s income statement, the prior period
financial statements must be restated. SAB 108 is effective for fiscal years
ending after November 15, 2006. The adoption of SAB 108 did not have a material
impact on our consolidated financial statements.
Statement
of Financial Accounting Standards No. 123(R)
In
December 2004, the FASB issued SFAS No. 123 - Revised, Share
Based Payment.
The
statement establishes the standards for the accounting for transactions in
which
an entity exchanges its equity instruments for goods and services. The statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Public companies may
apply the standard on a modified prospective method. Under this method, a
company records compensation expense for all awards it grants after
the
date
it
adopts the standard. In addition, public companies are required to record
compensation expense for the unvested portion of previously granted awards
that
remain outstanding at the date of adoption. During 2005, the Securities and
Exchange Commission deferred the effective date of this statement until the
first annual period beginning after June 15, 2005. The adoption of this
statement in 2006 did not have a material impact on our financial position
or
results of operations.
Forward-Looking
Statements
Our
statements in this annual 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:
|
·
|
with
respect to our cinema operations:
|
|
o
|
the
number and attractiveness to movie goers of the films released
in future
periods;
|
|
o
|
the
amount of money spent by film distributors to promote their motion
pictures;
|
|
o
|
the
licensing fees and terms required by film distributors from motion
picture
exhibitors in order to exhibit their
films;
|
|
o
|
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;
and
|
|
o
|
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;”
|
|
·
|
with
respect to our real estate development and operation
activities:
|
|
o
|
the
rental rates and capitalization rates applicable to the markets in
which
we operate and the quality of properties that we
own;
|
|
o
|
the
extent to which we can obtain on a timely basis the various land
use
approvals and entitlements needed to develop our
properties;
|
|
o
|
the
risks and uncertainties associated with real estate
development;
|
|
o
|
the
availability and cost of labor and materials;
|
|
o
|
competition
for development sites and tenants;
and
|
|
o
|
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
|
|
·
|
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:
|
|
o
|
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;
|
|
o
|
the
relative values of the currency used in the countries in which we
operate;
|
|
o
|
changes
in government regulation, including by way of example, the costs
resulting
from the implementation of the requirements of
Sarbanes-Oxley;
|
|
o
|
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);
|
|
o
|
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;
|
|
o
|
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
|
|
o
|
changes
in applicable accounting policies and
practices.
|
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 annual
report may contain “pro forma” information or “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.
The
Securities and Exchange Commission requires that registrants include information
about potential effects of changes in currency exchange and interest rates
in
their Form 10-K 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:
|
·
|
it
is based on a single point in time.
|
|
·
|
it
does not include the effects of other complex market reactions that
would
arise from the changes modeled.
|
Although
the results of such an analysis may be useful as a benchmark, they should not
be
viewed as forecasts.
At
December 31, 2006, approximately 49% and 23% of our assets (determined by the
book value of such assets) were invested in assets denominated in Australian
dollars (Reading Australia) and New Zealand dollars (Reading New Zealand),
respectively, including approximately $9.0 million in cash and cash equivalents.
At December 31, 2005, approximately 50% and 23% of our assets were invested
in
assets denominated in Australian and New Zealand dollars, respectively,
including approximately $9.3 million in cash and cash equivalents.
Our
policy in Australia and New Zealand is to match revenue 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 negligible foreign currency effect on our earnings.
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 entertainment complexes 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, approximately 45% and 28% of our Australian and New Zealand assets (based
on
book value), respectively, remain subject to such exposure unless we elect
to
hedge our foreign currency exchange between the U.S. 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 $6.4 million
and
$1.8 million, respectively, and the change in annual net income would be
$472,000 and $341,000, respectively. At the present time, we have no plan to
hedge such exposure. On February 5, 2007 we issued $50.0 million in 20-year
fully subordinated notes and paid off our bank indebtedness in New Zealand
$34.4
million (NZ$50.0 million) and retired a portion of our bank indebtedness in
Australia $5.8 million (AUS$7.4 million). By paying off our New Zealand debt
and
paying down on our Australia debt with the proceeds of our Trust Preferred
Securities, we have added an increased element of currency risk to our Company.
We believe that this currency risk is mitigated by the comparatively favorable
interest rate and the long-term nature of the fully subordinated
notes.
We
record
unrealized foreign currency translation gains or losses which could materially
affect our financial position. We have accumulated unrealized foreign currency
translation gains of approximately $33.4 million and $28.6 million as of
December 31, 2006 and 2005, respectively.
Historically,
we maintained most of our cash and cash equivalent balances in short-term money
market instruments with original maturities of six 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. bank 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 approximately $5,000 increase
or decrease in our 2006 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 $81,000 increase in 2006 Australian
and New Zealand interest expense while a 1% decrease in short-term interest
rates would have resulted in approximately $83,000 decrease 2006 Australian
and
New Zealand interest expense.
Item
8 - Financial Statements and Supplementary
Data
TABLE
OF CONTENTS
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Report
of Independent Registered Public
Accountants
To
the
Board of Directors and Stockholders of
Reading
International, Inc.
Los
Angeles, California:
We
have
audited the accompanying consolidated balance sheets of Reading International,
Inc., and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2006. Our
audits also included the financial statement schedule listed in the index at
Item 15. These financial statements and the financial statement schedule are
the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Reading International, Inc., and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on the criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated March 29, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an adverse opinion on the effectiveness of the Company’s
internal control over financial reporting because of a material
weakness.
DELOITTE
& TOUCHE LLP
Los
Angeles, California
March
29,
2007
Reading
International, Inc. and
Subsidiaries
Consolidated
Balance Sheets as of December 31, 2006 and 2005
(U.S.
dollars in thousands)
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
11,008
|
$
|
8,548
|
|||
|
Receivables
|
6,612
|
5,272
|
|||||
|
Inventory
|
606
|
468
|
|||||
|
Investment
in marketable securities
|
8,436
|
401
|
|||||
|
Restricted
cash
|
1,040
|
--
|
|||||
|
Prepaid
and other current assets
|
2,589
|
996
|
|||||
|
Total
current assets
|
30,291
|
15,685
|
|||||
|
Property
held for development
|
1,598
|
6,889
|
|||||
|
Property
under development
|
38,876
|
23,069
|
|||||
|
Property
& equipment, net
|
170,667
|
167,389
|
|||||
|
Investment
in unconsolidated joint ventures and entities
|
19,067
|
14,025
|
|||||
|
Capitalized
leasing costs
|
10
|
15
|
|||||
|
Goodwill
|
17,919
|
14,653
|
|||||
|
Intangible
assets, net
|
7,954
|
8,788
|
|||||
|
Other
assets
|
2,849
|
2,544
|
|||||
|
Total
assets
|
$
|
289,231
|
$
|
253,057
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable and accrued liabilities
|
$
|
13,539
|
$
|
13,538
|
|||
|
Film
rent payable
|
4,642
|
4,580
|
|||||
|
Notes
payable - current portion
|
2,237
|
1,776
|
|||||
|
Note
payable to related party - current portion
|
5,000
|
--
|
|||||
|
Taxes
payable
|
9,128
|
7,504
|
|||||
|
Deferred
current revenue
|
2,565
|
2,319
|
|||||
|
Other
current liabilities
|
177
|
250
|
|||||
|
Total
current liabilities
|
37,288
|
29,967
|
|||||
|
Notes
payable - long-term portion
|
113,975
|
93,544
|
|||||
|
Notes
payable to related party - long-term portion
|
9,000
|
14,000
|
|||||
|
Deferred
non-current revenue
|
528
|
554
|
|||||
|
Other
liabilities
|
18,178
|
12,509
|
|||||
|
Total
liabilities
|
178,969
|
150,574
|
|||||
|
Commitments
and contingencies (Note 18)
|
|||||||
|
Minority
interest in consolidated affiliates
|
2,603
|
3,079
|
|||||
|
Stockholders'
equity:
|
|||||||
|
Class
A Nonvoting Common Stock, par value $0.01, 100,000,000 shares authorized,
35,558,089 issued and 20,980,865 outstanding at December 31, 2006
and
35,468,733 issued and 20,990,458 outstanding at December 31,
2005
|
216
|
215
|
|||||
|
Class
B Voting Common Stock, par value $0.01, 20,000,000 shares authorized
and
1,495,490 issued and outstanding at December 31, 2006 and at December
31,
2005
|
15
|
15
|
|||||
|
Nonvoting
Preferred Stock, par value $0.01, 12,000 shares authorized and no
outstanding shares at December 31, 2006 and 2005
|
--
|
--
|
|||||
|
Additional
paid-in capital
|
128,399
|
128,028
|
|||||
|
Accumulated
deficit
|
(50,058
|
)
|
(53,914
|
)
|
|||
|
Treasury
shares
|
(4,306
|
)
|
(3,515
|
)
|
|||
|
Accumulated
other comprehensive income
|
33,393
|
28,575
|
|||||
|
Total
stockholders' equity
|
107,659
|
99,404
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
289,231
|
$
|
253,057
|
|||
See
accompanying notes to consolidated financial statements.
Reading
International, Inc. and
Subsidiaries
Consolidated
Statements of Operations for the Three Years Ended December 31,
2006
(U.S.
dollars in thousands, except per share amounts)
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
revenue
|
||||||||||
|
Cinema
|
$
|
94,048
|
$
|
86,760
|
$
|
74,324
|
||||
|
Real
estate
|
12,077
|
11,345
|
9,765
|
|||||||
|
Total
operating revenue
|
106,125
|
98,105
|
84,089
|
|||||||
|
Operating
expense
|
||||||||||
|
Cinema
|
70,142
|
67,487
|
56,816
|
|||||||
|
Real
estate
|
7,365
|
7,359
|
6,948
|
|||||||
|
Depreciation
and amortization
|
13,212
|
12,384
|
11,823
|
|||||||
|
General
and administrative
|
12,991
|
17,247
|
14,824
|
|||||||
|
Total
operating expense
|
103,710
|
104,477
|
90,411
|
|||||||
|
Operating
income (loss)
|
2,415
|
(6,372
|
)
|
(6,322
|
)
|
|||||
|
Non-operating
income (expense)
|
||||||||||
|
Interest
income
|
308
|
209
|
843
|
|||||||
|
Interest
expense
|
(6,916
|
)
|
(4,682
|
)
|
(3,921
|
)
|
||||
|
Net
loss on sale of assets
|
(45
|
)
|
(32
|
)
|
(114
|
)
|
||||
|
Other
income (expense)
|
(1,953
|
)
|
51
|
998
|
||||||
|
Loss
before minority interest, discontinued operations, income tax expense
and
equity earnings of unconsolidated joint ventures and entities
|
(6,191
|
)
|
(10,826
|
)
|
(8,516
|
)
|
||||
|
Minority
interest
|
(672
|
)
|
(579
|
)
|
(112
|
)
|
||||
|
Loss
from continuing operations
|
(6,863
|
)
|
(11,405
|
)
|
(8,628
|
)
|
||||
|
Discontinued
operations:
|
||||||||||
|
Gain
on disposal of business operations
|
--
|
13,610
|
--
|
|||||||
|
Loss
from discontinued operations, net of tax
|
--
|
(1,379
|
)
|
(469
|
)
|
|||||
|
Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
|
(6,863
|
)
|
826
|
(9,097
|
)
|
|||||
|
Income
tax expense
|
(2,270
|
)
|
(1,209
|
)
|
(1,046
|
)
|
||||
|
Loss
before equity earnings of unconsolidated joint ventures and
entities
|
(9,133
|
)
|
(383
|
)
|
(10,143
|
)
|
||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
9,547
|
1,372
|
1,680
|
|||||||
|
Gain
on sale of unconsolidated joint venture
|
3,442
|
--
|
--
|
|||||||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
|||
|
Earnings
(loss) per common share - basic:
|
||||||||||
|
Earnings
(loss) from continuing operations
|
$
|
0.17
|
$
|
(0.51
|
)
|
$
|
(0.37
|
)
|
||
|
Earnings
(loss) from discontinued operations, net
|
--
|
0.55
|
(0.02
|
)
|
||||||
|
Basic
earnings (loss) per share
|
$
|
0.17
|
$
|
0.04
|
$
|
(0.39
|
)
|
|||
|
Weighted
average number of shares outstanding - basic
|
22,425,941
|
22,249,967
|
21,948,065
|
|||||||
|
Earnings
(loss) per common share - diluted:
|
||||||||||
|
Earnings
(loss) from continuing operations
|
$
|
0.17
|
$
|
(0.51
|
)
|
$
|
(0.37
|
)
|
||
|
Earnings
(loss) from discontinued operations, net
|
--
|
0.55
|
(0.02
|
)
|
||||||
|
Diluted
earnings (loss) per share
|
$
|
0.17
|
$
|
0.04
|
$
|
(0.39
|
)
|
|||
|
Weighted
average number of shares outstanding - diluted
|
22,674,818
|
22,249,967
|
21,948,065
|
|||||||
See
accompanying notes to consolidated financial statements.
Reading
International, Inc. and
Subsidiaries
Consolidated
Statements of Stockholders’ Equity
for the Three Years Ended December 31, 2006
(U.S.
dollars in thousands)
|
Common
Stock
|
||||||||||||||||||||||||||||
|
Class
A Shares
|
Class
A Par Value
|
Class
B Shares
|
Class
B
Par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income/(Loss)
|
Total
Stockholders’
Equity
|
||||||||||||||||||||
|
At
January 1, 2004
|
19,867
|
$
|
199
|
2,032
|
$
|
20
|
$
|
123,516
|
$
|
--
|
$
|
(46,440
|
)
|
$
|
31,196
|
$
|
108,491
|
|||||||||||
|
Net
loss
|
--
|
--
|
--
|
--
|
--
|
--
|
(8,463
|
)
|
--
|
(8,463
|
)
|
|||||||||||||||||
|
Other
comprehensive income:
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||
|
Cumulative
foreign exchange rate adjustment
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
1,190
|
1,190
|
|||||||||||||||||||
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(7,273
|
)
|
||||||||||||||||||
|
Class
B common stock received from stockholder in exchange for Class
A common
stock
|
487
|
5
|
(487
|
)
|
(5
|
)
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Class
A common stock issued
|
99
|
1
|
--
|
--
|
791
|
--
|
--
|
--
|
792
|
|||||||||||||||||||
|
At
December 31, 2004
|
20,453
|
$
|
205
|
1,545
|
$
|
15
|
$
|
124,307
|
$
|
--
|
$
|
(54,903
|
)
|
$
|
32,386
|
$
|
102,010
|
|||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
--
|
--
|
989
|
--
|
989
|
|||||||||||||||||||
|
Other
comprehensive income:
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||
|
Cumulative
foreign exchange rate adjustment
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(3,822
|
)
|
(3,822
|
)
|
|||||||||||||||||
|
Unrealized
gain on securities
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
11
|
11
|
|||||||||||||||||||
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(2,822
|
)
|
||||||||||||||||||
|
Class
B common stock received from stockholder in exchange for Class
A common
stock
|
50
|
--
|
(50
|
)
|
--
|
--
|
--
|
--
|
--
|
--
|
||||||||||||||||||
|
Class
A common stock issued for stock options exercised in exchange for
cash or
treasury shares
|
487
|
10
|
--
|
--
|
3,721
|
(3,515
|
)
|
--
|
--
|
216
|
||||||||||||||||||
|
At
December 31, 2005
|
20,990
|
$
|
215
|
1,495
|
$
|
15
|
$
|
128,028
|
$
|
(3,515
|
)
|
$
|
(53,914
|
)
|
$
|
28,575
|
$
|
99,404
|
||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
--
|
--
|
3,856
|
--
|
3,856
|
|||||||||||||||||||
|
Other
comprehensive income:
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||
|
Cumulative
foreign exchange rate adjustment
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
4,928
|
4,928
|
|||||||||||||||||||
|
Unrealized
loss on securities
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(110
|
)
|
(110
|
)
|
|||||||||||||||||
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
8,674
|
|||||||||||||||||||
|
Stock
option and restricted stock compensation expense
|
16
|
--
|
--
|
--
|
284
|
--
|
--
|
--
|
284
|
|||||||||||||||||||
|
Class
A common stock received upon exercise of put option
|
(99
|
)
|
--
|
--
|
--
|
--
|
(791
|
)
|
--
|
--
|
(791
|
)
|
||||||||||||||||
|
Class
A common stock issued for stock options exercised
|
74
|
1
|
--
|
--
|
87
|
-
|
--
|
--
|
88
|
|||||||||||||||||||
|
At
December 31, 2006
|
20,981
|
$
|
216
|
1,495
|
$
|
15
|
$
|
128,399
|
$
|
(4,306
|
)
|
$
|
(50,058
|
)
|
$
|
33,393
|
$
|
107,659
|
||||||||||
See
accompanying notes to consolidated financial statements.
Reading
International, Inc. and
Subsidiaries
Consolidated
Statements of Cash Flows for the Three Years Ended December 31,
2006
(U.S.
dollars in thousands)
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
Activities
|
||||||||||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
|||
|
Adjustments
to reconcile net income( loss) to net cash provided by operating
activities:
|
||||||||||
|
Realized
(gain) loss on foreign currency translation
|
38
|
(417
|
)
|
(1,686
|
)
|
|||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
(9,547
|
)
|
(1,372
|
)
|
(1,680
|
)
|
||||
|
Distributions
of earnings from unconsolidated joint ventures and
entities
|
6,647
|
855
|
1,546
|
|||||||
|
Gain
on the sale of unconsolidated joint venture
|
(3,442
|
)
|
--
|
--
|
||||||
|
Gain
on sale of Puerto Rico
|
--
|
(1,597
|
)
|
--
|
||||||
|
Gain
on sale of Glendale Building
|
--
|
(12,013
|
)
|
--
|
||||||
|
Gain
on settlement of litigation
|
--
|
--
|
(1,375
|
)
|
||||||
|
Loss
on extinguishment of debt
|
167
|
--
|
--
|
|||||||
|
Loss
on sale of assets, net
|
45
|
32
|
114
|
|||||||
|
Depreciation
and amortization
|
13,212
|
12,384
|
12,899
|
|||||||
|
Stock
based compensation expense
|
284
|
--
|
--
|
|||||||
|
Minority
interest
|
672
|
579
|
112
|
|||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
(Increase)
decrease in receivables
|
(556
|
)
|
1,559
|
(889
|
)
|
|||||
|
(Increase)
decrease in prepaid and other assets
|
(1,914
|
)
|
797
|
(619
|
)
|
|||||
|
Increase
in payable and accrued liabilities
|
1,108
|
748
|
448
|
|||||||
|
Increase
(decrease) in film rent payable
|
(103
|
)
|
549
|
(402
|
)
|
|||||
|
Increase
(decrease) in deferred revenues and other liabilities
|
1,442
|
(506
|
)
|
778
|
||||||
|
Net
cash provided by operating activities
|
11,909
|
2,587
|
783
|
|||||||
|
Investing
Activities
|
||||||||||
|
Proceeds
from sale of unconsolidated joint venture
|
4,573
|
--
|
--
|
|||||||
|
Proceeds
from sale of Puerto Rico
|
--
|
2,335
|
--
|
|||||||
|
Proceeds
from sale of Glendale Building
|
--
|
10,300
|
--
|
|||||||
|
Acquisitions
of real estate and leasehold interests
|
(8,087
|
)
|
(13,693
|
)
|
(20,031
|
)
|
||||
|
Purchases
of and additions to property and equipment, net
|
(8,302
|
)
|
(30,461
|
)
|
(7,794
|
)
|
||||
|
Investment
in unconsolidated joint ventures and entities
|
(2,676
|
)
|
(6,468
|
)
|
(2,290
|
)
|
||||
|
(Increase)
decrease in restricted cash
|
(844
|
)
|
1,011
|
(359
|
)
|
|||||
|
Repayment
of loan receivable
|
--
|
--
|
13,000
|
|||||||
|
Purchases
of marketable securities
|
(8,109
|
)
|
(376
|
)
|
--
|
|||||
|
Proceeds
from disposal of assets, net
|
--
|
515
|
157
|
|||||||
|
Net
cash used in investing activities
|
(23,445
|
)
|
(36,837
|
)
|
(17,317
|
)
|
||||
|
Financing
Activities
|
||||||||||
|
Repayment
of long-term borrowings
|
(6,242
|
)
|
(513
|
)
|
(52,439
|
)
|
||||
|
Proceeds
from borrowings
|
19,274
|
31,666
|
60,681
|
|||||||
|
Capitalized
borrowing costs
|
(223
|
)
|
--
|
(266
|
)
|
|||||
|
Option
deposit received
|
3,000
|
--
|
--
|
|||||||
|
Proceeds
from exercise of stock options
|
88
|
161
|
--
|
|||||||
|
Repurchase
of Class A Nonvoting Common Stock
|
(791
|
)
|
--
|
--
|
||||||
|
Minority
interest distributions
|
(1,167
|
)
|
(944
|
)
|
(1,137
|
)
|
||||
|
Net
cash provided by financing activities
|
13,939
|
30,370
|
6,839
|
|||||||
|
Increase
(decrease) in cash and cash equivalents
|
2,403
|
(3,880
|
)
|
(9,695
|
)
|
|||||
|
Effect
of exchange rate on cash
|
57
|
136
|
252
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
8,548
|
12,292
|
21,735
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
11,008
|
$
|
8,548
|
$
|
12,292
|
||||
|
Supplemental
Disclosures
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
on borrowings
|
$
|
8,731
|
$
|
6,188
|
$
|
4,634
|
||||
|
Income
taxes
|
$
|
585
|
$
|
328
|
$
|
312
|
||||
|
Non-Cash
Transactions
|
||||||||||
|
Increase
in cost basis of Cinemas 1, 2, & 3 related to the purchase price
adjustment of the call option liability to a related party
|
1,087
|
--
|
--
|
|||||||
|
Debt
issued to purchase Cinemas 1, 2, 3 (Note 8)
|
--
|
9,000
|
--
|
|||||||
|
Deposit
applied to Cinemas 1, 2, 3 (Note 8)
|
--
|
800
|
--
|
|||||||
|
Property
addition from purchase option asset (Note 8)
|
--
|
1,337
|
--
|
|||||||
|
Buyer
assumption of note payable on Glendale Building (Note 9)
|
--
|
(10,103
|
)
|
--
|
||||||
|
Common
stock issued for acquisition (Note 20)
|
--
|
--
|
792
|
|||||||
|
Common
stock issued for note receivable (Note 20)
|
--
|
55
|
--
|
|||||||
|
Treasury
shares received (Note 20)
|
--
|
(3,515
|
)
|
--
|
||||||
|
Stock
options exercised in exchange for treasury shares received (Note
20)
|
--
|
3,515
|
--
|
|||||||
See
accompanying notes to consolidated financial statements.
Reading
International, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2006
Note
1 - Nature of Business
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 incorporated in 1999 and, following the
consummation of a consolidation transaction on December 31, 2001 (the
“Consolidation”), is now the owner of the consolidated businesses and assets of
Reading Entertainment, Inc. (“RDGE”), Craig Corporation (“CRG”), and Citadel
Holding Corporation (“CDL”). 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”) in Australia and New Zealand
and live theater assets in Manhattan and Chicago in the United
States.
|
Note
2 - Summary of Significant Accounting Policies
Basis
of Consolidation
The
consolidated financial statements of RDI and its subsidiaries include the
accounts of CDL, RDGE and CRG. Also consolidated are Angelika Film Center LLC
(“AFC”), in which we own a 50% controlling membership interest and whose only
asset is the Angelika Film Center in Manhattan; Australia Country Cinemas Pty,
Limited (“ACC”), a company in which we own a 75% interest, and whose only assets
are our leasehold cinemas in Townsville and Dubbo, Australia; and the
Elsternwick Classic, an unincorporated joint venture in which we own a 66.6%
interest and whose only asset is the Elsternwick Classic cinema in Melbourne,
Australia.
With
the
exception of one other investment, we have concluded that all other investment
interests are appropriately accounted for unconsolidated joint ventures and
entities, and accordingly, our unconsolidated joint ventures and entities in
20%
to 50% owned companies
are accounted for on the equity method. These investment interests include
our
33.3% undivided interest in the unincorporated joint venture that owns the
Mt.
Gravatt cinema in a suburb of Brisbane, Australia; our 50% undivided interest
in
the unincorporated joint venture that owns a cinema in the greater Auckland
area
of New Zealand; our 25% undivided interest in the unincorporated joint venture
that owns 205-209 East 57th
Street
Associates, LLC (Place
57)
a
limited liability company formed to redevelop our former cinema site at 205
East
57th
Street
in Manhattan; our 33.3% undivided interest in Rialto Distribution, an
unincorporated joint venture engaged in the business of distributing art film
in
New Zealand and Australia; and our 25% undivided interest in the unincorporated
joint venture that owns Rialto Entertainment Village Roadshow Ltd (“Village”)
and SkyCity Leisure Ltd (“Sky”) in Rialto Cinemas.
We
also
have an 18.4% undivided interest in a private real estate company with holdings
principally in California, Texas and Hawaii, including the Guenoc Winery and
other land located in Northern California. We have been in contact with the
controlling shareholder of Malulani Investments, Ltd. and requested quarterly
or
annual operating financials. To date, he has not responded to our request for
relevant financial information. Based on this situation, we do not believe
that
we can assert significant influence over the dealings of this entity. As such
and in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 35 - Criteria
for Applying the Equity Method of Accounting for Investments in Common Stock
-
an Interpretation of APB Opinion No. 18,
we are
treating this investment on a cost basis by recognizing earnings as they are
distributed to us.
Accounting
Principles
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).
Cash
and Cash Equivalents
We
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Receivables
Our
receivables balance is composed primarily of credit card receivables,
representing the purchase price of tickets or coupon books sold at our various
businesses. Sales charged on customer credit cards are collected when the credit
card transactions are processed. The remaining receivables balance is primarily
made up of the goods and services tax (“GST”) refund receivable from our
Australian taxing authorities and the management fee receivable from the managed
cinemas. We have no history of significant bad debt losses and we establish
an
allowance for accounts that we deem uncollectible.
Inventory
Inventory
is composed of concession goods used in theater operations and is stated at
the
lower of cost (first-in, first-out method) or net realizable value.
Investment
in Marketable Securities
We
account for investments in marketable debt and equity securities in accordance
with SFAS No. 115, “Accounting
for Certain Investments in Debt and Equity Securities”
(SFAS
No. 115). Our investment in Marketable Securities includes equity
instruments which are classified as available for sale and are recorded at
market using the specific identification method. In accordance with SFAS
No. 115, available for sale securities are carried at their fair market
value and any difference between cost and market value is recorded as unrealized
gain or loss, net of income taxes, and is reported as accumulated other
comprehensive income in the consolidated statement of stockholders’ equity.
Premiums and discounts of debt instruments are recognized in interest income
using the effective interest method. Realized gains and losses and declines
in
value expected to be other-than-temporary on available for sale securities
are
included in other income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available for sale are included in interest income.
Restricted
Cash
We
classify restricted cash as those cash accounts for which the use of funds
is
restricted by contract or bank covenant. At December 31, 2006, our restricted
cash balance was $1.0 million made up of deposits transferred to restricted
cash
accounts under our name by, and in accordance with, our agreement with our
domestic credit card processing bank. The deposits were transferred to cover
any
potential loss suffered by the bank in relation to the use by third parties
of
counterfeit credit cards and related credit card company fines.
Fair
Value of Financial Instruments
The
carrying amounts of our cash and cash equivalents, restricted cash and accounts
payable approximate fair value due to their short-term maturities. The carrying
amounts of our variable-rate secured debt approximate fair value since the
interest rates on these instruments are equivalent to rates currently offered
to
us. See Note 16 - Fair
Value of Financial Instruments.
Derivative
Financial Instruments
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
as
subsequently amended by SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities an Amendment
of SFAS No. 133,
we
carry all derivative financial instruments on our Consolidated Balance Sheets
at
fair value. Derivatives are generally executed for interest rate management
purposes but are not designated as hedges in accordance with SFAS No. 133 and
SFAS No. 138. Therefore, changes in market values are recognized in current
earnings.
Property
Held for Development
Property
held for development consists of land (including land acquisition costs)
initially acquired for the potential development of multiplex cinemas and/or
ETRC’s. Property held for development is carried at cost. At the time
construction of the related multiplex cinema, ETRC, or other development
commences, the property is transferred to “property under
development.”
Property
Under Development
Property
under development consists of land, new buildings and improvements under
development, and their associated capitalized interest and other development
costs. These building and improvement costs are directly associated with the
development of potential cinemas (whether for sale or lease), the development
of
ETRC locations, or other improvements to real property. Start-up costs (such
as
pre-opening cinema advertising and training expense) and other costs not
directly related to the acquisition of long-term assets are expensed as
incurred.
Incident
to the development of our Burwood property, in late 2006, we began various
fill
and earth moving operations. In late February 2007, it became apparent that
our
cost estimates with respect to site preparation were low, as the extent of
the
contaminated soil present at the site - a former brickworks - was greater
than
we had originally believed. Our previous estimated cost of $500 million included
the approximately $1.4 million (AUS$1.8 million) of estimated cost to remove
the
contaminated soil. As we were not the source of this contamination, we are
not
currently under any legal obligation to remove this contaminated soil from
the
site. However, as a practical matter we intend to address these issues in
connection with our planned redevelopment of the site as a mixed-use retail,
entertainment, commercial and residential complex. We are currently evaluating
the additional site preparation costs likely to be associated with the removal
of this contaminated soil.
Property
and Equipment
Property
and equipment consists of land, buildings, leasehold improvements, fixtures
and
equipment. With the exception of land, property and equipment is carried at
cost
and depreciated over the useful lives of the related assets. In accordance
with
US GAAP, land is not depreciated.
Construction-in-Progress
Costs
Construction-in-progress
includes costs associated with already existing buildings, property, furniture
and fixtures for which we are in the process of improving the site or its
associated business assets.
Accounting
for the Impairment of Long Lived Assets
We
assess
whether there has been an impairment in the value of our long-lived assets
whenever events or changes in circumstances indicate the carrying amount of
an
asset may not be recoverable. Recoverability of assets to be held and used
is
measured by a comparison of the carrying amount to the future net cash flows,
undiscounted and without interest, expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized
is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value, less costs to sell. At December 31, 2006,
no
impairment in the net carrying values of our investments in real estate and
cinema leasehold interests or in unconsolidated real estate entities had
occurred for the periods presented.
Goodwill
and Intangible Assets
In
June
2001, the FASB issued SFAS No. 141, Business
Combinations
(SFAS
141), and SFAS No. 142, Goodwill
and
Other Intangible Assets
(SFAS
142), which are effective for fiscal years beginning after December 15,
2001. SFAS 141 requires that the purchase method of accounting be used for
all
business combinations initiated or completed after June 30, 2001. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead, tested for impairment at least annually in
accordance with the provisions of SFAS 142. As required by SFAS 142, prior
to
conducting our goodwill impairment analysis, we assess long-lived assets for
impairment in accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-lived Assets.
We then
perform the impairment analysis at one level below the operating segment level
(see Note 10 - Goodwill
and Intangibles)
as
defined by SFAS 142. This analysis requires management to make a series of
critical assumptions to: (1) evaluate whether any impairment exists; and (2)
measure the amount of impairment. SFAS 142 requires that we estimate the fair
value of our reporting units as compared with their estimated book value. If
the
estimated fair value of a reporting unit is less than the estimated book value,
then an impairment is deemed to have occurred. In estimating the fair value
of
our reporting units, we primarily use the income approach (which uses
forecasted, discounted cash flows to estimate the fair value of the reporting
unit).
Revenue
Recognition
Revenue
from cinema ticket sales and concession sales are recognized when sold. Revenue
from gift certificate sales is deferred and recognized when the certificates
are
redeemed. Rental revenue is recognized on a straight-line basis in accordance
with SFAS No. 13 - Accounting
for Leases.
Deferred
Leasing/Financing Costs
Direct
costs incurred in connection with obtaining tenants and/or financing are
amortized over the respective term of the lease or loan on a straight-line
basis.
Advertising
Costs
Costs
of
advertising are expensed as incurred. Advertising expense for the years ended
December 31, 2006, 2005 and 2004 are approximately $2.5 million, $2.6 million,
and $2.8 million, respectively.
General
and Administrative Expenses
For
years
ended December 31, 2006, 2005 and 2004, we booked gains on the settlement of
litigation of $900,000, $494,000, and $1.4 million, respectively, as a recovery
of legal expenses included in general and administrative expenses.
Depreciation
and Amortization
Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are generally as
follows:
|
Building
and building improvements
|
40
years
|
|
Leasehold
improvement
|
Shorter
of the life of the lease or useful life of the
improvement
|
|
Theater
equipment
|
7
years
|
|
Furniture
and fixtures
|
5
-
10 years
|
Translation
of Non-U.S. Currency Amounts
The
financial statements and transactions of our Australian and New Zealand cinema
and real estate operations are reported in their functional currencies, namely
Australian and New Zealand dollars, respectively, and are then translated into
U.S. dollars. Assets and liabilities of these operations are denominated in
their functional currencies and are then translated at exchange rates in effect
at the balance sheet date. Revenues and expenses are translated at the average
exchange rate for the reporting period. Translation adjustments are reported
in
“Accumulated Other Comprehensive Income,” a component of Stockholders’ Equity.
The
carrying value of our Australian and New Zealand assets fluctuates due to
changes in the exchange rate between the U.S. dollar and the Australian and
New
Zealand dollars. The exchange rates of the U.S. dollar to the Australian dollar
were $0.7884 and $0.7342 as of December 31, 2006 and 2005, respectively. The
exchange rates of the U.S. dollar to the New Zealand dollar were $0.7046 and
$0.6845 as of December 31, 2006 and 2005, respectively.
Earnings
Per Share
Basic
earnings per share is calculated using the weighted average number of shares
of
Class A and Class B Stock outstanding during the years ended December 31, 2006,
2005, and 2004, respectively. Diluted earnings per share is calculated by
dividing net earnings available to common stockholders by the weighted average
common shares outstanding plus the dilutive effect of stock options. Stock
options to purchase 514,100, 521,100, and 1,488,200 shares of Class A Common
Stock were outstanding at December 31, 2006, 2005, and 2004, respectively,
at a
weighted average exercise price of $5.21, $5.00, and $4.19 per share,
respectively. Stock options to purchase 185,100 shares of Class B Common Stock
were outstanding at each of the years ended December 31, 2006, 2005, and 2004
at
a weighted average exercise price of $9.90 per share. In accordance with SFAS
128 - Earnings Per Share, as we had recorded an operating loss before
discontinued operations for the years ended December 31, 2005 and 2004, the
effect of the stock options was anti-dilutive and accordingly excluded from
the
earnings per share computation.
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.
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.
Recent
Accounting Pronouncements
Statement
of Financial Accounting Standards No. 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair
Value Measurement
(SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with Generally Accepted Accounting Principles (GAAP), and
expands disclosures about fair value measurements. The provisions of SFAS 157
are effective for fiscal years beginning after November 15, 2007. We do not
anticipate the application of this pronouncement will have a material impact
on
our results of operations or financial condition.
Financial
Interpretation No. 48
In
June
2006, the FASB issued Financial Interpretation No. 48 Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109.
This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes
a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The benefit of a tax position may be recognized if there is a more
likely than not probability that the position will be sustained on its merits
when examined by the taxing authorities. If a benefit is thus recognized, the
amount of benefit is measured as the largest tax benefit that is more than
50
percent probable of being secured upon ultimate settlement.
The
provisions of FIN 48 are effective for years beginning after December 15, 2006.
We estimate the application of FIN 48 will result in a cumulative charge to
retained earnings as of January 1, 2007 between $400,000 and
$900,000.
Staff
Accounting Bulletin (SAB) 108
In
September 2006, the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”)
to address diversity in practice regarding consideration of the effects of
prior
year errors when quantifying misstatements in current year financial statements.
The SEC staff concluded that registrants should quantify financial statement
errors using both a balance sheet approach and an income statement approach
and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 states that if correcting an error in the current year
materially affects the current year’s income statement, the prior period
financial statements must be restated. SAB 108 is effective for fiscal years
ending after November 15, 2006. The adoption of SAB 108 did not have a material
impact on our consolidated financial statements.
Statement
of Financial Accounting Standards No. 123(R)
In
December 2004, the FASB issued SFAS No. 123 - Revised, Share
Based Payment.
The
statement establishes the standards for the accounting for transactions in
which
an entity exchanges its equity instruments for goods and services. The statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Public companies may
apply the standard on a modified prospective method. Under this method, a
company records compensation expense for all awards it grants after the date
it
adopts the standard. In addition, public companies are required to record
compensation expense for the unvested
portion
of previously granted awards that remain outstanding at the date of adoption.
During 2005, the Securities and Exchange Commission deferred the effective
date
of this statement until the first annual period beginning after June 15, 2005.
The adoption of this statement in 2006 did not have a material impact on our
financial position or results of operations.
Use
of
Estimates
The
preparation of financial statements in conformity with US GAAP requires us
to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Reclassifications
and Adjustments
Reclassifications
We
have
reclassified Distributions of earnings from unconsolidated joint ventures and
entities of $1.5 million in the consolidated statements of cash flows from
investing activities to operating activities for the year ended December 31,
2004 to conform to the 2006 and 2005 consolidated statement of cash flows
presentation. These reclassifications do not affect the total net change in
cash
and cash equivalents. In addition, certain reclassifications have been made
to
prior year amounts in order to conform to the discontinued operations
presentation in the year ended December 31, 2005 (See Note 9 - Discontinued
Operations).
Adjustments
Subsequent
to the issuance of the 2005 and 2004 consolidated financial statements, we
discovered that we had overstated our real estate revenue and cinema operating
expense by $3.0 million and $3.3 million, respectively, due to an error in
the
elimination of intercompany rental charges among our Australian subsidiaries.
We
have adjusted our consolidated statements of operations for years ending
December 31, 2005 and 2004 to correctly present consolidated real estate revenue
and cinema operating expenses. The effects of the adjustment on our originally
reported statements of operations are summarized below (dollars in
thousands):
|
2005
|
2004
|
||||||||||||
|
Real
Estate Revenue
|
Cinema
Expense
|
Real
Estate Revenue
|
Cinema
Expense
|
||||||||||
|
As
originally reported
|
$
|
14,310
|
$
|
70,452
|
$
|
13,078
|
$
|
60,129
|
|||||
|
Australia
intercompany eliminations
|
(2,965
|
)
|
(2,965
|
)
|
(3,313
|
)
|
(3,313
|
)
|
|||||
|
As
adjusted
|
$
|
11,345
|
$
|
67,487
|
$
|
9,765
|
$
|
56,816
|
|||||
This
adjustment had no impact on our operating losses, on our losses from continuing
operations, or on our net income (loss) for the years ended December 31, 2005
and 2004. These adjustments were not material to the presentation of our
consolidated financial statements for the years ended December 31, 2005 and
2004.
Note
3 - Stock Based Compensation and Employee Stock Option
Plan
Stock
Based Compensation
As
part
of his compensation package, Mr. James J. Cotter, our
Chairman of the Board and Chief Executive Officer, was granted $250,000 of
restricted Class A Non-Voting Common Stock for each of the years ending December
31, 2006 and 2005. These stock grants each have a vesting period of two years,
a
stock grant price of $7.79 and $8.26, respectively, and a total unrealized
market value at December 31, 2006 of $383,000. During the year ended December
31, 2006, we recorded compensation expense of $188,000 for the vesting of
restricted stock grants. At December
31, 2006, in recognition of the vesting of one-half of the 2005 stock grant,
we
issued to Mr.
Cotter 16,047 shares
of
Class A Non-Voting Common Stock which
had
a stock grant price of $7.79 per share and a fair market value of $133,000.
The
following table details the grants and vesting of restricted stock to our
employees (dollars in thousands):
|
Non-Vested
Restricted Stock
|
Weighted
Average Fair Value at Grant Date
|
||||||
|
Outstanding
- January 1, 2005
|
--
|
$
|
--
|
||||
|
Granted
|
32,094
|
250
|
|||||
|
Outstanding
- December 31, 2005
|
32,094
|
250
|
|||||
|
Granted
|
30,266
|
250
|
|||||
|
Vested
|
(16,047
|
)
|
(125
|
)
|
|||
|
Outstanding
- December 31, 2006
|
46,313
|
$
|
375
|
||||
In
2006,
we formed Landplan Property Partners, Ltd, to identify, acquire and develop
or
redevelop properties on an opportunistic basis. In connection with the formation
of Landplan, we entered into an agreement with Mr. Doug Osborne pursuant to
which (i) Mr. Osborne will serve as the chief executive officer of Landplan
and
(ii) Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”), will perform
certain property management services for Landplan. The agreement provides for
Mr. Osborne to hold an equity interest in the entities formed to hold these
properties; such equity interest to be (i) subordinate to our right to an 11%
compounded return on investment and (ii) subject to adjustment depending upon
various factors including the term of the investment and the amount invested.
Generally speaking, this equity interest will range from 27.5% to 15%. At
December 31, 2006, Landplan had acquired one property in Indooroopilly,
Brisbane, Australia. With the purchase of the Indooroopilly property, based
on
SFAS 123(R), we calculated the fair value of Mr. Osborne’s equity interest in
the Indooroopilly Trust at the grant date was $77,000 (AUS$98,000) and we have
expensed $13,000 (AUS$17,000)of this value during 2006.
Employee
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. During the year ending December 31, 2006, we issued
for
cash to an employee of the corporation under this stock based compensation
plan
12,000 shares and 15,000 shares of Class A Nonvoting Common Stock at exercise
prices of $3.80 and $2.76 per share, respectively. During the year endings
December 31, 2005 and 2004, we did not issue any shares under this stock based
compensation plan.
Prior
to
January 1, 2006, we accounted for stock-based employee compensation under the
intrinsic value method as outlined in the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations while disclosing pro-forma net income and pro-forma
net
income per share as if the fair value method had been applied in accordance
with
SFAS No. 123, Accounting
for Stock-Based Compensation.
Under
the intrinsic value method, we did not recognize any compensation expense when
the exercise price of the stock options equaled or exceeded the market price
of
the underlying stock on the date of grant. We issued all stock option grants
with exercise prices equal to, or greater than, the market value of the common
stock on the date of grant. No stock compensation expense was recognized in
the
consolidated statements of operations through December 31, 2005.
Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment
(SFAS
123(R)) which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
123(R) requires that all stock-based compensation be recognized as an expense
in
the financial statements and that such costs be measured at the fair value
of
the award. This statement was adopted using the modified prospective method,
which requires the Company to recognize compensation expense on a prospective
basis for all newly granted options and any modifications or cancellations
of
previously granted awards. Therefore, prior period consolidated financial
statements have not been restated. Under this method, in addition to reflecting
compensation expense for new share-based payment awards, modifications to
awards, and cancellations of awards, expense is also recognized to reflect
the
remaining vesting period of awards that had been included in pro-forma
disclosures in prior periods. We estimate the valuation of stock based
compensation using a Black-Scholes option pricing formula.
When
the
Company’s tax deduction from an option exercise exceeds the compensation cost
resulting from the option, a tax benefit is created. SFAS 123(R) requires that
excess tax benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows. Had we previously adopted SFAS
123(R), there
would
have been no impact on our presentation of the consolidated statement of cash
flows because there were no recognized tax benefits relating to the years ended
December 31, 2005 and 2004. For the year ended December 31, 2006, there also
was
no impact to the consolidated statement of cash flows because there were no
recognized tax benefits during this period.
SFAS
No.
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
at
the
year ended December 31, 2006.
In
November 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3,
Transition
Election Related to Accounting for Tax Effects of Share-Based Payment
Awards.
The
Company has elected to adopt the alternative transition method provided in
this
FASB Staff Position for calculating the tax effects of share-based compensation
pursuant to SFAS No. 123(R). The alternative transition method includes a
simplified method to establish the beginning balance of the additional paid-in
capital pool or APIC pool related to the tax effects of employee share-based
compensation, which is available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS No. 123(R).
In
accordance with SFAS No. 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.
There
were 7,500 options granted during the year ended December 31, 2005. In
accordance with APB 25, we used the intrinsic value method and did not recognize
any compensation expense when the exercise price of the stock options equaled
or
exceeded the market price of the underlying stock on the date of grant. For
the
20,000 options granted during 2006, we estimated the fair value of these
options
at the date of grant using a Black-Scholes option-pricing model with the
following weighted average assumptions:
|
2006
|
|
|
Stock
option exercise price
|
$
8.10
|
|
Risk-free
interest rate
|
4.22%
|
|
Expected
dividend yield
|
--
|
|
Expected
option life
|
5.97
yrs
|
|
Expected
volatility
|
34.70%
|
|
Weighted
average fair value
|
$
4.33
|
Using
the
above assumptions and in accordance with the SFAS No. 123(R) modified
prospective method, we recorded $98,000 in compensation expense for the total
estimated grant date fair value of stock options that vested during the year
ended December 31, 2006. The effect on earnings per share of the compensation
charge was immaterial. At December 31, 2006, the total unrecognized estimated
compensation cost related to non-vested stock options granted was $90,000,
which
is expected to be recognized over a weighted average vesting period of 2.09
years. The total realized value of stock options exercised during the years
ended December 31, 2006 and 2005 was $136,000 and $102,000, respectively.
The
grant date fair value of options that vested during the years ended December
31,
2006 and 2005 was $199,000 for each of those years. We recorded cash received
from stock options exercised of $88,000 and $161,000 during the years ended
December 31, 2006 and 2005, respectively. No options were exercised; therefore,
no cash was received from the exercising of stock options during the year
ended
December 31, 2004. The intrinsic, unrealized value of all options outstanding,
vested and expected to vest, at December 31, 2006 was $1.6 million of which
99%
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
1,350,000. 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 December 31,
2006
and December 31, 2005:
|
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, 2004
|
1,448,200
|
185,100
|
$
|
4.09
|
$
|
9.90
|
1,053,038
|
185,100
|
$
|
4.75
|
$
|
9.90
|
|||||||||||||
|
Granted
|
40,000
|
--
|
$
|
7.80
|
$
|
--
|
|||||||||||||||||||
|
Outstanding-December
31, 2004
|
1,488,200
|
185,100
|
$
|
4.19
|
$
|
9.90
|
1,377,700
|
185,100
|
$
|
4.80
|
$
|
9.90
|
|||||||||||||
|
Exercised
|
(974,600
|
)
|
--
|
$
|
3.78
|
$
|
--
|
||||||||||||||||||
|
Granted
|
7,500
|
--
|
$
|
7.86
|
$
|
--
|
|||||||||||||||||||
|
Outstanding-December
31, 2005
|
521,100
|
185,100
|
$
|
5.00
|
$
|
9.90
|
474,600
|
185,100
|
$
|
5.04
|
$
|
9.90
|
|||||||||||||
|
Exercised
|
(27,000
|
)
|
--
|
$
|
3.22
|
$
|
--
|
||||||||||||||||||
|
Granted
|
20,000
|
--
|
$
|
8.10
|
$
|
--
|
|||||||||||||||||||
|
Outstanding-December
31, 2006
|
514,100
|
185,100
|
$
|
5.21
|
$
|
9.90
|
488,475
|
185,100
|
$
|
5.06
|
$
|
9.90
|
|||||||||||||
The
weighted average remaining contractual life of all options outstanding, vested
and expected to vest, at December 31, 2006 and 2005 were approximately 3.60
and
4.47 years, respectively. The weighted average remaining contractual life
of the
exercisable options outstanding at December 31, 2006 and 2005 was approximately
3.39 and 4.25 years, respectively.
The
following table illustrates the effect on net income per common share for the
years ended December 31, 2005 and 2004 as if we had consistently measured the
compensation cost for stock option programs under the fair value method adopted
on January 1, 2006 (dollars in thousands):
|
Pro
forma net income (loss):
|
2005
|
2004
|
|||||
|
Net
income (loss)
|
$
|
989
|
$
|
(8,463
|
)
|
||
|
Add:
Stock-based compensation costs included in reported net
loss
|
--
|
--
|
|||||
|
Deduct:
Stock-based compensation costs under SFAS 123
|
83
|
358
|
|||||
|
Proforma
net income (loss)
|
$
|
906
|
$
|
(8,821
|
)
|
||
|
Pro
forma basic net earnings (loss) per common share:
|
|||||||
|
Pro
forma net earnings (loss) per common share-basic and
diluted
|
$
|
0.04
|
$
|
(0.40
|
)
|
||
|
Reported
net earnings (loss) per common share-basic and diluted
|
$
|
0.04
|
$
|
(0.39
|
)
|
||
Note
4 - Earnings (Loss) Per Share
For
the
three years ended December 31, 2006, we calculated the following earnings (loss)
per share (dollars in thousands, except per share amounts):
|
2006
|
2005
|
2004
|
||||||||
|
Income
(loss) from continuing operations
|
$
|
3,856
|
$
|
(11,242
|
)
|
$
|
(7,994
|
)
|
||
|
Income
(loss) from discontinued operations
|
--
|
12,231
|
(469
|
)
|
||||||
|
Net
income (loss)
|
3,856
|
989
|
(8,463
|
)
|
||||||
|
Weighted
average shares of common stock - basic
|
22,425,941
|
22,249,967
|
21,948,065
|
|||||||
|
Weighted
average shares of common stock - dilutive
|
22,674,818
|
22,249,967
|
21,948,065
|
|||||||
|
Earnings
(loss) per share:
|
||||||||||
|
Earnings
(loss) from continuing operations - basic and dilutive
|
$
|
0.17
|
$
|
(0.51
|
)
|
$
|
(0.37
|
)
|
||
|
Earnings
(loss) from discontinued operations - basic and dilutive
|
$
|
--
|
$
|
0.55
|
$
|
(0.02
|
)
|
|||
|
Earnings
(loss) per share - basic and dilutive
|
$
|
0.17
|
$
|
0.04
|
$
|
(0.39
|
)
|
|||
Note
5 - Prepaid and Other Assets
Prepaid
and other assets are summarized as follows (dollars in thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Prepaid
and other current assets
|
|||||||
|
Prepaid
expenses
|
$
|
1,214
|
$
|
246
|
|||
|
Prepaid
taxes
|
552
|
370
|
|||||
|
Deposits
|
534
|
157
|
|||||
|
Other
|
289
|
223
|
|||||
|
Total
prepaid and other current assets
|
$
|
2,589
|
$
|
996
|
|||
|
Other
non-current assets
|
|||||||
|
Other
non-cinema and non-rental real estate assets
|
$
|
1,270
|
$
|
1,314
|
|||
|
Long-term
restricted cash
|
--
|
191
|
|||||
|
Deferred
financing costs, net
|
898
|
847
|
|||||
|
Interest
rate swap
|
206
|
--
|
|||||
|
Other
|
475
|
192
|
|||||
|
Total
non-current assets
|
$
|
2,849
|
$
|
2,544
|
|||
Note
6 - Property Under Development
Property
under development is summarized as follows (dollars in thousands):
|
December
31,
|
|||||||
|
Property
Under Development
|
2006
|
2005
|
|||||
|
Land
|
$
|
30,296
|
$
|
18,585
|
|||
|
Construction-in-progress
(including capitalized interest)
|
8,580
|
4,484
|
|||||
|
Property
Under Development
|
$
|
38,876
|
$
|
23,069
|
|||
The
amount of capitalized interest for our properties under development was $1.8
million and $2.6 million for the years ending December 31, 2006 and 2005,
respectively.
Note
7 - Property and Equipment
Property
and equipment is summarized as follows (dollars in thousands):
|
December
31,
|
|||||||
|
Property
and Equipment
|
2006
|
2005
|
|||||
|
Land
|
$
|
56,830
|
$
|
54,476
|
|||
|
Building
|
99,285
|
92,188
|
|||||
|
Leasehold
interests
|
11,138
|
9,075
|
|||||
|
Construction-in-progress
|
425
|
863
|
|||||
|
Fixtures
and equipment
|
58,164
|
51,221
|
|||||
|
Total
cost
|
225,842
|
207,823
|
|||||
|
Less
accumulated depreciation
|
(55,175
|
)
|
(40,434
|
)
|
|||
|
Property
and equipment, net
|
$
|
170,667
|
$
|
167,389
|
|||
Depreciation
expense for property and equipment was $12.3 million, $9.6 million, and $11.6
million for the three years ending December 31, 2006, 2005 and 2004,
respectively.
Note
8 - Acquisitions and Property Development
2006
Acquisitions and Property Development
Indooroopilly
Land
On
September 18, 2006, we purchased a 0.3 acre property for $1.8 million (AUS$2.3
million) as part of our newly established Landplan Property Partners arrangement
with Mr. Doug Osborne.
In
July
2006, we entered into an agreement with Mr. Doug Osborne pursuant to which
(i)
Mr. Osborne will serve as the chief executive officer of our newly formed
Australian subsidiary Landplan Property Partners, Ltd (“LPP”) and (ii) Mr.
Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”), will perform certain
property management services for LPP. LPP was formed to identify, acquire,
develop and operate properties in Australia and New Zealand offering
redevelopment possibilities and, ultimately, to sell the resultant redeveloped
properties. The agreement provides for a base salary and an equity interest
to
Mr. Osborne in these properties. Mr. Osborne’s ownership interest in these
properties, however, is subordinate to our right to an 11% compounded return
on
investment and is subject to adjustment depending upon his length of service
and
the amounts we invest. Generally speaking, his ownership interest will range
from 27.5% to 15% based on meeting the defined service requirements and
depending on our level of investment. At December 31, 2006, Landplan had
acquired one property in Indooroopilly, Brisbane, Australia. With the purchase
of the Indooroopilly property, based on SFAS 123(R), we calculated the fair
value of Mr. Osborne’s equity interest in the Indooroopilly Trust at the grant
date as $77,000 (AUS$98,000) and we have expensed $13,000 (AUS$17,000)of this
value during 2006.
Moonee
Ponds Land
On
September 1, 2006, we purchased two parcels of land aggregating 0.4 acres
adjacent to our Moonee Ponds property for $2.5 million (AUS$3.3 million). This
acquisition increases our holdings at Moonee Ponds to 3.1 acres and gives us
frontage facing the principal transit station servicing the area. We are now
in
the process of developing the entire site and anticipate completion of this
project in 2008.
Berkeley
Cinemas
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6 million). This
8-screen, leasehold cinema had previously been included in our Berkeley Cinemas
Joint Venture investment and was not previously consolidated for accounting
purposes. We drew down $4.8 million (AUS$6.3 million) on our Australian
Corporate Credit Facility to purchase the Palms cinema and to payoff its bank
debt of $2.0 million (NZ$3.1 million). We have finalized the purchase price
allocation of this acquisition, which resulted in a 50% step up in basis of
assets and liabilities, in accordance with SFAS No. 141 Business Combinations.
A
summary
of the increased assets and liabilities relating to this acquisition as recorded
at estimated fair values is as follows (dollars
in thousands):
|
Palms
Cinema
|
||||
|
Assets
|
||||
|
Accounts
receivable
|
$
|
31
|
||
|
Inventory
|
11
|
|||
|
Other
assets
|
8
|
|||
|
Property
and equipment
|
1,430
|
|||
|
Goodwill
|
2,310
|
|||
|
Total
assets
|
3,790
|
|||
|
Liabilities
|
||||
|
Accounts
payable and accrued liabilities
|
178
|
|||
|
Note
payable
|
987
|
|||
|
Other
liabilities
|
12
|
|||
|
Total
liabilities
|
1,177
|
|||
|
Total
net assets
|
$
|
2,613
|
||
As
a
result of these transactions, the only cinema held in the Berkeley Joint
Venture
at December 31, 2006 was the Botany Downs cinema in suburban
Auckland.
Malulani
Investments, Ltd.
On
June
26, 2006, we acquired for $1.8 million, an 18.4% interest in a private real
estate company with holdings principally in California, Texas and Hawaii,
including the Guenoc Winery and other land located in Northern
California.
Queenstown
Cinema
Effective
February 23, 2006, we purchased a 3-screen leasehold cinema in Queenstown,
New
Zealand for $939,000 (NZ$1.4 million). Of this purchase price, $647,000
(NZ$977,000) was allocated to the acquired fixed assets and $297,000
(NZ$448,000) was allocated to goodwill. We funded this acquisition through
internal sources.
Newmarket
ETRC
During
the first quarter of 2006, we completed the development and opened the remaining
retail portion of an ETRC on our 177,497 square foot parcel in Newmarket, a
suburb of Brisbane, in Queensland, Australia. The total construction costs
for
the site were $26.7 million (AUS$34.2 million) including $1.4 million (AUS$1.9
million) of capitalized interest. This project was primarily funded through
our
$78.8 million (AUS$100.0 million) Australian Corporate Credit Facility with
the
Bank of Western Australia, Ltd.
2005
Acquisitions and Property Development
Newmarket
ETRC
During
2005, we developed and partially opened the retail portion of an ETRC on our
177,497 square foot parcel in Newmarket, a suburb of Brisbane, in Queensland,
Australia. At December 31, 2005, the remaining tenants were scheduled to take
occupancy by April 2006. Through December 31, 2005, the construction costs
of
the site were $24.2 million (AUS$32.5 million) including $1.4 million (AUS$1.9
million) of capitalized interest. Most of this project was funded by a $23.8
million (AUS$32.7 million) construction loan with the Bank of Western Australia,
Ltd. As of December 31, 2005, we had drawn $21.7 million (AUS$29.6 million)
on
this loan related to the construction on this property.
Elizabeth
Cinema
During
2005, we developed the leasehold interest in an 8-screen cinema in Adelaide,
Australia. The cost to us of the leasehold development was $2.2 million (AUS$2.9
million) and was funded from internal sources.
Rialto
Cinemas
Effective
October 1, 2005, we purchased, indirectly, a beneficial ownership of 100% in
the
stock of Rialto Entertainment for $4.8 million (NZ$6.9 million). Rialto
Entertainment is a 50% joint venture partner with Village Roadshow Ltd
(“Village”) and SkyCity Leisure Ltd (“Sky”) in Rialto Cinemas the largest art
cinema circuit in New Zealand. The joint venture owns or manages five cinemas
with 22 screens in the New Zealand cities of Auckland, Christchurch, Wellington,
Dunedin and Hamilton.
Rialto
Distribution
Effective
October 1, 2005, we purchased for $694,000 (NZ$1.0 million) a 1/3 interest
in
Rialto Distribution which we funded from internal sources. Rialto Distribution,
an unincorporated joint venture, is engaged in the business of distributing
art
film in New Zealand and Australia.
Melbourne
Office Building
On
September 29, 2005, we purchased an office building in Melbourne, Australia
for
$2.0 million (AUS$2.6 million) to serve as our Australia headquarters. We fully
financed this property by drawing on our Australian Corporate Credit
Facility.
Cinemas
1, 2 & 3 Ground Lease
On
September 19, 2005, we acquired the tenant’s interest in the ground lease estate
that is currently between (i) our fee ownership of the underlying land and
(ii)
our current possessory interest as the tenant in the building and improvements
constituting the Cinemas 1, 2 & 3 in Manhattan. This tenant’s ground lease
interest was purchased from Sutton Hill Capital LLC (“SHC”) for a $9.0 million
promissory note, bearing interest at a fixed rate of 8.25% and maturing on
December 31, 2010. As SHC is a related party to our corporation, our Board’s
Audit and Conflicts Committee, comprised entirely of outside independent
directors, and subsequently our entire Board of Directors unanimously approved
the purchase of the property (see Note 25 - Related
Parties and Transactions).
The
Cinemas 1, 2 & 3 is located on 3rd
Avenue
between 59th
and
60th
Streets.
The
acquisition of the tenant’s ground lease interest finalized the acquisition side
of a tax deferred exchange under Section 1031 of the Internal Revenue Code
designed to exchange our interest in our only non-entertainment oriented fee
property in the United States for the fee interest underlying our leasehold
estate in the Cinemas 1, 2 & 3. The acquisition of this tenant’s ground
lease interest and the Cinemas 1, 2, 3 Fee Interest described below have
resulted in a book value of approximately $23.9 million and a tax basis of
$10.4
million (which includes $1.3 million of option fees paid in 2000 as part of
the
City Cinemas Master Lease Agreement, see Note 10 - Goodwill
and Intangible Assets).
Cinemas
1, 2 & 3 Fee Interest
On
June
1, 2005, we acquired for $12.6 million the fee interest and the landlord’s
ground lease interest underlying our Cinemas 1, 2 & 3 property in Manhattan,
as a part of a tax deferred exchange under Section 1031 of the Internal Revenue
Code. The funds used for the acquisition came primarily from the sale proceeds
of our Glendale, California office building. As a result of the acquisition
of
this fee interest, the landlord’s interest in the ground lease and the tenant’s
interest in the ground lease, our effective rental expense with respect to
the
Cinemas 1, 2 & 3 and the Village East cinema has decreased by approximately
$1.0 million annually beginning September 30, 2005.
As
part
of the purchase of this ground lease interest, we have agreed in principal,
as a
part of our negotiations to acquire the land and the SHC interests in the
Cinemas 1, 2 & 3, to grant an option to Sutton Hill Capital, LLC, a limited
liability company beneficially owned in equal 50/50 shares by Messrs. James
J.
Cotter and Michael Forman (see Note 25 - Related
Parties and Transactions)
to
acquire, at cost, up to a 25% non-managing membership interest in the limited
liability company that we formed to acquire these interests. In relation to
this
option, we recorded $3.7 million and $1.0 million as call option liabilities
in
our other liabilities at December 31, 2006 and 2005, respectively. In accordance
with SFAS No. 141 - Business
Combinations,
the
purchase price allocation was finalized in the first quarter of
2006.
2004
Acquisitions and Property Development
Botany
Downs
On
December 24, 2004, we opened an additional 8-screen cinema, this one located
in
a suburb of Auckland, New Zealand and owned in an unincorporated joint venture
with our partner in the Berkeley Cinemas chain in New Zealand.
West
Lakes and Rhodes
In
December 2004, we completed the fit outs of the two cinemas with 15 screens.
The
leases and development rights for the two cinemas were acquired as part of
the
Anderson acquisition.
Sutton
Redevelopment Investment
On
September 14, 2004, we acquired for $2.3 million a non-managing membership
interest in 205-209 East 57th
Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th
Street
in Manhattan. Our membership interest represents a 25% interest in the LLC,
and
was issued to us by 205-209 East 57th
Street
Associates, LLC in consideration of a capital contribution equal to 25% of
its
total book capital, calculated after taking into account the effect of our
capital contribution. During the first quarter of 2005, we increased our
investment by $719,000 in the 205-209 East 57th Street Associates, LLC to
maintain our 25% equity ownership in the joint venture in light of increased
budgeted construction costs.
Also
during 2004, we made various investments of capital to purchase and/or develop
various existing or new assets. A
summary
of the assets acquired and liabilities assumed on the acquisition dates in
2004
(valued at the foreign currency exchange rates at the time of acquisition)
and
an explanation relating to these acquisitions is as follows:
|
Assets
Acquired
|
Anderson
Acquisition
|
Movieland
Acquisition
|
Newmarket
Acquisition
|
Total
|
|||||||||
|
Cash
|
$
|
135
|
$
|
18
|
$
|
--
|
$
|
153
|
|||||
|
Receivables
|
99
|
48
|
--
|
147
|
|||||||||
|
Inventory
|
25
|
--
|
--
|
25
|
|||||||||
|
Prepayments
|
56
|
--
|
--
|
56
|
|||||||||
|
Land
|
--
|
992
|
--
|
992
|
|||||||||
|
Building
|
--
|
6,083
|
--
|
6,083
|
|||||||||
|
Lease
agreements
|
282
|
593
|
--
|
875
|
|||||||||
|
Fixtures
and equipment
|
3,237
|
2,157
|
--
|
5,394
|
|||||||||
|
Property
held for development
|
--
|
--
|
1,042
|
1,042
|
|||||||||
|
Plans
and permits
|
--
|
162
|
--
|
162
|
|||||||||
|
Deferred
tax asset
|
9
|
--
|
--
|
9
|
|||||||||
|
Goodwill
|
3,129
|
5,415
|
--
|
8,544
|
|||||||||
|
Total
Acquired Assets
|
$
|
6,972
|
$
|
15,468
|
$
|
1,042
|
$
|
23,482
|
|||||
|
Liabilities
Assumed
|
|||||||||||||
|
Creditors
|
$
|
433
|
$
|
--
|
$
|
--
|
$
|
433
|
|||||
|
Prepaid
revenue
|
8
|
--
|
--
|
8
|
|||||||||
|
Accruals
|
71
|
--
|
--
|
71
|
|||||||||
|
Other
payables
|
62
|
--
|
--
|
62
|
|||||||||
|
Provisions
|
95
|
--
|
--
|
95
|
|||||||||
|
Lease
agreements
|
450
|
666
|
--
|
1,116
|
|||||||||
|
Loans
|
661
|
--
|
--
|
661
|
|||||||||
|
Put
Option
|
--
|
175
|
--
|
175
|
|||||||||
|
Total
Liabilities Assumed
|
$
|
1,780
|
$
|
841
|
$
|
--
|
$
|
2,621
|
|||||
|
Total
Net Assets
|
$
|
5,192
|
$
|
14,627
|
$
|
1,042
|
$
|
20,861
|
|||||
Other
Acquisitions
Movieland
Circuit
In
August
2004, we closed a series of agreements which, together, provided for the
acquisition of six existing New Zealand cinemas, representing 27 screens, and
in
the case of three of these locations, the fee interests underlying such cinemas.
Two of the locations included ancillary retail and commercial tenants. We also
acquired the plans and permits for the development of an additional two screens
at each of two of the cinemas, for a potential increase of four additional
screens.
The
acquisition costs of these cinemas and fee interests amounting to $14.6 million
(NZ$21.8 million) was funded by a combination of $13.3 million (NZ$19.8 million)
of working capital, $791,000 (NZ$1.2 million) in shares of our Class A Common
Stock (98,949 shares issued at $8.00 per share (NZ$11.94, using a NZ$ to US$
exchange ratio of $0.67)), and a $546,000 (NZ$784,000) purchase money promissory
note. The working capital was funded through a combination of cash of $5.4
million (NZ$8.1 million) and a drawdown under of our banking facility in New
Zealand of
$8.3
million (NZ$12.3 million). The shares issued includes a non-transferable option
to put to us the Class A Common Stock issued to them at a put price of NZ$11.94
at any time during January 2006. On January 27, 2006, this put option was
exercised by the sellers resulting in the extinguishment of this obligation
for
a net settlement value of $24,000. The $546,000 (NZ$784,000) purchase money
promissory note has an interest rate of 5.50%. Pursuant to the terms of the
note, the principal and interest of this note was paid in full in February
2006.
Anderson
Circuit
On
July
1, 2004, we acquired most of the assets of the Australia based “Anderson
Circuit” for $6.9 million (AUS$9.7 million) giving us four existing cinemas with
22 screens and agreements to lease with respect to two additional cinemas (with
an additional 15 screens) in two facilities then under
construction.
The
total
acquisition costs of these cinemas, of $5.7 million (AUS$8.0 million), excluding
the cost of the fit-out of the two development cinemas, were met from our own
funds in conjunction with a $3.4 million (AUS$4.7 million) drawdown on our
$39.3
million (AUS$55.0 million) bank facility. As
part
of this acquisition, several landlords required bank guarantees, which increased
our restricted cash by $296,000 (AUS$417,000) and reduced our total credit
facility by $1.9 million (AUS$2.7 million). The total fit-out cost for the
two
development cinemas aggregated $3.8 million (AUS$5.0 million) and was paid
from
our own funds.
The
acquisitions were structured as the acquisition of (i) the shares of one
company, which owns as its sole asset the 10-screen leasehold cinema at Epping
(a suburb of Melbourne), (ii) agreements to lease with respect to two leasehold
cinemas opened in the fourth quarter at Rhodes (8 screens) (a suburb of Sydney)
and West Lakes (7 screens) (a suburb of Adelaide), and (iii) three existing
leasehold cinemas at Colac (2 screens), Melton (5 screens) and Sunbury (5
screens) (all suburbs of Melbourne).
In
February 2005, we sold our Colac
two-screen
cinema located on the outskirts of Melbourne, for approximately $193,000
(AUS$250,000). As indicated above, we purchased the cinema in July 2004 as
part
of the Anderson Circuit acquisition, but the location was never part of our
on-going operational strategy.
Newmarket
- Dulux Property
On
July
1, 2004, we acquired an approximately 13,390 square foot parcel adjacent to
our
larger Newmarket site for $1.0 million (AUS$1.4 million). We anticipate that
the
addition of this property will allow the addition of a complementary cinema
element to the project. Plans for a 6-screen cinema as a part of the project
are
currently being considered by the applicable governmental
authorities.
Note
9 - Discontinued Operations and Disposals
In
accordance with SFAS 144, we report as discontinued operations real estate
assets that meet the definition of a component of an entity and have been sold
or meet the criteria to be classified as held for sale under SFAS 144. We
included all results of these discontinued operations, less applicable income
taxes, in a separate component of operations on the consolidated statements
of
operations under the heading “discontinued operations.” This treatment resulted
in reclassifications of our 2004 financial statement amounts to conform to
the
2006 and 2005 presentation.
2006
Transactions
Berkeley
Cinema Group.
On
August 28, 2006, we sold to our joint venture partner our interest in the
cinemas at Whangaparaoa, Takapuna and Mission Bay, New Zealand for $4.6 million
(NZ$7.2 million) in cash and the assumption of $1.6 million (NZ$2.5 million)
in
debt. The sale resulted in a gain on sale of unconsolidated joint venture for
the year ended December 31, 2006 of $3.4 million (NZ$5.4 million).
2005
Transactions
Railroad
Properties
On
September 26, 2005, we sold certain surplus properties used in connection with
our historic railroad activities for cash totaling $515,000 resulting in a
nominal loss on sale.
Glendale
Building
On
May
17, 2005, we sold our Glendale office building in Glendale, California for
$10.3
million cash and $10.1 million of assumed debt resulting in a $12.0 million
gain. All the cash proceeds from the sale were used in the purchase for $12.6
million of the Cinemas 1, 2 & 3 fee interest and of the landlord’s interest
in the ground lease, encumbering that land, as part of a tax-deferred exchange
under Section 1031 of the Internal Revenue Code.
For
the
two years ended December 31, 2005, we recorded the following results for the
Glendale building discontinued operations:
|
2005
|
2004
|
||||||
|
Revenue
|
$
|
1,103
|
$
|
2,648
|
|||
|
Operating
expense
|
355
|
984
|
|||||
|
Depreciation
& amortization expense
|
51
|
601
|
|||||
|
General
& administrative expense
|
--
|
5
|
|||||
|
Operating
income
|
697
|
1,058
|
|||||
|
Interest
income
|
2
|
1
|
|||||
|
Interest
expense
|
312
|
840
|
|||||
|
Income
from discontinued operations before gain on sale
|
387
|
219
|
|||||
|
Gain
on sale
|
12,013
|
--
|
|||||
|
Total
income from discontinued operations
|
$
|
12,400
|
$
|
219
|
|||
Puerto
Rico Cinema Operations
On
June
8, 2005, we sold our assets and certain liabilities associated with our Puerto
Rico cinema operations for $2.3 million resulting in a $1.6 million
gain.
For
the
two years ended December 31, 2005, we recorded the following results for the
Puerto Rico discontinued operations:
|
2005
|
2004
|
||||||
|
Revenue
|
$
|
4,575
|
$
|
12,932
|
|||
|
Operating
expense
|
5,752
|
12,347
|
|||||
|
Depreciation
& amortization expense
|
206
|
475
|
|||||
|
General
& administrative expense
|
383
|
798
|
|||||
|
Loss
from discontinued operations before gain on sale
|
(1,766
|
)
|
(688
|
)
|
|||
|
Gain
on sale
|
1,597
|
--
|
|||||
|
Total
loss from discontinued operations
|
$
|
(169
|
)
|
$
|
(688
|
)
|
|
2004
Transactions
We
did
not have any transactions involving discontinued operations or disposals during
2004.
Note
10 - Goodwill and Intangible Assets
Goodwill
associated with our asset acquisitions is tested for impairment in the third
quarter with continued evaluation through the fourth quarter of every
year. Based on the projected profits and cash flows of the related assets,
it
was determined that there is no indication of impairment to our goodwill as
of
December 31, 2006 or 2005. Goodwill increased during the period primarily due
to
2006
acquisitions discussed in Note 8 - Acquisitions
and Property Development.
At
December 31, 2006 and 2005, our goodwill consisted of the following (dollars
in
thousands):
|
2006
|
Cinema
|
Real
Estate
|
Total
|
|||||||
|
Balance
as of January 1, 2006
|
$
|
9,489
|
$
|
5,164
|
$
|
14,653
|
||||
|
Goodwill
acquired during 2006
|
2,849
|
--
|
2,849
|
|||||||
|
Foreign
currency translation adjustment
|
375
|
42
|
417
|
|||||||
|
Balance
at December 31, 2006
|
$
|
12,713
|
$
|
5,206
|
$
|
17,919
|
||||
|
2005
|
Cinema
|
Real
Estate
|
Total
|
|||||||
|
Balance
as of January 1, 2005
|
$
|
9,725
|
$
|
5,132
|
$
|
14,857
|
||||
|
Purchase
accounting adjustment during 2005
|
122
|
75
|
197
|
|||||||
|
Foreign
currency translation adjustment
|
(358
|
)
|
(43
|
)
|
(401
|
)
|
||||
|
Balance
at December 31, 2005
|
$
|
9,489
|
$
|
5,164
|
$
|
14,653
|
||||
We
have
intangible assets subject to amortization consisting of the following (dollars
in thousands):
|
As
of December 31, 2006
|
Beneficial
Lease
|
Option
Fee
|
Other
Intangibles
|
Total
|
|||||||||
|
Gross
carrying amount
|
$
|
10,984
|
$
|
2,773
|
$
|
219
|
$
|
13,976
|
|||||
|
Less:
Accumulated amortization
|
3,577
|
2,426
|
19
|
6,022
|
|||||||||
|
Total,
net
|
$
|
7,407
|
$
|
347
|
$
|
200
|
$
|
7,954
|
|||||
|
As
of December 31, 2005
|
Beneficial
Lease
|
Option
Fee
|
Other
Intangibles
|
Total
|
|||||||||
|
Gross
carrying amount
|
$
|
10,957
|
$
|
2,773
|
$
|
212
|
$
|
13,942
|
|||||
|
Less:
Accumulated amortization
|
2,809
|
2,332
|
13
|
5,154
|
|||||||||
|
Total,
net
|
$
|
8,148
|
$
|
441
|
$
|
199
|
$
|
8,788
|
|||||
As
fully
described in Note 25 - Related
Parties and Transactions,
in
October 2003, in connection with the sale of the Sutton Property, among other
things, the City Cinemas Purchase Option was amended to remove the Sutton
Property and to reduce our exercise price by $5.0 million from $33.0 million
to
$28.0 million. Accordingly, the net carrying value of the $5.0 million option
was reduced by $890,000 to reflect the decrease in the City Cinemas property
still available for purchase, following the sale of the Sutton Property in
2003
and the Murray Hill Property in 2002. Additionally, to recognize the exercise
of
a portion of the City Cinemas Master Lease Agreement in September 2005, we
recorded $1.3 million of our option fees to the Cinemas 1, 2, 3 tenant’s ground
lease interest that we purchased on September 19, 2005 (see Note 8 -
Acquisitions
and Property Development)
thus
reducing our net option fee balance to $0.5 million.
We
amortize our beneficial leases over the lease terms of twenty years and our
option fees over 10 years. For years ended December 31, 2006, 2005 and 2004,
our
amortization expense totaled $868,000, $1.1 million, and $1.1 million per year,
respectively. The estimated amortization expense in the five succeeding years
and thereafter is as follows (dollars in thousands):
|
Year
Ending December 31,
|
||||
|
2007
|
$
|
832
|
||
|
2008
|
832
|
|||
|
2009
|
832
|
|||
|
2010
|
801
|
|||
|
2011
|
738
|
|||
|
Thereafter
|
3,822
|
|||
|
Total
future amortization expense
|
$
|
7,857
|
||
Note
11 - Investments in and Advances to Unconsolidated Joint Ventures and
Entities
Investments
in and advances to unconsolidated joint ventures and entities are accounted
for
under the equity method of accounting except for Malulani Investments, Ltd.
as
described below. As of December 31, 2006 and 2005, these investments in and
advances to unconsolidated joint ventures and entities include the following
(dollars in thousands):
|
December
31,
|
||||||||||
|
Interest
|
2006
|
2005
|
||||||||
|
Malulani
Investments
|
18.4%
|
|
$
|
1,800
|
$
|
--
|
||||
|
Rialto
Distribution
|
33.3
%
|
|
782
|
734
|
||||||
|
Rialto
Cinemas
|
50.0
%
|
|
5,608
|
4,691
|
||||||
|
205-209
East 57th
Street Associates, LLC
|
25.0
%
|
|
5,557
|
3,139
|
||||||
|
Mt.
Gravatt
|
33.3
%
|
|
4,713
|
4,052
|
||||||
|
Berkeley
Cinema - Group
|
50.0
%
|
|
--
|
944
|
||||||
|
Berkeley
Cinemas - Palms & Botany
|
50.0
%
|
|
607
|
465
|
||||||
|
Total
|
$
|
19,067
|
$
|
14,025
|
||||||
For
the
years ending December 31, 2006, 2005 and 2004, we recorded our share of equity
earnings (loss) from our unconsolidated joint ventures and entities as
follows:
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Rialto
Distribution
|
$
|
25
|
$
|
50
|
$
|
--
|
||||
|
Rialto
Cinemas
|
(169
|
)
|
--
|
--
|
||||||
|
205-209
East 57th
Street Associates, LLC
|
8,277
|
(56
|
)
|
--
|
||||||
|
Mt.
Gravatt
|
648
|
501
|
956
|
|||||||
|
Berkeley
Cinema - Group
|
322
|
383
|
358
|
|||||||
|
Berkeley
Cinemas - Palms & Botany
|
444
|
494
|
366
|
|
||||||
|
$
|
9,547
|
$
|
1,372
|
$
|
1,680
|
|||||
Malulani
Investments, Ltd.
On
June
26, 2006, we acquired for $1.8 million, an 18.4% interest in a private real
estate company with holdings principally in California, Texas and Hawaii,
including the Guenoc Winery and other land in Northern California. This land
and
commercial real estate holdings are encumbered by debt. We have been in contact
with the controlling shareholder of Malulani Investments, Ltd. (“MIL”) and
requested quarterly or annual operating financials. To date, he has not
responded to our request for relevant financial information. Based on this
situation, we do not believe that we can assert significant influence over
the
dealings of this entity. As such and 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,
we are
treating this investment on a cost basis by recognizing earnings as they are
distributed to us.
Rialto
Distribution
Effective
October 1, 2005, we purchased for $694,000 (NZ$1.0 million) a 1/3 interest
in
Rialto Distribution. Rialto Distribution, an unincorporated joint venture,
is
engaged in the business of distributing art film in New Zealand and Australia.
We own an undivided 1/3 interest in the assets and liabilities of the joint
venture and treat our interest as an equity method interest in an unconsolidated
joint venture.
Rialto
Cinemas
Effective
October 1, 2005, we purchased, indirectly, beneficial ownership of 100% of
the
stock of Rialto Entertainment for $4.8 million (NZ$6.9 million). Rialto
Entertainment is a 50% joint venture partner with Village and Sky in Rialto
Cinemas, the largest art cinema circuit in New Zealand. We own an undivided
50%
interest in the assets and liabilities of the joint venture and treat our
interest as an equity method interest in an unconsolidated joint venture. The
joint venture owns or manages five cinemas with 22 screens in the New Zealand
cities of Auckland, Christchurch, Wellington, Dunedin and Hamilton.
As
of
December 31, 2005, we were in dispute with our joint venture partner, which
precluded us from receiving timely financial reporting which required us to
treat our ownership of Rialto Cinemas on a cost basis. We have now resolved
the
dispute and are receiving regular financial reporting on the results of the
cinemas. Also during the third quarter of 2006, we contributed an additional
$876,000 (NZ$1.4 million) to the partnership that was used to pay off the bank
loans owed by the cinemas.
205-209
East 57th
Street Associates, LLC
On
September 14, 2004, we acquired for $2.3 million a non-managing membership
interest in 205-209 East 57th
Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th
Street
in Manhattan. Our membership interest represents a 25% interest in the LLC,
and
was issued to us by 205-209 East 57th
Street
Associates, LLC in consideration of a capital contribution equal to 25% of
its
total book capital, calculated after taking into account the effect of our
capital contribution. During the first quarter of 2005, we increased our
investment by $719,000 in the 205-209 East 57th Street Associates, LLC to
maintain our 25% equity ownership in the joint venture in light of increased
budgeted construction costs. During 2005 and 2004, the project was only in
its
development stage which resulted in an equity loss from unconsolidated joint
venture of $125,000 and $56,000, respectively. During 2006, this joint venture
has been able to complete the development of most of the residential condominium
complex in midtown Manhattan called Place
57
and the
partnership has closed on the sales of 59 condominiums resulting in gross sales
of $117.7 million and equity earnings from unconsolidated joint venture to
us of
$8.3 million. The condensed balance sheet and statement of operations of 205-209
East 57th Street Associates, LLC are as follows:
205-209
East 57th
Street Associates, LLC Condensed Balance Sheet
Information:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Current
assets
|
$
|
4,456
|
$
|
73,538
|
|||
|
Non
current assets
|
18,488
|
229
|
|||||
|
Current
liabilities
|
2,187
|
62,684
|
|||||
|
Non
current liabilities
|
--
|
--
|
|||||
|
Minority
interest
|
5,608
|
3,139
|
|||||
205-209
East 57th
Street Associates, LLC Condensed Statements of Operations
Information:
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
revenue
|
$
|
117,708
|
$
|
--
|
$
|
--
|
||||
|
Operating
income
|
33,106
|
(500
|
) |
(500
|
) | |||||
|
Net
income
|
33,106
|
(500
|
)
|
(225
|
)
|
|||||
Mt.
Gravatt
In
May
2003, we acquired an undivided 1/3 interest in Mt Gravatt, an unincorporated
joint venture that owns and operates a 16-screen multiplex cinema in Australia.
We own an undivided 1/3 interest in the assets and liabilities of the joint
venture and treat our interest as an equity method interest in an unconsolidated
joint venture.
Berkeley
Cinemas - Group and Berkeley Cinemas -Palms & Botany
We
previously had investments in three joint ventures with Everard Entertainment
Ltd in New Zealand (the “NZ JVs”). We entered into the first joint venture in
1998, the second in 2003, and the third in 2004. These joint ventures were
unincorporated and as such, we own an undivided 50% interest in the assets
and
liabilities of each of the joint ventures and treat our interest as an equity
method interest in an unconsolidated joint venture.
On
August
28, 2006, we sold to our joint venture partner our interest in the cinemas
at
Whangaparaoa, Takapuna and Mission Bay, New Zealand, the Berkeley Cinema Group
for $4.6 million (NZ$7.2 million) in cash and the assumption of $1.6 million
(NZ$2.5 million) in debt. The sale resulted in a gain on sale of unconsolidated
joint venture for the year ending December 31, 2006 of $3.4 million (NZ$5.4
million). The condensed balance sheet and statement of operations for the
Berkeley Cinema Group is as follows (dollars in thousands):
Berkeley
Cinemas - Group Condensed Balance Sheet Information:
|
December
31,
|
||||
|
2005
|
||||
|
Current
assets
|
$
|
805
|
||
|
Non
current assets
|
5,263
|
|||
|
Current
liabilities
|
1,030
|
|||
|
Non
current liabilities
|
3,205
|
|||
|
Minority
interest
|
944
|
|||
Berkeley
Cinemas - Group Condensed Statements of Operations
Information:
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
revenue
|
$
|
3,440
|
$
|
5,292
|
$
|
4,952
|
||||
|
Operating
income
|
1,197
|
765
|
716
|
|||||||
|
Net
income
|
644
|
765
|
716
|
|||||||
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6 million). This
8-screen, leasehold cinema had previously been included in our Berkeley Cinemas
- Palms & Botany investment and was not previously consolidated for
accounting purposes. Subsequent to April 1, 2006, we have consolidated this
entity into our financial statements. See Note 8 - Acquisitions
and Property Development.
As
of
December 31, 2006, the only remaining cinema owned by this joint venture is
the
Botany Downs cinema, located in suburban Auckland.
Combined
Condensed Financial Information
The
combined condensed financial information for all of the above unconsolidated
joint ventures and entities accounted for under the equity method is as follows;
therefore, this only excludes Malulani Investments (dollars in
thousands):
Condensed
Balance Sheet Information (Unaudited):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Current
assets
|
$
|
10,153
|
$
|
8,146
|
|||
|
Non
current assets
|
30,573
|
95,184
|
|||||
|
Current
liabilities
|
5,004
|
9,265
|
|||||
|
Non
current liabilities
|
4,109
|
76,045
|
|||||
|
Minority
interest
|
19,067
|
14,025
|
|||||
Condensed
Statements of Operations Information (Unaudited):
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
revenue
|
$
|
135,675
|
$
|
34,156
|
$
|
21,195
|
||||
|
Operating
income
|
36,608
|
5,347
|
7,971
|
|||||||
|
Net
income
|
35,697
|
4,484
|
4,024
|
|||||||
Note
12 - Notes Payable
Notes
payable are summarized as follows (dollars in thousands):
|
December
31,
|
December
31,
|
|||||||||||||||
|
Name
of Note Payable
|
2006
Interest
Rate
|
2005
Interest
Rate
|
Maturity
Date
|
2006
Balance
|
2005
Balance
|
|||||||||||
|
Australian
Corporate Credit Facility
|
7.33%
|
|
6.96%
|
|
January
1, 2009
|
$
|
70,516
|
$
|
32,442
|
|||||||
|
Australian
Newmarket Construction Loan
|
N/A
|
7.34%
|
|
January
1, 2009
|
--
|
21,701
|
||||||||||
|
Australian
Shopping Center Loans
|
--
|
--
|
2007-2013
|
1,147
|
1,169
|
|||||||||||
|
New
Zealand Corporate Credit Facility
|
9.15%
|
|
9.15%
|
|
November
23, 2009
|
35,230
|
34,225
|
|||||||||
|
New
Zealand Movieland Note Payable
|
N/A
|
5.50%
|
|
February
26, 2006
|
--
|
537
|
||||||||||
|
US
Sutton Hill Capital Note 1 - Related Party
|
9.69%
|
|
9.26%
|
|
July
28, 2007
|
5,000
|
5,000
|
|||||||||
|
US
Royal George Theatre Term Loan
|
7.86%
|
|
6.97%
|
|
November
29, 2007
|
1,819
|
1,986
|
|||||||||
|
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%
|
|
7.31%
|
|
January
1, 2010
|
7,500
|
3,260
|
|||||||||
|
Total
Notes Payable
|
$
|
130,212
|
$
|
109,320
|
||||||||||||
Australia
Australian
Corporate Credit Facility
As
prescribed by the credit agreement, during 2006, our Australian Corporate Credit
Facility with the Bank of Western Australia, Ltd through our Australian
subsidiary, Reading Entertainment Australia Pty Ltd (the “Australia Credit
Facility”) was combined with our Newmarket Construction Loan during the first
quarter of 2006 upon completion of the retail portions of our Newmarket ETRC.
At
December 31, 2006, the combined total borrowing limit of our Australian
Corporate Credit Facility was $78.8 million (AUS$100.0 million). At December
31,
2006, we had drawn a total of $70.5 million (AUS$89.4 million) against this
facility and issued lease guarantees as the lessee of $3.2 million (AUS$4.0
million) leaving an available, undrawn balance of $5.1 million (AUS$6.5
million). Effective September 30, 2006, we renegotiated our Australian Corporate
Credit Facility. Under the new terms, it is unlikely that we will be required
to
make any further principal payments on the loan until the facility comes to
term
on January 1, 2009.
During
2006, we drew down $4.8 million (AUS$6.3 million) to purchase the Palms -
Christchurch Cinema and to payoff the Palms - Christchurch Cinema bank debt
(see
Note 8 - Acquisitions
and Property Development),
$2.2
million (AUS$3.0 million) to purchase a 0.4 acre commercial site adjacent to
our
Moonee Ponds property in Melbourne, Australia, $1.6 million (AUS$2.2 million)
to
purchase a commercial development in Indooroopilly a suburb of Brisbane,
Australia, and $1.1 million (AUS$1.4 million) to make capital improvements
to
our existing cinema sites. Additionally, we drew down $2.3 million (AUS$3.1
million) on our Newmarket Construction Loan used to finance the completion
of
the retail portions of our Newmarket Shopping Centre development in Brisbane,
Australia.
This
credit facility is secured by substantially all of our cinema assets in
Australia, but has not been guaranteed by any company other than several of
our
wholly owned Australian subsidiaries. The credit facility includes a number
of
affirmative and negative covenants designed to protect the Bank’s security
interests. The most restrictive covenant of the facility is a limitation on
the
total amount that we are able to drawdown based on the total assets that are
securing the loan. Our Australian Credit Facility provides for floating interest
rates based on the Bank Bill Swap Bid Rate (BBSY bid rate), but requires that
not less than 70% of the loan be swapped into fixed rate obligations. For
further information regarding our swap agreements, see Note 13 - Derivative
Instruments.
All
interest rates above include a 1.00% interest rate margin.
Fair
Value of Interest Rate Swap Agreements
In
accordance with SFAS No. 133, we marked our Australian interest rate swap
instruments to market resulting in an $845,000 (AUS$1.1 million) decrease,
$171,000 (AUS$180,000) increase, and a $91,000 (AUS$118,000) increase to
interest expense during 2006, 2005 and 2004, respectively (See Note 13 -
Derivative
Instruments).
Australian
Shopping Center Loans
As
part
of the Anderson Circuit, in July 2004, we assumed the three loans on the
properties of Epping, Rhodes, and West Lakes. The total amount assumed on the
transaction date was $1.5 million (AUS$2.1 million) and the loans carry no
interest as long as we make timely principal payments of approximately $250,000
(AUS$320,000) per year. The balance of these loans at December 31, 2006 and
2005
was $1.1 million (AUS$1.4 million) and $1.2 million (AUS$1.6 million),
respectively. Early repayment is possible without penalty. The only recourse
on
default of these loans is the security on the properties.
New
Zealand
Corporate
Credit Facility
On
December 15, 2006, our New Zealand Corporate Credit Facility with the Westpac
Banking Corporation was increased from $35.2 million (NZ$50.0 million) to $42.3
million (NZ$60.0 million) and the facility’s related principal payment were
deferred to begin in February 2009 after which we will be required to make
quarterly principal payments of $750,000 till the loan comes due in November
2009. During 2004, this credit facility had replaced our existing $20.9 million
(NZ$31.3 million) credit facility, with Bank of New Zealand, with a $35.5
million (NZ$50.0 million) credit facility with Westpac Banking Corporation.
The
facility is secured by substantially all of our New Zealand assets, but has
not
been guaranteed by any entity other than several of our New Zealand
subsidiaries. The facility expires on November 23, 2009. The credit facility
had
been fully drawn in order to repay the replaced facility and to finance our
2004
acquisitions of six cinemas (27 screens) and three underlying fee interests
in
New Zealand. The facility includes various affirmative and negative covenants
designed to protect the bank’s security, limits capital expenditures and the
repatriation of funds out of New Zealand without the approval of the bank.
Also
included in the restrictive covenants of the facility is the restriction of
transferring funds from subsidiary to parent. Interest on the facility is a
floating rate based on the 90-day Bank Bill Bid Rate (BBBR). At December 31,
2006 that rate was 9.15% (which includes a 1.45% interest rate margin) and
the
amount outstanding was $35.2 million (NZ$50.0 million).
Movieland
Note Payable
On
February 27, 2006, we paid off the balance of our New Zealand Movieland Note
Payable which we had issued in August 2004 in connection with the purchase
of
our Movieland Circuit. The balance of the purchase money promissory note was
paid in full for $520,000 (NZ$784,000) plus $14,000 (NZ$22,000) of accrued
interest.
Domestic
Sutton
Hill Capital Note 1 - City Cinemas Standby Credit Facility
In
connection with the City Cinemas Transaction, we undertook to lend SHC up to
$28.0 million commencing in July 2007. With the release of the Murray Hill
cinema from the Operating Lease in February 2002, this obligation decreased
to
$18.0 million. As more fully described in Note 25 - Related
Parties and Transactions,
the
City Cinemas Standby Credit Facility, in connection with the sale of the Sutton
Property, the Operating Lease was further reduced by $5.0 million from $18.0
million to $13.0 million and the draw down date was changed to the earlier
of
October 2005 or the payment of the Sutton Purchase Money Note.
Prior
to
the sale of the Sutton Property in 2003, our funding obligation under the City
Cinemas Standby Credit Facility was not recorded on our Consolidated Balance
Sheet. Instead, it was disclosed as an off balance sheet future loan commitment.
Following the October 2003 sale of the Sutton Property, this loan commitment
was
recorded as an “other non-current liability” on our Consolidated Balance Sheet.
On September 14, 2004, the Sutton Purchase Money Note was paid, and $13.0
million of the proceeds were called by SHC as the final drawdown of the City
Cinemas Standby Credit Facility.
On
September 14, 2004, we issued a $5.0 million promissory note to SHC which
carries an interest rate at December 31, 2006 of 9.69% per annum with interest
only payments payable monthly and a balloon principal payment due on July 28,
2007, the loan maturity date. We used the proceeds to in part invest in 205-209
East 57th
Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th
Street
in Manhattan.
Royal
George Theatre Term Loan
On
November 29, 2002, we entered into a $2.5 million loan agreement with a
financial institution, secured by our Royal George Theatre in Chicago, Illinois.
The loan is a 5-year term loan that accrues a variable interest rate payable
monthly in arrears. As of December 31, 2006, the interest rate on the loan
was
7.86% paid monthly in conjunction with the monthly scheduled principal payment.
The loan agreement contains various covenants. The most restrictive covenant
is
that we must maintain the ratio of EBITDA (as defined by the loan agreement)
to
capital expenditures, taxes and loan payments of at least 1.1 to 1. We owed
$1.8
million and $2.0 million on this term loan as of December 31, 2006 and 2005,
respectively.
Sutton
Hill Capital Note 2
On
September 19, 2005, we issued a $9.0 million promissory note, bearing interest
at a fixed rate of 8.25% with interest only payments payable monthly and a
balloon principal payment due on December 31, 2010, the loan maturity date,
in
exchange for the tenant’s interest in the ground lease estate that is currently
between (i) our fee ownership of the underlying land and (ii) our current
possessory interest as the tenant in the building and improvements constituting
the Cinemas 1, 2 & 3 in Manhattan. This tenant’s ground lease interest was
purchased from Sutton Hill Capital LLC (“SHC”). As SHC is a related party to our
corporation, our Board’s Audit and Conflicts Committee, comprised entirely of
outside independent directors, and subsequently our entire Board of Directors
unanimously approved issuance of debt in connection with the purchase of the
property. The Cinemas 1, 2 & 3 is located on 3rd
Avenue
between 59th
and
60th
Streets.
Union
Square Theatre Term Loan
On
December 4, 2006, we renegotiated our loan agreement which is secured by our
Union Square Theatre in Manhattan. The new loan increased our borrowing amount
from $3.2 million to $7.5 million and reduced our annual interest rate from
7.31% to 6.26%. This new three-year term loan requires monthly scheduled
principal and interest payments. We owed $7.5 million and $3.3 million on this
term loan for the years ended December 31, 2006 and 2005, respectively. While
this loan is structured as a limited recourse liability (the only collateral
being our Union Square building and the tenant leases with respect to that
building), this limited recourse structure is somewhat offset by our
inter-company obligation under the lease of the live theater portion of the
building, which provides for an annual rent of $546,000.
Summary
of Notes Payable
Our
aggregate future principal loan payments are as follows (dollars in
thousands):
|
Year
Ending December 31,
|
||||
|
2007
|
$
|
7,237
|
||
|
2008
|
363
|
|||
|
2009
|
106,123
|
|||
|
2010
|
16,055
|
|||
|
2011
|
158
|
|||
|
Thereafter
|
276
|
|||
|
Total
future principal loan payments
|
$
|
130,212
|
||
Since
approximately $106.9 million of our total debt of $130.2 million at December
31,
2006 consisted of debt denominated in Australian and New Zealand dollars,
the
U.S dollar amounts of these repayments will fluctuate in accordance with
the
relative values of these currencies.
Note
13 - Derivative Instruments
We
are
exposed to interest rate changes from our outstanding floating rate borrowings.
We manage our fixed to floating rate debt mix to mitigate the impact of adverse
changes in interest rates on earnings and cash flows and on the market value
of
our borrowings. From time to time, we may enter into interest rate hedging
contracts which effectively convert a portion of our Australian dollar and/or
New Zealand dollar denominated variable rate debt to a fixed rate over the
term
of the interest rate swap. In the case of our Australian borrowings, we are
presently required to
swap
no
less than 70% of our drawdowns under our Australian Corporate Credit Facility
into fixed interest rate obligations.
The
following table sets forth the terms of our interest rate swap derivative
instruments at December 31, 2006 and 2005:
|
Type
of Instrument
|
Notional
Amount
|
Pay
Fixed Rate
|
Receive
Variable Rate
|
Maturity
Date
|
|||||||||
|
Interest
rate swap
|
$
|
8,870,000
|
5.7000%
|
|
6.2233%
|
|
December
31, 2007
|
||||||
|
Interest
rate swap
|
$
|
12,812,000
|
6.4400%
|
|
6.2233%
|
|
December
31, 2008
|
||||||
|
Interest
rate swap
|
$
|
12,871,000
|
6.6800%
|
|
6.2233%
|
|
December
31, 2008
|
||||||
|
Interest
rate swap
|
$
|
9,598,000
|
5.8800%
|
|
6.2233%
|
|
December
31, 2008
|
||||||
|
Interest
rate swap
|
$
|
2,759,000
|
6.3600%
|
|
6.2233%
|
|
December
31, 2008
|
||||||
In
accordance with SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities,
we
marked our Australian interest swap instruments to market on the consolidated
balance sheet resulting in a $845,000 (AUS$1.1 million) decrease to interest
expense during 2006, a $171,000 (AUS$180,000) increase to interest expense
during 2005, and a $91,000 (AUS$118,000) increase to interest expense during
2004. At December 31, 2006 we recorded the fair market value of our interest
rate swaps at $206,000 (AUS$261,000) as an other long-term asset. At December
31, 2005, we recorded the fair market value of our interest rate swaps at
$638,000 (AUS$870,000) as an other long-term liability. In accordance with
SFAS
No. 133, we have not designated any of our current interest rate swap positions
as financial reporting hedges.
Note
14 - Income Taxes
Income
(loss) before income tax expense includes the following (dollars in thousands):
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
United
States
|
$
|
(4,460
|
)
|
$
|
(1,863
|
)
|
$
|
20
|
||
|
Foreign
|
(2,403
|
)
|
2,689
|
(9,117
|
)
|
|||||
|
Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
|
$
|
(6,863
|
)
|
$
|
826
|
$
|
(9,097
|
)
|
||
|
Equity
earnings and gain on sale of unconsolidated subsidiary:
|
||||||||||
|
United
States
|
8,277
|
(56
|
)
|
--
|
||||||
|
Foreign
|
4,712
|
1,428
|
1,680
|
|||||||
|
Income
(loss) before income tax expense
|
$
|
6,126
|
$
|
2,198
|
$
|
(7,417
|
)
|
|||
Significant
components of the provision for income taxes are as follows (dollars in
thousands):
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Current
income tax expense (benefit)
|
||||||||||
|
Federal
|
$
|
688
|
$
|
444
|
$
|
--
|
||||
|
State
|
409
|
186
|
216
|
|||||||
|
Foreign
|
1,173
|
579
|
830
|
|||||||
|
Total
|
2,270
|
1,209
|
1,046
|
|||||||
|
Deferred
income tax expense
|
||||||||||
|
Federal
|
--
|
--
|
--
|
|||||||
|
State
|
--
|
--
|
--
|
|||||||
|
Foreign
|
--
|
--
|
--
|
|||||||
|
Total
|
--
|
--
|
--
|
|||||||
|
Total
income tax expense
|
$
|
2,270
|
$
|
1,209
|
$
|
1,046
|
||||
Deferred
income taxes reflect the net tax effect of “temporary differences” between the
financial statement carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The components
of the deferred tax liabilities and assets are as follows (dollars in
thousands):
|
December
31,
|
|||||||
|
Components
of Deferred Tax Assets and Liabilities
|
2006
|
2005
|
|||||
|
Deferred
Tax Assets:
|
|||||||
|
Net
operating loss carry forwards
|
$
|
46,573
|
$
|
51,678
|
|||
|
Impairment
reserves
|
1,060
|
465
|
|||||
|
Alternative
minimum tax carry forwards
|
3,624
|
3,483
|
|||||
|
Installment
sale of cinema property
|
5,070
|
5,321
|
|||||
|
Other
|
6,781
|
1,912
|
|||||
|
Total
Deferred Tax Assets
|
63,108
|
62,859
|
|||||
|
Deferred
Tax Liabilities:
|
|||||||
|
Acquired
and option properties
|
6,890
|
4,275
|
|||||
|
Net
deferred tax assets before valuation allowance
|
56,218
|
58,584
|
|||||
|
Valuation
allowance
|
(56,218
|
)
|
(58,584
|
)
|
|||
|
Net
deferred tax asset
|
$
|
--
|
$
|
--
|
|||
We
have
determined as of December 31, 2006 that $56.2 million of deferred tax assets
do
not satisfy the recognition criteria set forth in SFAS No. 109 - Accounting
for
Income Taxes. Accordingly, a valuation allowance has been recorded for this
amount.
As
of
December 31, 2006, we had the following U.S. expiring net operating loss carry
forwards (dollars in thousands):
|
Expiration
Date
|
Amount
|
|||
|
2018
|
$
|
4
|
||
|
2019
|
1,320
|
|||
|
2021
|
9,002
|
|||
|
2022
|
1,636
|
|||
|
2025
|
28,345
|
|||
|
Total
net operating loss carryforwards
|
$
|
40,307
|
||
In
addition to the above expiring net operating losses carried forward, we have
the
following loss carry forwards that have no expiration date:
|
·
|
approximately
$3.6 million in alternative minimum tax credit carry forwards at
December
31, 2006;
|
|
·
|
approximately
$53.9 million in Australian loss carry forwards; and
|
|
·
|
approximately
$827,000 in New Zealand loss carry
forwards.
|
We
disposed of our Puerto Rico operations during 2005 and plan no further
investment in Puerto Rico for the foreseeable future. We have approximately
$34.6 million in Puerto Rico loss carry forwards expiring no later than 2012.
Accordingly, we would have to re-enter the Puerto Rico market to recognize
material future tax benefits from Puerto Rico loss carry forwards.
We
expect
no other substantial limitations on the future use of U.S. or foreign loss
carry
forwards except for reductions in unused U.S. loss carry forwards that may
occur
in connection with the 1996 Tax Audit described in Note 18 - Commitments and
Contingencies.
The
provision for income taxes is different from amounts computed by applying U.S.
statutory rates to consolidated losses before taxes. The significant reason
for
these differences follows (dollars in thousands):
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Expected
tax provision (benefit)
|
$
|
2,149
|
$
|
769
|
$
|
(2,596
|
)
|
|||
|
Reduction
(increase) in taxes resulting from:
|
||||||||||
|
Change
in valuation allowance
|
(2,366
|
)
|
(596
|
)
|
1,752
|
|||||
|
Foreign
tax provision
|
1,173
|
579
|
830
|
|||||||
|
Tax
effect of foreign tax rates on current income
|
425
|
740
|
341
|
|||||||
|
State
and local tax provision
|
409
|
186
|
216
|
|||||||
|
Other
items
|
480
|
(469
|
)
|
503
|
||||||
|
Actual
tax provision
|
$
|
2,270
|
$
|
1,209
|
$
|
1,046
|
||||
Pursuant
to APB No.23, Accounting for Income Taxes - Special Areas, a provision should
be
made for the tax effect of earnings of foreign subsidiaries which are not
permanently invested outside the United States. In our opinion, the earnings
of
our foreign subsidiaries are not permanently invested outside the United States.
No taxable earnings were available in the Reading Australia consolidated group
of subsidiaries or in the Puerto Rico subsidiary as of December 31, 2006. The
Reading New Zealand consolidated group of subsidiaries generated pre-tax
earnings in 2006. We
have
provided $453,000 in foreign withholding taxes connected with these retained
earnings.
We
have
accrued $13.6 million in income tax liabilities as of December 31, 2006, of
which $8.4 have been classified as income taxes payable and $5.2 million have
been classified as other non-current liabilities. As part of income taxes
payable, we have accrued $4.0 million as a probable loss in connection with
the
“Appeal of IRS Deficiency Notices” and we believe that the possible total
settlement amount will be between $4.0 million and $47.3 million (see 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.
In
June
2006, the FASB issued Financial Interpretation No. 48 Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109.
This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes
a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return.
The
benefit of a tax position may be recognized if there is a more likely than
not
probability that the position will be sustained on its merits when examined
by
the taxing authorities. If a benefit is thus recognized, the amount of benefit
is measured as the largest tax benefit that is more than 50 percent probable
of
being secured upon ultimate settlement.
The
provisions of FIN 48 are effective for years beginning after December 15, 2006.
We estimate the application of FIN 48 will result in a cumulative charge to
retained earnings as of January 1, 2007 between $400,000 and
$900,000.
Note
15 - Other Liabilities
Other
liabilities are summarized as follows (dollars in thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Current
liabilities
|
|||||||
|
Security
deposit payable
|
$
|
177
|
$
|
174
|
|||
|
Other
|
--
|
76
|
|||||
|
Other
current liabilities
|
$
|
177
|
$
|
250
|
|||
|
Other
liabilities
|
|||||||
|
Foreign
withholding taxes
|
$
|
5,212
|
$
|
4,944
|
|||
|
Straight-line
rent liability
|
3,693
|
3,541
|
|||||
|
Option
liability
|
3,681
|
1,055
|
|||||
|
Environmental
reserve
|
1,656
|
1,656
|
|||||
|
Interest
rate swap
|
--
|
635
|
|||||
|
Option
deposit
|
3,000
|
--
|
|||||
|
Other
|
936
|
678
|
|||||
|
Other
liabilities
|
$
|
18,178
|
$
|
12,509
|
|||
As
part
of the purchase of the real property underlying our leasehold interest in the
Cinemas 1, 2, & 3 we have granted an option to Sutton Hill Capital, LLC, a
limited liability company beneficially owned in equal 50/50 shares by Messrs.
James J. Cotter and Michael Forman, to acquire, at cost, up to a 25%
non-managing membership interest in the limited liability company that we formed
to acquire these interests. That limited liability company is called Sutton
Hill
Properties LLC, a subsidiary of Reading International, Inc. In June 2006, Sutton
Hill Capital, LLC gave us $3.0 million as a deposit on the exercise price of
this option.
In
relation to this option, we had previously recorded a $1.0 million call option
liability in other liabilities and a corresponding increase in purchase price
paid for the land by Sutton Hill Properties LLC at December 31, 2005. We have
adjusted our purchase price allocation relating to the completed valuation
of
the option as of September 19, 2005 and have recorded an additional $1.1 million
as land acquisition costs and option liability. Any change in the option value
subsequent to the issuance date is recorded as other income or expense in the
statement of operations. As part of our quarterly valuation procedures and
with
the input from our real estate appraisers, we updated the valuation of these
property interests in Cinemas 1, 2, & 3. Because of an increase in the value
of the underlying real property assets, the value of the option December 31,
2006 increased to $3.7 million, resulting in a charge for the year ended
December 31, 2006 of $1.6 million.
During
the first quarter of 2006, the Motion Picture Projectionists, Video Technicians
and Allied Crafts Union asserted that due to the Company’s reduced reliance on
union labor in New York City, there was a partial withdrawal from the union
pension plan by the Company in 2003 resulting in a funding liability on the
part
of the Company of approximately $342,000. We believe that the estimated amount
of our obligation to the Union for their pension plan is in question and
disputable. For this reason, we intend to discuss further the matter with the
Union. However, to reflect the Union’s asserted assessment at this time, we have
recorded the $342,000 liability in our other liabilities at December 31,
2006.
Note
16 - Fair Value of Financial Instruments
The
carrying amounts of our cash and cash equivalents, restricted cash and accounts
payable approximate fair value due to their short-term maturities. Interest
rate
swap contracts are carried at fair value and included in other liabilities
on
the consolidated balance sheet. The carrying amounts of our variable-rate
secured debt approximate fair value since the interest rates on these
instruments are equivalent to rates currently offered us. The following table
summarizes our financial instruments and their calculated fair values (dollars
in thousands):
|
Book
Value
|
Fair
Value
|
||||||||||||
|
Financial
Instrument
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Cash
|
$
|
11,008
|
$
|
8,548
|
$
|
11,008
|
$
|
8,548
|
|||||
|
Accounts
receivable
|
$
|
6,612
|
$
|
5,272
|
$
|
6,612
|
$
|
5,272
|
|||||
|
Investment
in marketable securities
|
$
|
8,436
|
$
|
401
|
$
|
8,436
|
$
|
401
|
|||||
|
Restricted
cash
|
$
|
1,040
|
$
|
--
|
$
|
1,040
|
$
|
--
|
|||||
|
Accounts
and film rent payable
|
$
|
18,181
|
$
|
18,118
|
$
|
18,181
|
$
|
18,118
|
|||||
|
Notes
payable
|
$
|
130,212
|
$
|
109,320
|
$
|
130,333
|
$
|
107,727
|
|||||
|
Interest
rate swaps asset (liability)
|
$
|
206
|
$
|
(638
|
)
|
$
|
206
|
$
|
(638
|
)
|
|||
Note
17 - Lease Agreements
Most
of
our cinemas conduct their operations in leased facilities. Nine of our thirteen
operating multiplexes in Australia, three of our seven cinemas in New Zealand
and all of our cinemas in the United States are in leased facilities. These
cinema leases have remaining terms inclusive of options of 10 to 50 years.
Certain of our cinema leases provide for contingent rentals based upon a
specified percentage of theater revenues with a guaranteed minimum.
Substantially all of our leases require the payment of property taxes, insurance
and other costs applicable to the property. We also lease office space and
equipment under non-cancelable operating leases. All of our leases are accounted
for as operating leases and accordingly, we have no leases of facilities which
require capitalization.
We
determine the annual base rent expense of our cinemas by amortizing total
minimum lease obligations on a straight-line basis over the lease terms. Base
rent expense and contingent rental expense under the operating leases totaled
approximately $10.8 million and $332,000 for 2006, respectively, $9.8 million
and $719,000 for 2005, respectively; and $7.5 million and $739,000 for 2004,
respectively. Future minimum lease payments by year and, in the aggregate,
under
non-cancelable operating leases consisted of the following at December 31,
2006
(dollars in thousands):
|
Minimum
Lease Payments
|
||||
|
2007
|
$
|
11,482
|
||
|
2008
|
10,840
|
|||
|
2009
|
10,833
|
|||
|
2010
|
10,609
|
|||
|
2011
|
9,928
|
|||
|
Thereafter
|
65,290
|
|||
|
Total
minimum lease payments
|
$
|
118,982
|
||
Since
approximately $78.8 million of our total minimum lease payments of $119.0
million as of December 31, 2006 consisted of lease obligations denominated
in
Australian and New Zealand dollars, the U.S dollar amounts of these obligations
will fluctuate in accordance with the relative values of these
currencies.
Note
18 - Commitments and Contingencies
Tower
Lease
At
December 31, 2006, we were under contract to purchase the underlying lease
of
our Tower Cinema in Sacramento, California. The agreement called for a purchase
price of $493,000 to be paid in two installments of $243,000 due on February
8,
2007 and $250,000 due on July 1, 2007. See Note 26 - Subsequent
Events.
Cinemas
1, 2 & 3 Ground Lease
As
part
of the purchase of the Cinemas 1, 2, 3 tenant’s ground lease interest, we have
agreed in principal, as a part of our negotiations to acquire the land and
the
SHC interests in the Cinemas 1, 2 & 3, to grant an option to Sutton Hill
Capital, LLC, a limited liability company beneficially owned in equal 50/50
shares by Messrs. James J. Cotter and Michael Forman (see Note 25 - Related
Parties and Transactions)
to
acquire, at cost, up to a 25% non-managing membership interest in the limited
liability company that we formed to acquire these interests. In relation to
this
option,
we
recorded a $3.7 million and $1.0 million call option liability in our other
liabilities at December 31, 2006 and 2005, respectively.
Unconsolidated
Joint Venture Loans
The
following section describes the loans associated with our investments in
unconsolidated joint ventures. As they are unconsolidated, their associated
bank
loans are not reflected in our Consolidated Balance Sheet at December 31, 2006.
Each loan is without recourse to any assets other than our interests in the
individual joint venture.
Rialto
Distribution
We
are
the 33.3% co-owners of the assets of Rialto Distribution. At December 31, 2006,
the total line of credit was $1.4 million (NZ$2.0 million) and had an
outstanding balance of $1.1 million (NZ$1.6 million).
Berkeley
Cinemas
We
are
the 50% co-owners with the Everard Entertainment Ltd of the assets comprising
an
unincorporated joint venture in New Zealand, referred to in these financial
statements as the Berkeley Cinemas Joint Venture. The balance of the bank loan
at December 31, 2006 was $3.7 million (NZ$5.2 million) which is secured by
a
first mortgage over the land and building assets of the joint venture.
Tax
Audit/Litigation
The
Internal Revenue Service (the “IRS”) completed its audits of the tax return of
Reading Entertainment Inc. (RDGE) for its tax years ended December 31, 1996
through December 31, 1999 and the tax return of Craig Corporation (CRG) for
its
tax year ended June 30, 1997. With respect to both of these companies, the
principal focus of these audits was the treatment of the contribution by RDGE
to
our wholly owned subsidiary, Reading Australia, and thereafter the subsequent
repurchase by Stater Bros. Inc. from Reading Australia of certain preferred
stock in Stater Bros. Inc. (the “Stater Stock”) received by RDGE from CRG as a
part of a private placement of securities by RDGE which closed in October 1996.
A second issue involving equipment leasing transactions entered into by RDGE
(discussed below) is also involved.
By
letters dated November 9, 2001, the IRS issued reports of examination proposing
changes to the tax returns of RDGE and CRG for the years in question (the
“Examination Reports”). The Examination Report for each of RDGE and CRG proposed
that the gains on the disposition by RDGE of Stater Stock, reported as taxable
on the RDGE return, should be allocated to CRG. As reported, the gain resulted
in no additional tax to RDGE inasmuch as the gain was entirely offset by a
net
operating loss carry forward of RDGE. This proposed change would result in
an
additional tax liability for CRG of approximately $20.9 million plus interest
of
approximately $13.5 million as of December 31, 2006. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $3.5 million as of December 31, 2006. Accordingly,
this proposed change represented, as of December 31, 2006, an exposure of
approximately $43.3 million.
Moreover,
California has “amnesty” provisions imposing additional liability on taxpayers
who are determined to have materially underreported their taxable income. While
these provisions have been criticized by a number of corporate taxpayers to
the
extent that they apply to tax liabilities that are being contested in good
faith, no assurances can be given that these new provisions will be applied
in a
manner that would mitigate the impact on such taxpayers. Accordingly, these
provisions may cause an additional $4.0 million exposure to CRG, for a total
exposure of approximately $47.3 million. We have accrued $4.0 million as a
probable loss in relation to this exposure and believe that the possible total
settlement amount will be between $4.0 million and $47.3 million.
In
early
February 2005, we had a mediation conference with the IRS concerning this
proposed change. The mediation was conducted by two mediators, one of whom
was
selected by the taxpayer from the private sector and one of whom was an employee
of the IRS. In connection with this mediation, we and the IRS each prepared
written submissions to the mediators setting forth our respective cases. In
its
written submission, the IRS noted that it had offered to settle its claims
against us at 30% of the proposed change, and reiterated this offer at the
mediation. This offer constituted, in effect, an offer to settle for a payment
of $5.0 million federal tax, plus interest, for an aggregate settlement amount
of approximately $8.0 million. Based on advice of counsel given after reviewing
the materials submitted by the IRS to the mediation panel, and the oral
presentation made by the IRS to the mediation panel and the comments of the
mediators (including the IRS mediator), we determined not to accept this
offer.
Notices
of deficiency (“N/D”) dated June 29, 2006 were received with respect to each of
RDGE and CRG determining proposed deficiencies of $20.9 million for CRG and
a
total of $349,000 for RDGE for the tax years 1997, 1998 and 1999.
We
intend
to litigate aggressively these matters in the U.S. Tax Court and an appeal
was
filed with the court on September 26, 2006. While there are always risks in
litigation, we believe that a settlement at the level currently offered by
the
IRS would substantially understate the strength of our position and the
likelihood that we would prevail in a trial of these matters.
Since
these tax liabilities relate to time periods prior to the Consolidation of
CDL,
RDGE, and CRG into Reading International, Inc. and since RDGE and CRG continue
to exist as wholly owned subsidiaries of RII, it is expected that any adverse
determination would be limited in recourse to the assets of RDGE or CRG, as
the
case may be, and not to the general assets of RII. At the present time, the
assets of these subsidiaries are comprised principally of RII securities.
Accordingly, we do not anticipate, even if there were to be an adverse judgment
in favor of the IRS that the satisfaction of that judgment would interfere
with
the internal operation or result in any levy upon or loss of any of our material
operating assets. The satisfaction of any such adverse judgment would, however,
result in a material dilution to existing stockholder interests.
The
N/D
issued to RDGE does not cover its tax year 1996 which will be held in abeyance
pending the resolution of the CRG case. An adjustment to 1996 taxable income
for
RDGE would result in a refund of alternative minimum tax paid that year. The
N/D
issued to RDGE eliminated the gains booked by RDGE in 1996 as a consequence
of
its acquisition certain computer equipment and sale of the anticipated income
stream from the lease of such equipment to third parties and disallowed
depreciation deductions that we took with respect to that equipment in 1997,
1998 and 1999. Such disallowance has the effect of decreasing net operating
losses but did not result in any additional regular federal income tax for
such
years. However, the depreciation disallowance would increase RDGE state tax
liability for those years by approximately $170,000 plus interest. The only
tax
liability reflected in the RDGE N/D is alternative minimum tax in the total
amount of approximately $349,000 plus interest. On September 26, 2006, we filed
an appeal on this N/D with the U.S. Tax Court.
Environmental
and Asbestos Claims
The
City
of Philadelphia (the “City”) has asserted that the North Viaduct property owned
by a subsidiary of Reading requires environmental decontamination and that
such
subsidiary’s share of any such remediation cost will aggregate approximately
$3.5 million. The City has also asserted that we should demolish certain bridges
and overpasses that comprise a portion of the North Viaduct. We have in the
recent past had discussions with the City involving a possible conveyance of
the
property. However, these discussions have not been productive of any definitive
offer or proposal from the City. We continue to believe that our recorded
remediation reserves related to the North Viaduct are adequate. See Note 15
-
Other
Liabilities.
Certain
of our subsidiaries were historically involved in railroad operations, coal
mining and manufacturing. Also, certain of these subsidiaries appear in the
chain of title of properties which may suffer from pollution. Accordingly,
certain of these subsidiaries have, from time to time, been named in and may
in
the future be named in various actions brought under applicable environmental
laws. Also, we are in the real estate development business and may encounter
from time to time unanticipated environmental conditions at properties that
we
have acquired for development. These environmental conditions can increase
the
cost of such projects, and adversely affect the value and potential for profit
of such projects. We do not currently believe that our exposure under applicable
environmental laws is material in amount.
From
time
to time, we have claims brought against us relating to the exposure of former
employees of our railroad operations to asbestos and coal dust. These are
generally covered by an insurance settlement reached in September 1990 with
our
insurance carriers. However, this insurance settlement does not cover litigation
by people who were not our employees and who may claim second hand exposure
to
asbestos, coal dust and/or other chemicals or elements now recognized as
potentially causing cancer in humans.
Whitehorse
Center Litigation
On
October 30, 2000, we commenced litigation in the Supreme Court of Victoria
at
Melbourne, Commercial and Equity Division, against our joint venture partner
and
the controlling stockholders of our joint venture partner in the Whitehorse
Shopping Center. That action is entitled Reading Entertainment Australia Pty,
Ltd vs. Burstone Victoria Pty, Ltd and May Way Khor and David Frederick Burr,
and was brought to collect on a promissory note (the “K/B Promissory Note”)
evidencing a loan that we made to Ms. Khor and Mr. Burr and that was guaranteed
by Burstone Victoria Pty, Ltd (“Burstone” and collectively with Ms. Khor and Mr.
Burr, the “Burstone Parties”). This loan balance has been previously written off
and is no longer recorded on our books. The Burstone Parties asserted in defense
certain set-offs and counterclaims, alleging, in essence, that we had breached
our alleged obligations to proceed with the development of the Whitehorse
Shopping Center, causing the Burstone Parties substantial damages. Following
trial, the trial court not only affirmed the liability of the Burstone Parties
on the K/B Promissory Note but also determined that we had breached certain
obligations owed to WPG (the joint venture in which we own a 50% interest and
in
which Burstone owns the remaining 50% interest). The trial court did not,
however, find us in breach of any direct obligations to any one or more of
the
Burstone Parties.
The
trial
court has entered judgment against us and in favor of WPG in the amount of
$3.5
million (AUS$4.5 million). The trial court has also entered judgment against
the
Burstone Parties and in our favor in the amount of $3.3 million (AUS$4.2
million). Further, the trial court has found us responsible to reimburse the
Burstone Parties for 60% of their out-of-pocket legal fees. The Burstone Parties
estimate that the final costs order will be in the range of $710,000 to $867,000
(AUS$900,000 to AUS$1.1 million). Even if the Court allows the maximum of this
range, our judgment against the Burstone Parties will still exceed our net
liability under the judgment in favor of WPG. In addition, we have settled
various ancillary claims against us for an additional $315,000 (AUS$400,000),
which has now been paid to WPG.
A
provisional liquidator has been appointed for WPG, and that company is now
in
the process of being wound up. As a consequence of our 50% interest in WPG,
in
the event that we are not successful in our appeal, we currently anticipate
that
we will ultimately receive liquidating distributions from WPG in an amount
equal
to approximately $1.8 million (AUS$2.3 million). During the third quarter of
2005, the Burstone Parties paid us $237,000 (AUS$300,000) against our judgment
against them, and we have now entered into an agreement with the Burstone
Parties, pursuant to which they have agreed to pay the balance of our judgment
against them, together with ongoing interest, over time and have provided
various undertakings and a guaranty to secure that obligation. Accordingly,
we
believe that our judgment against the Burstone Parties is adequately secured
and, even if we do not prevail on appeal, we will still net in the range of
$1.3
million (AUS$1.6 million) from the litigation, less such attorney’s fees as may
be assessed against us when the final accounting for such fees is made, and
our
own costs of collection.
We
are
advised by senior Queen’s Counsel after conducting an independent review of the
evidence submitted at trial and the trial court’s opinion that, in his opinion,
the trial court erred in a number of critical aspects, and that we should have
no liability to WPG or any of the Burstone Parties. Accordingly, we have
appealed that part of the trial court’s determination. The Burstone Parties have
likewise appealed, arguing that the damages assessed in favor of WPG and against
us should be higher. The appeal has been set down for hearing on March 19,
2007.
On
June
22, 2005, consent orders were made, which included the appointment of Mr. Jim
Downey as the provisional liquidator to WPG. The provisional liquidator is
awaiting the determination of the appeal before taking further steps in relation
to WPG.
Mackie
Litigation
On
November 7, 2005, we were sued in the Supreme Court of Victoria at Melbourne
by
a former construction contractor with respect to the discontinued development
of
an ETRC at Frankston, Victoria. The action is entitled Mackie Group Pty Ltd
v.
Reading Properties Pty Ltd, and in it the former contractor seeks payment of
a
claimed fee in the amount of $788,000 (AUS$1.0 million). We do not believe
that
any such fee is owed, and are contesting the claim. Discovery has now been
completed by both parties. The next step in the litigation is likely to be
mediation.
On
a
hearing conducted on November 22 and 29, 2006, Reading successfully defended
an
application for summary judgment brought by Mackie and was awarded costs for
part of the preparation of its defense to the application. A bill of costs
has
been prepared by a cost consultant in the sum of $20,000 (AUS$25,000) (including
disbursements). A summons for taxation of costs has been issued and is set
down
for a call over on February 27, 2007
at
which
time a hearing will be set and Mackie will have an opportunity to dispute the
quantum of the costs claimed by Reading.
Other
Claims - Credit Card Claims
During
2006, the bank, which administers our credit card activities, asserted a claim
of potential loss suffered in relation to the use by third parties of
counterfeit credit cards and related credit card company fines. We expect the
associated claims from the bank and credit card companies for these losses
and
fines to total approximately $1.2 million. For this reason, we have expensed
an
other loss of $1.2 million during the year ending December 31, 2006. The issues
surrounding this credit card situation have now been addressed and we intend
to
seek to recoup all or substantially all of these charges.
Note
19 - Minority Interest
The
minority interests are comprised of the following:
|
·
|
50%
of membership interest in AFC by a subsidiary of National Auto Credit,
Inc. (“NAC”)
|
|
·
|
25%
minority interest in Australian Country Cinemas by 21st
Century Pty, Ltd
|
|
·
|
33%
minority interest in the Elsternwick joint venture by Champion Pictures
Pty Ltd
|
|
·
|
up
to 27.5% minority interest in the Landplan Property Partners, Ltd
by
Landplan Property Group, Ltd
|
|
·
|
20%
minority interest in Big 4 Farming LLC by Cecelia Packing
Corporation
|
The
components of minority interest are as follows (dollars in
thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
AFC
|
$
|
2,264
|
$
|
2,847
|
|||
|
Australian
Country Cinemas
|
174
|
113
|
|||||
|
Elsternwick
unincorporated joint venture
|
151
|
116
|
|||||
|
Landplan
Property Partners
|
13
|
--
|
|||||
|
Other
|
1
|
3
|
|||||
|
Total
minority interest
|
$
|
2,603
|
$
|
3,079
|
|||
The
components of minority interest expense are as follows (dollars in
thousands):
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
AFC
|
$
|
624
|
$
|
730
|
$
|
320
|
||||
|
Australian
Country Cinemas
|
50
|
10
|
(93
|
)
|
||||||
|
Elsternwick
unincorporated joint venture
|
(17
|
)
|
(161
|
)
|
(115
|
)
|
||||
|
Landplan
Property Partners
|
14
|
--
|
--
|
|||||||
|
Other
|
1
|
--
|
--
|
|||||||
|
Total
minority interest
|
$
|
672
|
$
|
579
|
$
|
112
|
||||
Landplan Property Partners, Ltd
In
2006,
we formed Landplan Property Partners, Ltd, to identify, acquire and develop
or
redevelop properties on an opportunistic basis. In connection with the formation
of Landplan, we entered into an agreement with Mr. Doug Osborne pursuant to
which (i) Mr. Osborne will serve as the chief executive officer of Landplan
and
(ii) Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”), will perform
certain property management services for Landplan. The agreement provides for
Mr. Osborne to hold an equity interest in the entities formed to hold these
properties; such equity interest to be (i) subordinate to our right to an 11%
compounded return on investment and (ii) subject to adjustment depending upon
various factors including the term of the investment and the amount invested.
Generally speaking, this equity interest will range from 27.5% to 15%. At
December 31, 2006, Landplan had acquired one property in Indooroopilly,
Brisbane, Australia. With the purchase of the Indooroopilly property, based
on
SFAS
123(R),
we calculated the fair value of Mr. Osborne’s equity interest in the
Indooroopilly Trust at the grant date was $77,000 (AUS$98,000) and we have
expensed $13,000 (AUS$17,000)of this value during 2006.
Note
20 - Common Stock
Our
common stock trades on the American Stock Exchange under the symbols RDI and
RDI.B which are our Class A (non-voting) and Class B (voting) stock,
respectively. Our Class A (non-voting) has preference over our Class B (voting)
share upon liquidation. No dividends have ever been issued for either share
class.
During
2006, we issued for cash to an employee of the corporation under our stock
based
compensation plan 12,000 shares and 15,000 shares of Class A Nonvoting Common
Stock at exercise prices of $3.80 and $2.76 per share, respectively.
Additionally, in December 2006, we issued to Mr.
James
J. Cotter, our Chairman of the Board and Chief Executive Officer, 16,047 shares
of Class A Non-Voting Common Stock at a market price of $7.79 per share as
under
the normal vesting schedule of his 2005 restricted stock compensation (see
Note
3 - Stock
Based Compensation and Employee Stock Option Plan.
On
February 27, 2006, we paid $791,000 (NZ$1.2 million) to the sellers of the
Movieland Circuit in exchange for 98,949 Class A Common Nonvoting Common Stock.
This transaction resulted from the exercise of their option to put back to
us at
an exercise price of NZ$11.94 the shares they received as part of the purchase
price of the Movieland Circuit.
In
July
2005, we issued 925,000 shares of Class A Non-Voting Common Stock at an exercise
price of $3.80 per share to Mr. James J. Cotter, our Chairman of the Board
and
Chief Executive Officer, in connection with options issued to him under our
stock based compensation plan. Pursuant to the terms of the stock option award,
Mr. Cotter paid the exercise price by surrendering 486,842 shares of Class
A
Non-Voting Common Stock to us as treasury stock, resulting in a net increase
in
the number of shares of Class A Non-Voting Common Stock outstanding of 438,158
shares.
During
2005, we issued Class A Non-Voting Common Stock to employees of the corporation
under our stock based compensation plan totaling 29,600 shares with exercise
prices ranging from $2.76 to $4.97 per share for cash. Additionally, we issued
20,000 shares of Class A Non-Voting Common Stock with an exercise price of
$2.76
per share pursuant to the exercise by a former director of fully vested and
then
currently exercisable stock options. The exercise price was paid in the form
of
a promissory note for $55,000. Payment
of the full amount of the note was received in February 2006.
Note
21 - Business Segments and Geographic Area Information
Effective
the fourth quarter of 2006, we have changed the presentation of our segment
reporting such that our intersegment revenues and expenses are reported
separately from our segments’ operating activity. The effect of this change is
to include intercompany rent revenues and rent expenses into their respective
cinema and real estate business segments. The revenues and expenses for 2005
and
2004 have been adjusted to conform to the current year presentation. We believe
that this presentation portrays how our operating decision makers’ view the
operations, how they assess segment performance, and how they make decisions
about allocating resources to the segments.
The
table
below sets forth certain information concerning our cinema operations and our
real estate operations (which includes information relating to both our real
estate development, retail rental and live theater rental activities) for the
three years ended December 31, 2006 (dollars in thousands):
|
Year
Ended December 31, 2006
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
|||||||||
|
Revenue
|
$
|
94,048
|
$
|
17,285
|
$
|
(5,208
|
)
|
$
|
106,125
|
||||
|
Operating
expense
|
75,350
|
7,365
|
(5,208
|
)
|
77,507
|
||||||||
|
Depreciation
& amortization
|
8,648
|
4,080
|
--
|
12,728
|
|||||||||
|
General
& administrative expense
|
3,658
|
782
|
--
|
4,440
|
|||||||||
|
Segment
operating income
|
$
|
6,392
|
$
|
5,058
|
$
|
--
|
$
|
11,450
|
|||||
|
Year
Ended December 31, 2005
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
|||||||||
|
Revenue19
|
$
|
86,760
|
$
|
16,523
|
$
|
(5,178
|
)
|
$
|
98,105
|
||||
|
Operating
expense19
|
72,665
|
7,359
|
(5,178
|
)
|
74,846
|
||||||||
|
Depreciation
& amortization
|
8,323
|
3,674
|
--
|
11,997
|
|||||||||
|
General
& administrative expense
|
6,802
|
328
|
--
|
7,130
|
|||||||||
|
Segment
operating income (loss)
|
$
|
(1,030
|
)
|
$
|
5,162
|
$
|
--
|
$
|
4,132
|
||||
|
Year
Ended December 31, 2004
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
|||||||||
|
Revenue19
|
$
|
74,324
|
$
|
14,990
|
$
|
(5,225
|
)
|
$
|
84,089
|
||||
|
Operating
expense19
|
62,041
|
6,948
|
(5,225
|
)
|
63,764
|
||||||||
|
Depreciation
& amortization
|
8,093
|
3,630
|
--
|
11,723
|
|||||||||
|
General
& administrative expense
|
5,868
|
489
|
--
|
6,357
|
|||||||||
|
Segment
operating income (loss)
|
$
|
(1,678
|
)
|
$
|
3,923
|
$
|
--
|
$
|
2,245
|
||||
19
2005 and
2004 real estate revenues and cinema operating expenses have been adjusted
from
the amounts previously reported. See Note 2 - Summary
of Significant Accounting Policies.
|
Reconciliation
to net income:
|
2006
|
2005
|
2004
|
|||||||
|
Total
segment operating income
|
$
|
11,450
|
$
|
4,132
|
$
|
2,245
|
||||
|
Non-segment:
|
||||||||||
|
Depreciation
and amortization expense
|
484
|
387
|
100
|
|||||||
|
General
and administrative expense
|
8,551
|
10,117
|
8,467
|
|||||||
|
Operating
income (loss)
|
2,415
|
(6,372
|
)
|
(6,322
|
)
|
|||||
|
Interest
expense, net
|
(6,608
|
)
|
(4,473
|
)
|
(3,078
|
)
|
||||
|
Other
income (expense)
|
(1,998
|
)
|
19
|
884
|
||||||
|
Minority
interest
|
(672
|
)
|
(579
|
)
|
(112
|
)
|
||||
|
Gain
on disposal of discontinued operations20
|
--
|
13,610
|
--
|
|||||||
|
Income
(loss) from discontinued operations
|
--
|
(1,379
|
)
|
(469
|
)
|
|||||
|
Income
tax expense
|
(2,270
|
)
|
(1,209
|
)
|
(1,046
|
)
|
||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
9,547
|
1,372
|
1,680
|
|||||||
|
Gain
on sale of unconsolidated joint venture
|
3,442
|
--
|
--
|
|||||||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
|||
|
Segment
assets
|
$
|
264,963
|
$
|
236,669
|
||||||
|
Corporate
assets
|
24,268
|
16,388
|
||||||||
|
Total
Assets
|
$
|
289,231
|
$
|
253,057
|
||||||
|
Segment
capital expenditures
|
$
|
16,168
|
$
|
51,649
|
$
|
32,987
|
||||
|
Corporate
capital expenditures
|
221
|
2,305
|
193
|
|||||||
|
Total
capital expenditures
|
$
|
16,389
|
$
|
53,954
|
$
|
33,180
|
||||
20
Comprised of $12.0 million from the sale of our Glendale office
building and
$1.6 million from the sale of our Puerto Rico cinema
operations.
The
cinema results shown above include revenue and operating expense directly
linked
to our cinema assets. The real estate results include rental income
from our
properties and live theaters and operating expense directly linked
to our
property assets.
The
following table sets forth the book value of our property and equipment by
geographical area (dollars in thousands):
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Australia
|
$
|
86,317
|
$
|
84,615
|
|||
|
New
Zealand
|
38,772
|
37,025
|
|||||
|
United
States
|
45,578
|
45,749
|
|||||
|
Total
property and equipment
|
$
|
170,667
|
$
|
167,389
|
|||
The
following table sets forth our revenues by geographical area (dollars in
thousands):
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Australia
|
$
|
53,434
|
$
|
47,181
|
$
|
43,666
|
||||
|
New
Zealand
|
21,230
|
20,179
|
13,531
|
|||||||
|
United
States
|
31,461
|
30,745
|
26,892
|
|||||||
|
Total
Revenues
|
$
|
106,125
|
$
|
98,105
|
$
|
84,089
|
||||
Note
22 - Unaudited Quarterly Financial Information (dollars in thousands, except
per
share amounts)
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
|
2006
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||
|
Revenue
|
$
|
25,230
|
$
|
27,247
|
$
|
24,319
|
$
|
29,329
|
|||||
|
Net
earnings (loss)
|
$
|
(3,147
|
)
|
$
|
(234
|
)
|
$
|
6,093
|
$
|
1,144
|
|||
|
Basic
earnings (loss)
|
$
|
(0.14
|
)
|
$
|
(0.01
|
)
|
$
|
0.27
|
$
|
0.05
|
|||
|
Diluted
earnings (loss) per share
|
$
|
(0.14
|
)
|
$
|
(0.01
|
)
|
$
|
0.27
|
$
|
0.05
|
|||
|
2005
|
|||||||||||||
|
Revenue
|
$
|
24,733
|
$
|
24,081
|
$
|
24,080
|
$
|
25,211
|
|||||
|
Net
loss
|
$
|
(2,403
|
)
|
$
|
10,500
|
$
|
(4,572
|
)
|
$
|
(2,536
|
)
|
||
|
Basic
loss per share
|
$
|
(0.11
|
)
|
$
|
0.48
|
$
|
(0.20
|
)
|
$
|
(0.13
|
)
|
||
|
Diluted
loss per share
|
$
|
(0.11
|
)
|
$
|
0.48
|
$
|
(0.20
|
)
|
$
|
(0.13
|
)
|
||
In
our
opinion, the quarterly financial information presented above reflects all
adjustments that are necessary for a fair presentation of the results of the
quarterly periods presented.
Note
23 - Comprehensive Income (Loss)
US
GAAP
requires us to classify unrealized gains and losses on equity securities as
well
as our foreign currency adjustments as comprehensive income. The following
table
sets forth our comprehensive income for the periods indicated (in
thousands):
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
income (loss)
|
$
|
3,856
|
$
|
989
|
$
|
(8,463
|
)
|
|||
|
Cumulative
foreign currency adjustment
|
4,928
|
(3,822
|
)
|
1,190
|
||||||
|
Unrealized
gain/(loss) on securities
|
(110
|
)
|
11
|
--
|
||||||
|
Comprehensive
income (loss)
|
$
|
8,674
|
$
|
(2,822
|
)
|
$
|
(7,273
|
)
|
||
Note
24 - Future Minimum Rental Income
Real
estate revenue amounted to $12.1 million, $11.3 million, and $9.8 million,
for
the years ended December 31, 2006, 2005 and 2004, respectively. For the year
ended December 31, 2006, rental revenue includes the revenue from Courtenay
Central, Invercargill, Rotorua, and Napier in New Zealand; Auburn, Belmont,
Bundaberg, Maitland, Newmarket and Waurn Ponds in Australia; the Union Square
Theatre, the Village East Cinema in New York; and the Royal George Theatre
in
Chicago.
Future
minimum rental income under all contractual operating leases is summarized
as
follows (dollars in thousands):
|
Year
Ending December 31,
|
||||
|
2007
|
$
|
6,675
|
||
|
2008
|
5,818
|
|||
|
2009
|
4,609
|
|||
|
2010
|
4,205
|
|||
|
2011
|
3,905
|
|||
|
Thereafter
|
34,846
|
|||
|
Total
future minimum rental income
|
$
|
60,058
|
||
Note
25 - Related Parties and Transactions
Sutton
Hill Transaction
In
2000,
we entered into a transaction with Sutton Hill Capital L.L.C. (“SHC”), a related
party, designed to give us (i) operating control, through an operating lease,
of
the 4 cinema “City Cinemas” theater chain in Manhattan, and (ii) the right to
enjoy any appreciation in the underlying real estate assets, though a fixed
price option to purchase these cinemas on an all or nothing basis in 2010.
Two
of the cinemas included in that chain - the Murray Hill Cinema and the Sutton
Cinema - have now been sold for redevelopment, under terms that we believe
preserve this basic structure and which will, if we exercise our purchase
option, give us the future benefit of any appreciation realized in those assets
during the time they were under our operation and control. In addition, this
last year we acquired as a part of a tax-deferred exchange pursuant to Section
1031 of the Internal Revenue Code, (i) from a third party, the fee interest
underlying the third of the four cinemas (the Cinemas 1, 2 & 3) and (ii)
from SHC its tenant’s interest in the ground lease underlying the Cinemas 1, 2
& 3. Set out below is a more detailed discussion of the City Cinemas
Transaction, and the subsequent modifications of that transaction to provide
for
the release of the Murray Hill Cinema, the Sutton Cinema and the Cinemas 1,
2
& 3 properties.
In
July
2000, we acquired from SHC the Manhattan based City Cinemas circuit in a
transaction structured as a 10 year operating lease (the “City Cinemas Operating
Lease”) with options either to extend the lease for an additional 10 year term
or, alternatively, to purchase the improvements and certain of the real estate
assets underlying that lease (the “City Cinemas Purchase Option”). We paid an
option fee of $5.0 million, which will be applied against the purchase price
if
we elect to exercise the City Cinemas Purchase Option. The aggregate exercise
price of the City Cinemas Purchase Option was originally $48.0 million, and
rent
was calculated to provide an 8.25% yield to SHC (subject to an annual modified
cost of living adjustment) on the difference between the exercise price and
the
$5.0 million option fee. Incident to that transaction, we agreed to lend to
SHC
(the “City Cinemas Standby Credit Facility”) up to $28.0 million, beginning in
July 2007, all due and payable in December 2010 (the principal balance and
accrued interest on any such loan was likewise to be applied against the option
exercise price, in the event the option was exercised). The interest rate on
the
City Cinemas Standby Credit Facility was also fixed at 8.25%, subject to the
same modified cost of living adjustment used to calculate rent under the City
Cinemas Operating Lease.
We
have
no legal obligation to exercise either the option to extend the City Cinemas
Operating Lease or the City Cinemas Purchase Option. However, our recourse
against SHC on the City Cinemas Standby Credit Facility is limited to the assets
of SHC which consist of, generally speaking, only the assets subject to the
City
Cinemas Purchase Option. In this annual report, we refer to the transaction
memorialized by the City Cinemas Operating Lease, City Cinemas Purchase Option
and City Cinemas Standby Credit Agreement as the City Cinemas Transaction.
Because the City Cinemas
Operating
Lease is an operating lease and since the City Cinemas Standby Credit Facility
was, in our view, adequately secured, no asset or liability was established
on
our balance sheet at the time of the City Cinemas Transaction other than the
option fee, which has been deferred and is being amortized over the 10 year
period of the lease.
SHC
is
indirectly owned by Messrs. James J. Cotter and Michael Forman. Mr. Cotter
is
our Chairman, Chief Executive Officer and controlling stockholder. Mr. Forman
is
a major holder of our Class A Stock. As the transaction was a related party
transaction, it was reviewed and approved by a committee of our Board of
Directors comprised entirely of independent directors.
Since
we
entered into the City Cinemas Transaction, two of the cinema properties involved
in that transaction have been sold to third parties for redevelopment: the
Murray Hill Cinema and the Sutton Cinema. These purchasers paid $10.0 million
and $18.0 million respectively for these two properties, which included the
cost
of acquiring the fee interest in these properties held by Nationwide Theatres
(an affiliate of SHC), the leasehold interest held by SHC, and our rights under
the City Cinemas Operating Lease and the City Cinemas Purchase Option. Since
we
believed that a sale of these properties at these prices was more beneficial
to
us than continuing to operate them as cinemas, and since the original City
Cinemas Transaction did not contemplate a piece-meal release of properties
or
give us the right to exercise our City Cinemas Purchase Option either (i) on
a
piece-meal basis or (ii) prior to July 2010, we worked with SHC to devise a
transaction that would allow us to dispose of our collective interests in these
properties while preserving the fundamental benefits of the transaction for
ourselves and SHC. Included among the benefits to be preserved by SHC was the
deferral of any capital gains tax with respect to the transfer of the remaining
properties until 2010 and assurances that the various properties involved in
the
City Cinemas Transaction would only be acquired by us on an “all or nothing”
basis. Included among the benefits to be preserved for us was the right to
get
the benefit of 100% of any appreciation in the properties underlying the City
Cinemas Operating Lease between the date of that lease (July 2000) and the
date
any such properties were sold, provided that we ultimately exercised our
purchase rights under the City Cinemas Purchase Option.
As
a
result of these negotiations and the sale of these two properties, our rent
under the City Cinemas Operating Lease was reduced by approximately $1.9 million
per annum, the exercise price of the City Cinemas Purchase Option was reduced
from $48.0 million to $33.0 million, and our funding obligation under the City
Cinemas Standby Line of Credit was reduced from $28.0 million to $13.0 million.
In addition, we received in consideration of the release of our interest in
the
Murray Hill Cinema a cash payment of $500,000. In consideration of the transfer
of our interest in the Sutton Cinema we received (i) a $13.0 million purchase
money promissory note (the Sutton Purchase Money Note”) secured by a first
mortgage on the Sutton Cinema property (the “Sutton Purchase Money Mortgage”),
(ii) a right to acquire up to a 25% interest in the special purpose entity
formed to redevelop the Sutton Cinema property for a prorated capital
contribution (the “Sutton Reinvestment Option”) or to receive instead an in lieu
fee of $650,000, and (iii) the right to operate the Sutton Cinema until such
time as the Sutton Purchase Money Note was paid. The Sutton Purchase Money
Note
was due and payable on October 21, 2005, and carried interest for the first
year
at 3.85%, increasing in the second year to 8.25%. On September 14, 2004, the
Sutton Purchase Money Note was prepaid in full and we exercised our Sutton
Reinvestment Option.
In
keeping with the “all or nothing” nature of our rights under the City Cinemas
Purchase Option, we agreed to use the principal proceeds of the Sutton Purchase
Money Promissory Note to fund our remaining $13.0 million obligation under
the
City Cinemas Standby Credit Facility. We have also agreed that the principal
amount of the City Cinemas Standby Credit Facility will be forgiven if we do
not
exercise our purchase rights under the City Cinemas Purchase Option.
Accordingly, if we exercise our rights under the City Cinemas Purchase Option
to
purchase the remaining City Cinemas assets, we will be acquiring the remaining
assets subject to the City Cinemas Operating Lease for an additional cash
payment of $15.0 million, (offsetting against the current $33.0 million exercise
price, the previously paid $5.0 million deposit and the $13.0 million principal
amount of the City Cinemas Standby Credit Facility) and will receive, in
essence, the benefit of 100% of the appreciation in all of the properties
initially subject to the City Cinemas Operating Lease between July 2000, and
the
date such properties were either disposed of or acquired by us pursuant to
the
City Cinemas Purchase Option. If we do not exercise our option to purchase,
then
the City Cinemas Credit Facility will be
forgiven,
and we will not get the benefit of such appreciation. Immediately following
the
sale of the Sutton Cinema, the remaining properties consisted of (i) the Village
East Cinema, which is located at the corner of 2nd
Avenue
and 11th
Street
in Manhattan, on a 27 year land lease, and (ii) the Cinemas 1, 2 & 3, which
is located on 3rd
Avenue
between E. 59th
and E.
60th
Streets
in Manhattan and which was likewise at that time on a long term ground lease.
Since
the
Murray Hill Cinema sale transaction was structured as a release of our leasehold
interest in the Murray Hill Cinema, we did not recognize any gain or loss for
either book or tax purposes, other than the $500,000 in lieu fee, which was
recognized as non-operating income. We likewise did not book any gain or loss
on
the disposition of the Sutton Cinema for book purposes. However, we did
recognize gain in the amount of approximately $13.0 million for state and
federal tax purposes, which gain was offset against net operating losses.
Notwithstanding this offset, we were still liable for alternative minimum tax
on
the transaction. That alternative minimum tax will, however, be offset against
our future tax liabilities. In the event that we decide not to exercise our
City
Cinemas Purchase Option, we would at that time recognize a $13.0 million loss
for tax purposes.
Following
the release of our leasehold interest in the Murray Hill Cinema and disposition
of the Sutton Cinema in 2003, we decreased the value of the option fee in the
City Cinemas Purchase Option agreement by $890,000. In addition, in October
2003
we recorded our loan commitment under the City Cinemas Standby Credit Facility
as a payable in our long-term debt on the Consolidated Balance Sheet.
In
September 2004, simultaneous with the drawdown by SHC of the remaining $13.0
million under the Standby Credit Facility, SHC lent us $5.0 million. This amount
was used principally to fund our purchase of the 25% membership interest in
limited liability company that was developing the Sutton Cinema site, and for
working capital purposes. The loan bears interest currently at 9.26%, payable
monthly, with principal due and payable on September 14, 2007.
On
June
1, 2005, we acquired from a third party the fee interest and the landlord’s
interest in the ground lease underlying our leasehold estate in the Cinemas
1, 2
& 3. In consideration of the fact that there was some uncertainty as to
whether the opportunity to acquire this fee interest was an asset of SHC (as
the
tenant of the ground lease estate and the owner of the improvements located
upon
the land) or an asset of our Company, a compromise was reached whereby we agreed
to grant to SHC an option to acquire - at cost - up to a 25% membership interest
in the special purpose entity that we formed to acquire the fee interest -
Sutton Hill Properties, LLC. That agreement has not yet been
documented.
On
September 19, 2005, we acquired from SHC its’ “tenant’s interest” in the ground
lease underlying our leasehold estate in the Cinemas 1, 2 & 3. The purchase
price of the “tenant’s interest” was $9.0 million, and was paid in the form of a
5-year unsecured purchase money promissory note, bearing interest at 8.25%,
interest payable monthly with principal payable on December 31, 2010 (the
“Purchase Money Promissory Note”). This interest is also held by Sutton Hill
Properties, LLC, the same special purpose entity that acquired the fee interest
in the property. Accordingly, SHC’s option to buy into Sutton Hill Properties,
LLC, is, in essence, a right to buy-back into both the fee interest acquired
from the unrelated third party and the leasehold interest acquired from SHC.
Following the purchase of the “tenant’s interest,” we decreased the value of the
option fee in the City Cinemas Purchase Option agreement by $1.3 million. We
have not yet acquired the building and improvements constituting the Cinemas
1,
2 & 3 from SHC. However, Sutton Hill Properties, LLC, has an option to
acquire such improvements exercisable at any time in the event we determine
to
redevelop the property, for $100,000.
As
a
result of the acquisition of SHC’s tenant’s interest in the ground lease, the
City Cinemas Operating Lease was amended to reduce the rent by an amount equal
to the interest payable under the Purchase Money Promissory Note, and the
exercise price on the City Cinemas Purchase Option was likewise reduced by
$9.0
million. Consequently, an exercise of our option to purchase the Village East
Cinema would require a cash payment on our part of $6.0 million.
Each
of
the above modification transactions involved was reviewed by a committee of
the
independent directors of the Board of Directors. In each case, the independent
directors of the applicable committee have found the transaction to be fair
and
in the best interests of our Company and our public stockholders.
Reflecting
the disposition of the Murray Hill Cinema and the Sutton Cinema, the acquisition
of the fee, the landlord’s interest in the ground lease and the tenant’s
interest in the ground lease underlying the Cinemas 1, 2 & 3, and the
amendments to date with respect to the City Cinemas Transaction, which has
reduced our rent expense for this property to zero, our anticipated rental
payments for 2006 under the City Cinemas Operating Lease will be approximately
$495,000. For the years ended December 31, 2006, 2005 and 2004, rent expense
to
SHC under the City Cinemas Operating Lease was $495,000, $1.0 million and $2.4
million, respectively. We have funded our entire $13.0 million obligation under
the City Cinemas Standby Credit Facility. We also have the option to purchase
in
July 2010 the remaining assets under the City Cinemas Operating Agreement (SHC’s
long-term leasehold interests in the Village East Cinema and the improvements
comprising this cinema) for an additional payment of $6.0 million. As separate
matters, we currently owe SHC $5.0 million (due September 14, 2007) with respect
to the borrowing used principally to finance the acquisition of our interest
in
the limited liability company currently developing the Sutton Cinema site and
$9.0 million on the Purchase Money Promissory Note (due December 31, 2010),
for
an aggregate liability of $14.0 million.
Reflecting
the release of the Murray Hill Cinema and the sale of our interest in the Sutton
Cinema, we expensed from the $5.0 million option fee for book purposes $890,000
related to such sales. In connection with the purchase of SHC’s interest in the
Cinemas 1, 2 & 3 property, we allocated $1.3 million of this option amount
to the purchase price of that interest. Accordingly, at the present time, we
carry only $441,000 of the original $5.0 million option fee as a net asset
on
our balance sheet.
The
option granted to SHC to buy up to a 25% interest in Sutton Hill Properties,
LLC
had been valued at $3.7 million and $1.0 million at December 31, 2006 and 2005,
respectively, and is reflected in our other liabilities on our balance sheet
(see Note 15 - Other
Liabilities).
In
June 2006, we received $3.0 million from Sutton Hill Capital as a deposit on
the
exercise of this option.
OBI
Management Agreement
Pursuant
to a Theater Management Agreement (the “Management Agreement”), our live theater
operations are managed by OBI LLC (“OBI Management”), which is wholly owned by
Ms. Margaret Cotter who is the daughter of James J. Cotter and a member of
our
Board of Directors.
The
Management Agreement generally provides that we will pay OBI Management a
combination of fixed and incentive fees which historically have equated to
approximately 19% of the net cash flow received by us from our live theaters
in
New York. Since the fixed fees are applicable only during such periods as the
New York theaters are booked, OBI Management receives no compensation with
respect to a theater at any time when it is not generating revenues for us.
This
arrangement provides an incentive to OBI Management to keep the theaters booked
with the best available shows, and mitigates the negative cash flow that would
result from having an empty theater. In addition, OBI Management manages our
Royal George live theater complex in Chicago on a fee basis based on theater
cash flow. In 2006, OBI Management earned $470,000 (including $43,000 for
managing the Royal George) which was 23.6% of net live theater cash flows for
the year. In 2005, OBI Management earned $533,000 (including $74,000 for
managing the Royal George) which was 20.7% of net live theater cash flows for
the year. In 2004, OBI Management earned $419,000 (including $35,000 for
managing the Royal George) which was 17.2% of net live theater cash flows for
the year. In each year, we reimbursed travel related expenses for OBI Management
personnel with respect to travel between New York City and Chicago in connection
with the management of the Royal George complex.
OBI
Management conducts its operations from our office facilities on a rent-free
basis, and we share the cost of one administrative employee of OBI
Management.
Other
than these expenses and travel-related expenses for OBI Management personnel
to travel to Chicago as referred to above, OBI Management is responsible for
all
of its costs and expenses related to the performance of its management
functions. The Management Agreement renews automatically each year unless either
party gives at least six months’ prior notice of its determination to allow the
Management Agreement to expire. In addition, we may terminate the Management
Agreement at
any
time for cause.
Live
Theater Play Investment
From
time
to time, our officers and directors may invest in plays that lease our live
theaters. During 2004, an affiliate of Mr. James J. Cotter and Michael Forman
have a 25% investment in the play, I
Love You, You’re Perfect, Now Change,
playing
in one of our auditoriums at our Royal George Theatre. We similarly had a 25%
investment in the play. The play has earned for us $27,000, $25,000 and $35,000
during the years ended December 31, 2006, 2005 and 2004, respectively. This
investment received board approval from our Conflicts Committee on August 12,
2002.
The
play
STOMP has been playing in our Orpheum Theatre since prior to the time we
acquired the theater in 2001. Messrs. James J. Cotter and Michael Forman own
an
approximately 5% interest in that play, an interest that they have held since
prior to our acquisition of the theater.
Note
26 - Subsequent Events
Trust
Preferred
On
February 5, 2007 we issued $50.0 million in 20-year fully subordinated notes,
interest fixed for five years at 9.22%, to a trust which we control, and which
in turn issued $50.0 million in trust preferred securities in a private
placement. There are no principal payments until maturity in 2027 when the
notes
are paid in full. The trust is essentially a pass through, and the transaction
is accounted for on our books as the issuance of fully subordinated notes.
The
placement generated $48.4 million in net proceeds, which were used principally
to retire all of our bank indebtedness in New Zealand $34.4 million (NZ$50.0
million) and to retire a portion of our bank indebtedness in Australia $5.8
million (AUS$7.4 million).
Tower
Lease
At
December 31, 2006, we were under
contract to purchase the underlying lease of our Tower Cinema in Sacramento,
California. The agreement called for a purchase price of $493,000 to be paid
in
two installments. The first installment of $243,000 was paid on February 8,
2007
and the second installment of $250,000 is due on July 1, 2007.
Lake
Taupo
On
February 14, 2007, we acquired through Landplan Property Partners commercial
real estate of 1.0 acre in New Zealand. The acquisition of this property
constitutes an investment of approximately $4.9 million (NZ$7.1
million).
Charlestown
Lease Agreement
On
February 23, 2007, we entered into an agreement to lease a site for an initial
term of 15 years in which we intend to fit-out an 8-screen cinema in a regional
shopping center located in a fast growing residential area in Australia. It
is
anticipated that this cinema will open in the first quarter of
2010.
|
Description
|
Balance
at beginning of year
|
Additions
charged to costs and expenses
|
Deductions
|
Balance
at end of year
|
|||||||||
|
Allowance
for doubtful accounts
|
|||||||||||||
|
Year-ended
December 31, 2006 - Allowance for doubtful accounts
|
$
|
416
|
$
|
247
|
$
|
190
|
$
|
473
|
|||||
|
Year-ended
December 31, 2005 - Allowance for doubtful accounts
|
$
|
319
|
$
|
183
|
$
|
86
|
$
|
416
|
|||||
|
Year-ended
December 31, 2004 - Allowance for doubtful accounts
|
$
|
281
|
$
|
38
|
$
|
--
|
$
|
319
|
|||||
|
Tax
valuation allowance
|
|||||||||||||
|
Year-ended
December 31, 2006 - Tax valuation allowance
|
$
|
58,584
|
$
|
--
|
$
|
2,366
|
$
|
56,218
|
|||||
|
Year-ended
December 31, 2005 - Tax valuation allowance
|
$
|
59,180
|
$
|
--
|
$
|
596
|
$
|
58,584
|
|||||
|
Year-ended
December 31, 2004 - Tax valuation allowance
|
$
|
57,428
|
$
|
1,752
|
$
|
--
|
$
|
59,180
|
|||||
Regarding
the allowance for doubtful accounts, certain prior year amounts were
reclassified to conform to the current year presentation.
Item
9 - Change in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item
9A — Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and under the Securities Exchange
Act
of 1934 Exchange Act) as of December 31, 2006. Based on this evaluation, our
chief executive officer and chief financial officer concluded that, as of
December 31, 2006, our disclosure controls and procedures were (1) designed
to
ensure that material information relating to us, including our consolidated
subsidiaries, is made known to our chief executive officer and chief financial
officer by others within those entities, particularly during the period in
which
this report was being prepared, and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act are recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on that evaluation under the framework in Internal Control—Integrated Framework,
our management concluded that our internal control over financial reporting
was
not effective as of December 31, 2006 as described below. Our management’s
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2006 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
Our
controls related to the cut-off of cinema operating revenue and cinema operating
expense failed to prevent or detect errors in our accounts, which were
identified by Deloitte & Touche, LLP, our independent registered public
accounting firm. As a result, we identified the following material weakness
at
December 31, 2006:
• The
Company did not design effective controls relating to the timely cut-off
of
cinema operating revenue and cinema operating expense general ledger accounts
as
of the reporting date of the consolidated financial statements.
We
concluded that this deficiency resulted in an actual material misstatement
to
the cinema operating revenue, cinema operating expense, cash, receivables,
prepaid rent, accounts payable and accrued liabilities, and film rent payable
accounts in the annual and interim consolidated financial statements that
was
not prevented or detected by our internal control over financial reporting.
Such
actual material misstatement has been corrected in the accompanying consolidated
financial statements.
Changes
in Internal Control Over Financial Reporting
Except
as
noted below, no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the quarter ended December 31, 2006 that has materially affected, or is
reasonable likely to materially affect, our internal control over financial
reporting.
In
the
fourth quarter of fiscal year 2006 we determined that a control weakness
existed
as of December 31, 2005 and 2004 relating to the elimination of intercompany
rental charges between Australian subsidiaries. As a result of identifying
this
control weakness, we materially changed our system of internal controls over
financial reporting. This change of internal controls involves a more complete
verification process surrounding our intercompany elimination entries that
are
required for subsidiary and corporate consolidations of the financial
statements. This process has been supplemented by an additional management
review of the consolidated financials prior to their finalization. We believe
that these enhanced procedures provide additional internal controls over
financial reporting and improve our ability to identify potential accounting
issues prior to and during the comprehensive review of our consolidated
financial statements. Management believes these changes remediate the control
weakness that led to the prior year adjustments discussed above. Such
remediation was completed and tested by us and such enhanced internal controls
over financial reporting were subject to our management’s assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2006.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Reading International, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Reading International,
Inc. and subsidiaries (the "Company") did not maintain effective internal
control over financial reporting as of December 31, 2006, because of the
effect
of the material weakness identified in management's assessment based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management
is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal
control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included
in
management's assessment: Cinema revenues and cinema operating expenses were
cut-off on December 27, 2006 in Australia and New Zealand, and on December
28,
2006 in the United States for the year-end December 31, 2006 to coincide
with
internal management reporting dates. This error resulted from a deficiency
in
the design of the controls that should require the cinema operating revenue
and
cinema operating expense general ledger accounts be properly closed as of
the
reporting date of the consolidated financial statements. This deficiency
resulted in an actual material misstatement to the cinema operating revenue,
cinema operating expense, cash, receivables, prepaid rent, accounts payable
and
accrued liabilities, and film rent payable accounts in the annual and interim
consolidated financial statements that was not prevented or detected. This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the consolidated financial statements
and
financial statement schedule as of and for the year ended December 31, 2006
of
the Company and this report does not affect our report on such financial
statements and financial statement schedule.
In
our
opinion, management's assessment that the Company did not maintain effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, because of the effect of
the
material weakness described above on the achievement of the objectives of
the
control criteria, the Company has not maintained effective internal control
over
financial reporting as of December 31, 2006, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2006,
of
the Company and our report dated March 29, 2007 expressed an unqualified
opinion
on those financial statements and financial statement schedule.
DELOITTE
& TOUCHE LLP
Los
Angeles, California
March
29,
2007
Items
10,
11, 12, 13 and 14
Information
required by Part II (Items 10, 11, 12, 13 and 14) of this From 10-K is herby
incorporated by reference from the Reading International, Inc.’s definitive
Proxy Statement for its 2006 Annual Meeting of Stockholders, which will be
filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year.
Item
15 - Exhibits, Financial Statement Schedule, and Reports on Form
8-K
(a) The
following documents are filed as a part of this report:
1. Financial
Statements
The
following financial statements are filed as part of this report under Item
8
“Financial Statements and Supplementary Data.”
|
Description
|
Pg.
No.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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2. Financial
Statement Schedule for the years ended December 31, 2006, 2005 and
2004
Schedule
II - Valuation and Qualifying Accounts
Financial
Statement Schedules: Consolidated financial statements of 205-209 EAST
57th
STREET
ASSOCIATES, LLC.
3. Exhibits
(Listed by numbers corresponding to Item 601 of Regulation
S-K)
Following
are consolidated financial statements and notes of 205-209 EAST 57th
STREET
ASSOCIATES, LLC for the periods indicated. We are required to include in our
Report on Form 10-K audited financial statements for the year ended December
31,
2006 and unaudited financial statements for the years ending December 31, 2005
and 2004.
205-209
EAST 57th
STREET ASSOCIATES, LLC
BALANCE
SHEETS
DECEMBER
31, 2006 and 2005
(U.S.
dollars in thousands)
|
December
31,
|
|||||||
|
2006
Audited
|
2005
(Unaudited)
|
||||||
|
ASSETS
|
|||||||
|
REAL
ESTATE:
|
|||||||
|
Land
|
$
|
5,230
|
$
|
25,508
|
|||
|
Construction
and development costs
|
12,950
|
47,167
|
|||||
|
Negotiable
certificates - real estate tax abatements
|
308
|
863
|
|||||
|
TOTAL
REAL ESTATE
|
18,488
|
73,538
|
|||||
|
OTHER
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
4,449
|
163
|
|||||
|
Security
deposits
|
7
|
66
|
|||||
|
Intangible
assets, net
|
--
|
--
|
|||||
|
TOTAL
OTHER ASSETS
|
4,456
|
229
|
|||||
|
TOTAL
ASSETS
|
$
|
22,944
|
$
|
73,767
|
|||
|
LIABILITIES
AND MEMBERS' EQUITY
|
|||||||
|
LIABILITIES:
|
|||||||
|
Accounts
payable and accrued liabilities
|
$
|
340
|
$
|
3,048
|
|||
|
Income
taxes payable
|
860
|
--
|
|||||
|
Retainage
payable
|
751
|
1,704
|
|||||
|
Construction
loan payable
|
--
|
57,932
|
|||||
|
Due
to affiliate
|
236
|
--
|
|||||
|
TOTAL
LIABILITIES
|
2,187
|
62,684
|
|||||
|
COMMITMENTS
AND CONTINGENCIES (Note 12)
|
--
|
--
|
|||||
|
MEMBERS’
EQUITY
|
20,757
|
11,083
|
|||||
|
TOTAL
LIABILITIES AND MEMBERS’ EQUITY
|
$
|
22,944
|
$
|
73,767
|
|||
The
accompanying notes are an integral part of these financial
statements.
205-209
EAST 57th
STREET ASSOCIATES, LLC
STATEMENTS
OF OPERATIONS
FOR
THE THREE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(U.S.
dollars in thousands)
|
Years
Ended December 31,
|
||||||||||
|
2006
Audited
|
2005
(Unaudited)
|
2004
(Unaudited)
|
||||||||
|
REVENUE:
|
||||||||||
|
Sales
- condominium units
|
$
|
117,329
|
$
|
--
|
$
|
--
|
||||
|
Contract
termination income
|
239
|
--
|
--
|
|||||||
|
Dividends
and interest
|
140
|
--
|
--
|
|||||||
|
TOTAL
REVENUE
|
117,708
|
--
|
--
|
|||||||
|
EXPENSES:
|
||||||||||
|
Costs
of sales of condominium units
|
75,382
|
--
|
--
|
|||||||
|
Selling
costs
|
6,523
|
--
|
--
|
|||||||
|
Marketing
and promotion
|
740
|
500
|
225
|
|||||||
|
Sponsor
common charges
|
421
|
--
|
--
|
|||||||
|
Utilities
|
90
|
--
|
--
|
|||||||
|
Contributions
|
6
|
--
|
--
|
|||||||
|
Miscellaneous
|
5
|
--
|
--
|
|||||||
|
New
York City unincorporated business tax
|
1,435
|
--
|
--
|
|||||||
|
TOTAL
EXPENSES
|
84,602
|
500
|
225
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
33,106
|
$
|
(500
|
)
|
$
|
(225
|
)
|
||
The
accompanying notes are an integral part of these financial
statements.
205-209
EAST 57th
STREET ASSOCIATES, LLC
STATEMENTS
OF CHANGES IN MEMBERS’ EQUITY
FOR
THE THREE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(U.S.
dollars in thousands)
|
CLARETT
CAPITAL, LLC
|
PGA
CLARETT 1, LLC
|
PGA
CLARETT 2, LLC
|
PGA
CLARETT 3, LLC
|
PGA
CLARETT 4, LP
|
CLARETT
PARTNERS, LLC
|
CC
SUTTON MANAGER, LLC
|
CITADEL
CINEMAS, INC.
|
TOTAL
|
||||||||||||||||||||
|
MEMBERS’
EQUITY - January 1, 2004 (Unaudited)
|
$
|
35
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
35
|
||||||||||
|
Member
contributions
|
52
|
1,933
|
1,340
|
746
|
--
|
67
|
2,611
|
2,233
|
8,982
|
|||||||||||||||||||
|
Member
distributions
|
(87
|
)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(87
|
)
|
|||||||||||||||||
|
Assignment
of interest
|
--
|
(557
|
)
|
--
|
(603
|
)
|
1,160
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Net
loss
|
--
|
(35
|
)
|
(34
|
)
|
(4
|
)
|
(29
|
)
|
(2
|
)
|
(65
|
)
|
(56
|
)
|
(225
|
)
|
|||||||||||
|
MEMBERS’
EQUITY - December 31, 2004 (Unaudited)
|
--
|
1,341
|
1,306
|
139
|
1,131
|
65
|
2,546
|
2,177
|
8,705
|
|||||||||||||||||||
|
Member
contributions
|
--
|
323
|
432
|
387
|
153
|
22
|
842
|
719
|
2,878
|
|||||||||||||||||||
|
Assignment
of interest
|
--
|
115
|
--
|
(325
|
)
|
210
|
--
|
--
|
--
|
--
|
||||||||||||||||||
|
Net
loss
|
--
|
(72
|
)
|
(75
|
)
|
(23
|
)
|
(55
|
)
|
(4
|
)
|
(146
|
)
|
(125
|
)
|
(500
|
)
|
|||||||||||
|
MEMBERS’
EQUITY - December 31, 2005 (Unaudited)
|
--
|
1,707
|
1,663
|
178
|
1,439
|
83
|
3,242
|
2,771
|
11,083
|
|||||||||||||||||||
|
Member
distributions
|
--
|
(2,813
|
)
|
(2,739
|
)
|
(293
|
)
|
(2,372
|
)
|
(2,503
|
)
|
(6,854
|
)
|
(5,858
|
)
|
(23,432
|
)
|
|||||||||||
|
Net
income
|
--
|
1,355
|
1,319
|
141
|
1,143
|
11,188
|
9,684
|
8,276
|
33,106
|
|||||||||||||||||||
|
At
December 31, 2006
|
$
|
--
|
$
|
249
|
$
|
243
|
$
|
26
|
$
|
210
|
$
|
8,768
|
$
|
6,072
|
$
|
5,189
|
$
|
20,757
|
||||||||||
The
accompanying notes are an integral part of these financial
statements.
205-209
EAST 57th
STREET ASSOCIATES, LLC
STATEMENTS
OF CASH FLOWS
FOR
THE THREE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(U.S.
dollars in thousands)
|
Year
Ended December 31,
|
||||||||||
|
2006
(Audited)
|
2005
(Unaudited)
|
2004
(Unaudited)
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||
|
Net
income (loss)
|
$
|
33,106
|
$
|
(500
|
)
|
$
|
(225
|
)
|
||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Costs
of sales of condominium units
|
75,382
|
--
|
--
|
|||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
Acquisition
of land
|
--
|
(2,160
|
)
|
(600
|
)
|
|||||
|
Additions
to land, construction and development costs
|
(19,689
|
)
|
(38,446
|
)
|
(8,376
|
)
|
||||
|
Inclusionary
air rights
|
--
|
(2,500
|
)
|
(1,213
|
)
|
|||||
|
Deposit
for negotiable certificates
|
--
|
--
|
61
|
|||||||
|
Acquisition
of negotiable certificates
|
(643
|
)
|
(863
|
)
|
--
|
|||||
|
Decrease
(increase) in security deposits
|
58
|
(36
|
)
|
(30
|
)
|
|||||
|
(Decrease)
increase in accounts payable and accrued expenses
|
(2,734
|
)
|
1,932
|
922
|
||||||
|
Increase
in income taxes payable
|
860
|
--
|
--
|
|||||||
|
(Decrease)
increase in retainage payable
|
(953
|
)
|
1,675
|
29
|
||||||
|
Increase
in due to affiliates
|
263
|
--
|
--
|
|||||||
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
85,650
|
(40,898
|
)
|
(9,432
|
)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||
|
Payments
of loans payable
|
--
|
--
|
(6,212
|
)
|
||||||
|
Proceeds
from construction loan
|
19,224
|
38,130
|
19,802
|
|||||||
|
Repayment
of construction loan
|
(77,156
|
)
|
--
|
--
|
||||||
|
Payment
of mortgage loan payable
|
--
|
--
|
(13,000
|
)
|
||||||
|
(Payments)
proceeds from loan payable Clarett Capital
|
(1
|
)
|
1
|
|||||||
|
Member
distributions
|
(23,432
|
)
|
--
|
(86
|
)
|
|||||
|
Member
contributions
|
--
|
2,877
|
8,982
|
|||||||
|
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
(81,364
|
)
|
41,006
|
9,487
|
||||||
|
NET
INCRESE IN CASH AND CASH EQUIVALENTS
|
4,286
|
108
|
55
|
|||||||
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
163
|
55
|
--
|
|||||||
|
CASH
AND CASH EQUIVALENTS - END OF YEAR
|
$
|
4,449
|
$
|
163
|
$
|
55
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
which was capitalized
|
$
|
4,244
|
$
|
1,163
|
$
|
1,258
|
||||
|
Income
Taxes
|
$
|
575
|
$
|
--
|
$
|
--
|
||||
The
accompanying notes are an integral part of these financial
statements.
205-209
EAST 57TH
STREET ASSOCIATES, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
1 - ORGANIZATION
AND BUSINESS PURPOSE
205-209
East 57th
Street
Associates, LLC (“the Company”) was formed as a limited liability company under
the laws of the State of Delaware. The Company was formed to acquire, finance,
develop, own, operate, lease and sell property located at 205-209 East
57th
Street,
New York, New York. During 2006 the Company substantially completed construction
of the property, known as “Place 57”, a 143,000 square foot, thirty-six story
building comprised of 68 residential condominium units and one commercial
condominium unit.
From
September 3, 2003 (the “inception date”) through September 14, 2004 the Company
was a single member limited liability company with Clarett Capital, LLC
(“Clarett Capital”) as the sole member. Effective September 14, 2004, the
operating agreement (“the Agreement”) was amended and restated to provide for
the admission of the following new members: Citadel Cinemas, Inc. (“Citadel”)
25%, CC Sutton Manager, LLC (“CC Sutton”) 29.25%, PGA Clarett 1, LLC (“PGA 1”)
8.352%, PGA Clarett 2, LLC (“PGA 2”) 15%, PGA Clarett 3, LLC (“PGA 3”) 21.648%
and Clarett Partners, LLC (“Clarett Partners”) 0.75%.
Effective
December 30, 2004 PGA Clarett 1, LLC assigned 28.820% of its percentage interest
and PGA 3, assigned 80.791% of its percentage interest to a new member, PGA
Clarett 4, LP (“PGA 4”).
Net
income or loss and distributions are allocated to the members in accordance
with
the terms of the Company’s operating agreement. The members of a limited
liability company are generally not individually liable for the obligations
of
the limited liability company.
NOTE
2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Income
Taxes
|
The
Company was formed as a limited liability company and has elected to be taxed
as
a partnership. Components of the Company’s net income or loss are taxable to the
members. Accordingly, no provision for federal or state income taxes is provided
for in the accompanying financial statements.
The
construction project is located in the City of New York where an entity level
income tax is imposed on unincorporated businesses, which, for the year ended
December 31, 2006 amounted to approximately $1,435,000.
|
(b)
|
Use
of Estimates in Financial Statement
Presentation
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies, if any, at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates include the allocation of costs to units sold,
determination of remaining costs to complete, and estimated sales prices
of
unsold units.
|
(c)
|
Revenue
Recognition
|
Revenue
has been recognized upon the closing of each condominium
unit.
|
(d)
|
Marketing
and Promotion
|
Marketing
and promotion costs are charged to operations when incurred. The Company
expensed marketing and promotion costs of $740,492, $500,000 and $224,545
for
the years ended December 31, 2006, 2005 and 2004, respectively.
|
(e)
|
Capitalized
Costs
|
The
Company capitalizes all costs associated with the development project.
Capitalized costs include, but are not limited to, construction and development
costs, construction period interest, real estate taxes and architect,
development and professional fees.
|
(f)
|
Costs
of Sales of Condominium Units
|
In
connection with the sale of condominium units during 2006, land, capitalized
construction and development costs and negotiable certificates for real
estate
tax abatements have been expensed based on the total costs incurred and
the
estimated costs to complete, multiplied by the relative sales value of
units
sold in 2006.
|
(g)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments with an original maturity
of
three months or less to be cash equivalents. Cash equivalents consist of
an
interest-bearing money fund account.
NOTE
3 - LAND
At
December 31, 2006 and 2005, land was comprised of the following (dollars in
thousands):
|
Year
Ended December 31,
|
|||||||
|
|
2006
(Audited)
|
2005
(Unaudited)
|
|||||
|
Direct
purchase cost
|
$
|
15,339
|
$
|
18,655
|
|||
|
Air
rights
|
6,910
|
5,753
|
|||||
|
Mortgage
recording tax
|
1,953
|
--
|
|||||
|
Brokerage
fees
|
500
|
500
|
|||||
|
Demolition
costs
|
600
|
600
|
|||||
|
Title
insurance
|
256
|
--
|
|||||
|
TOTAL
LAND
|
25,558
|
25,508
|
|||||
|
less
: Costs allocated to condominium units sold
|
20,328
|
--
|
|||||
|
Net
Land Value
|
$
|
5,230
|
$
|
25,508
|
|||
NOTE
4 - CONSTRUCTION
AND DEVELOPMENT COSTS
Construction
and development costs include direct and indirect construction costs. Direct
construction costs (“Hard costs”) include those costs directly related to the
construction of the development project. Indirect costs (“Soft costs”) include
costs that have been capitalized, such as construction period interest and
financing costs, real estate and recording taxes, insurance, development fees
and architect fees.
At
December 31, 2006 and 2005, construction and development costs are comprised
of
the following (dollars in thousands):
|
Year
Ended December 31,
|
|||||||
|
|
2006
(Audited)
|
2005
(Unaudited)
|
|||||
|
Hard
Costs
|
$
|
48,355
|
$
|
34,597
|
|||
|
Soft
Costs
|
18,451
|
12,570
|
|||||
|
TOTAL
CONSTRUCTION AND DEVELOPMENT COSTS
|
66,806
|
47,167
|
|||||
|
less
: Costs allocated to condominium units sold
|
53,856
|
--
|
|||||
|
Net
Construction and Development Costs
|
$
|
12,950
|
$
|
47,167
|
|||
NOTE
5 - NEGOTIABLE
CERTIFICATES
In
December 2003, the Company entered into an agreement to purchase 61 negotiable
certificates under Section 421a of the New York State Real Property tax law
in
order to obtain real estate tax abatements. Section 421a provides that property
constructed north of 14th
Street
in Manhattan, on vacant or underutilized land, is eligible for partial real
estate tax abatements. Abatements are for ten years and provide for limited
real
estate tax reductions. The agreement contained an option to purchase an
additional seven certificates, which the Company exercised in March 2004. The
final purchase price was $863,083, which is equal to the sum of $793,083 for
the
original 61 certificates plus $10,000 for each of the seven additional
certificates.
In
February 2006, the Company purchased an additional 17 negotiable 421a
certificates for $340,000.
In
May
2006, the Company paid a Preliminary Certificate of Eligibility Fee to The
City
of New York for $302,681, which is required to be paid in conjunction with
these
negotiable certificates.
At
December 31, 2006 and 2005 negotiable certificates is comprised of the following
(dollars in thousands):
|
Year
Ended December 31,
|
|||||||
|
|
2006
(Audited)
|
2005
(Unaudited)
|
|||||
|
421a
certificates
|
$
|
1,203
|
$
|
863
|
|||
|
Preliminary
Certificate of Eligibility Fee
|
303
|
--
|
|||||
|
TOTAL
NEGOTIABLE CERTIFICATES
|
1,506
|
863
|
|||||
|
less
: Costs allocated to condominium units sold
|
1,198
|
--
|
|||||
|
Net
Negotiable Certificates
|
$
|
308
|
$
|
863
|
|||
NOTE
6 - AIR
RIGHTS
In
2003,
the Company purchased 25,550 square feet of inclusionary air rights in order
to
generate an inclusionary building bonus (air rights) under The Inclusionary
Housing Program, as defined in the Zoning Resolution of the City of New York.
The purchase price was $2,499,750, which has been capitalized and is included
in
land.
On
July
21, 2004, the Company entered into an exchange agreement with Joseph E. Marx
Company, Inc. (“Marx”) to exchange like-kind property. The Company exchanged
previously acquired land located at 957
Third
Avenue, New York, New York, plus cash of $1,300,000, for excess floor area
rights (“air rights”) having an agreed value of $4,410,000. The value of the air
rights has been capitalized and is included in land.
During
the year ended December 31, 2006, 127,391 square feet out of a total of 128,560
square feet of Inclusionary air rights were utilized to build the condominium
development project. The Company estimates that the remaining 1,169 square
feet
of development air rights will not be able to be sold separately and,
accordingly, are included in costs of sales of condominium units.
NOTE
7 - CONSTRUCTION
LOAN PAYABLE
On
September 14, 2004, the Company obtained nonrecourse financing in the form
of a
$80,602,000 construction loan facility (the “Construction Project Loan”) from
Corus Bank N.A. (“Construction Lender”) for the development of the property
located at 205-209 East 57th
Street
and 957 Third Avenue, New York, New York.
The
Construction Project Loan was comprised of three separate facilities: a
$14,300,000 acquisition loan to retire the $13,000,000 existing mortgage with
Citadel and to finance the payment of $1,300,000 made in connection with the
acquisition of the air rights from Marx (Note 6), a $44,133,805 building loan
facility and a $22,168,195 soft cost loan facility.
Each
loan
component was evidenced by a separate note (the “Notes”) and was secured by the
land, including improvements and equipment thereon, a security agreement and
the
assignment of leases and rents. The loan was guaranteed by Clarett Capital.
The
building loan facility was required to be used to pay for certain hard
construction costs incurred in connection with the construction, conversion
and
completion of the condominium project. The soft cost facility was required
to be
used for soft costs incurred in connection with the project, such as interest,
real estate taxes and certain other fees.
The
$14,300,000 acquisition loan was separated into two tranches each of which
accrued interest at different rates. Tranche A, in the amount of $5,598,000,
bore interest per annum at the greater of 5% or a defined three-month LIBOR
rate
plus 3.5%. Tranche B, in the amount of $8,702,000, bore interest at the rate
of
12% per annum and could not be repaid until the entire balance of the building
loan facility, the Tranche A and Tranche 1 (see below) loans had been paid.
The
building loan facility bore interest per annum at the greater of 5% or a defined
three-month LIBOR rate plus 3.5%.
The
soft
cost loan facility was comprised of two tranches, each of which accrued at
different interest rates. Tranche 1, in the amount of $20,092,195, bore interest
per annum at the greater of 5% or a defined three-month LIBOR rate plus 3.5%.
Tranche 2, in the amount of $2,076,000, bore interest at the rate of 12% per
annum and could not be repaid until the entire balance of the building loan
facility, the Tranche A and Tranche 1 loans had been paid.
Construction
loan interest incurred by the Company for the years ended December 31, 2006,
2005 and 2004 amounted to $3,846,469, $2,776,884 and $478,773, respectively.
Construction loan interest was capitalized as construction and development
costs
throughout the construction period.
The
Construction Project Loan agreement provided for the outstanding principal
balance of the loan to be paid to the Lender upon the closing of sale of each
residential condominium unit in an amount equal to the greater of 100% of the
Net Sales Proceeds from each unit, as defined, or 92% of the contract sales
price for the unit.
In
the
event of the sale of any retail units, the Construction Project Loan principal
to be paid was to be the greater of 100% of the Net Sales Proceeds, as defined,
or $1,083 per square foot of the ground floor of the retail unit sold.
As
of
December 31, 2005 and 2004, the combined outstanding principal balance of all
three components of the Construction Project Loan amounted to $57,931,969 and
$19,802,244, respectively. During the year ended December 31, 2006, the Company
fully repaid the entire outstanding principal balance of the Construction Loan,
which amounted to $77,156,151 using proceeds from the sale of the condominium
units.
The
Company was obligated to pay an exit fee to the Construction Lender in the
amount of $403,010 (the “Exit Fee”). Portions of this fee were required to be
paid upon the closing of the sale of each condominium unit at a rate of $15,000
per unit until the Exit Fee was paid in full. This obligation has been paid
in
full during 2006.
NOTE
8 - RETAINAGE
PAYABLE
The
construction agreement requires retainage of not less than ten percent of the
costs incurred to the contractor until fifty percent of the work is completed.
Thereafter, Bovis Lend Lease (“Construction manager”) has the discretion to
determine the retainage percentage on a subcontractor-by-subcontractor basis.
For the years ended December 31, 2006, 2005 and 2004 the retainage payable
amounted to $751,369, $1,704,298 and $28,525, respectively.
NOTE
9 - CONDOMINIUM
SALES
In
2004,
the Company initiated a condominium offering plan, which obtained the necessary
approvals in 2005 and 2006. The condominium consists of 68 residential units
and
one commercial unit. 67 residential units were offered for sale and one
residential unit will be retained by the Company and leased to the condominium
association.
The
Company entered into contracts to sell 65 of the saleable residential
condominium units. 59 of the units closed as of December 31, 2006, and for
the
remaining units the selling prices are estimated to be approximately
$25,152,000. At December 31, 2006, down payments of $1,967,700, plus interest
of
$66,065, are being held in third-party attorney escrow accounts in connection
with 6 units under contracts of sale. All interest earned on the escrow deposits
belong to the buyer. The commercial unit, which has a projected selling price
of
approximately $4,500,000, is still available for sale.
NOTE
10 - SELLING
COSTS
At
December 31, 2006, selling costs are comprised of the following (dollars in
thousands):
|
Broker
fees
|
$
|
3,720
|
||
|
Commissions
|
2,783
|
|||
|
Title
recording
|
20
|
|||
|
$
|
6,523
|
NOTE
11 - RELATED
PARTY TRANSACTIONS
| (a) |
Due
to Affiliate
|
At
December 31, 2006, the Company owes $236,014 to The Clarett Group (“Clarett
Group”) for marketing commissions and other reimbursable expenses paid on behalf
of the Company. Members of the Company are also members in Clarett Group.
| (b) |
Development
Fees
|
In
accordance with a development services agreement, the Company is to pay
development fees and expense reimbursements to CC Developer, LLC (“CC
Developer”). The members of CC Developer are also members of CC Sutton and
Clarett Partners. The development services agreement provides for a total
project development fee of $2,685,960, of which 80% is required to be paid
in
equal monthly installments
of
$149,220 during the development period and the remaining 20% to be paid within
30 days of the later of the closing of the sale of the last residential or
commercial unit.
This
development fee has been fully paid, and for the year ended December 31, 2006,
charges from this affiliate for development fees and expense reimbursements
aggregated $381,773.
|
(c)
|
Commissions
|
Clarett
Group had been designated as the exclusive sales agent for selling residential
units pursuant to a Sales Agreement. The Sales Agreement provides for a
commission equal to four percent of the gross sales price of each unit sold
and
a sales commission of two percent when sales involve a third-party broker.
As of
December 31, 2006, the Company paid $2,783,140 of commissions to Clarett
Group.
NOTE
12 - COMMITMENTS
AND CONTINGENCIES
|
(a)
|
Operating
Lease
|
The
Company leased a sales office in New York, New York under a two-year operating
lease, which expired in July 2006. The lease provided for monthly rental
payments of $15,000 plus escalation provisions. In connection with obtaining
the
lease, the Company paid a $30,000 security deposit to the landlord in 2004.
$15,000 of the security deposit was returned to the Company and the remaining
$15,000 was used to pay the final month’s rent.
Rent
expenditures for the sales office for the years ended December 31, 2006,
2005
and 2004 amounted to $120,000, $180,000 and $45,723, respectively.
|
(b)
|
Sponsor
Common Charges
|
The
Company is the sponsor for the condominium and is obligated to pay all
common
charges, special assessments and real estate taxes allocated to any unsold
units
or commercial units in accordance with the provisions of the By-Laws. During
the
year ended December 31, 2006, the Company incurred $420,949 of sponsor
common
charges, which is reflected in the accompanying statement of
operations.
|
(c)
|
Estimated
Costs to Complete
|
At
December 31, 2006, the Company estimates the cost to complete the development
project to be approximately $1,012,000.
NOTE
13 - CONSTRUCTION
MANAGER INCENTIVE
The
construction management agreement provides for an incentive fee to be paid
to
the construction manager in the event that the total cost of construction,
as
defined, is less than the guaranteed maximum price of $49,217,811. Total project
costs are expected to exceed the original projected cost of construction.
Accordingly, no construction manager fee will be paid.
NOTE
14 - CONCENTRATIONS
OF RISK
At
December 31, 2006, the Company’s deposits with banks exceeded federal deposit
insurance coverage of $100,000.
The
Company and the constructed property are located in New York City and are
subject to local economic conditions.
The
Company contracted with a single company, Bovis Lend Lease, as the construction
manager for the project.
Report
of Independent Auditors
To
the
Members of
205-209
East 57th
Street
Associates, LLC:
In
our
opinion, the accompanying balance sheet and the related statements of
operations, changes in members' equity, and cash flows present fairly, in all
material respects, the financial position of 205-209 East 57th
Street
Associates, LLC
(the
"Company") at December 31, 2006,
and the
results of its
operations
and its
cash
flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of
America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States
of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PRICEWATERHOUSECOOOPERS
LLP
New
York,
New York
February
9, 2007
Exhibits
(Listed by numbers corresponding to Item 601 of Regulation
S-K)
|
3.1
|
Certificate
of Amendment of Restatement Articles of Incorporation of Citadel
Holding
Corporation (filed as Exhibit 3.1 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein
by
reference).
|
|
3.2
|
Restated
By-laws of Citadel Holding Corporation, a Nevada corporation (filed
as
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference).
|
|
3.3
|
Certificate
of Amendment of Articles of Incorporation of Citadel Holding Corporation
(filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2001).
|
|
3.4
|
Articles
of Merger of Craig Merger Sub, Inc. with and into Craig Corporation
(filed
as Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2001).
|
|
3.5
|
Articles
of Merger of Reading Merger Sub, Inc. with and into Reading Entertainment,
Inc. (filed as Exhibit 3.5 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2001).
|
|
3.6
|
Restated
By-laws of Reading International, Inc., a Nevada corporation (filed
as
Exhibit 3.6 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004, and incorporated herein by
reference).
|
|
4.1
|
1999
Stock Option Plan of Reading International, Inc. as amended on December
31, 2001 (filed as Exhibit 4.1 to the Company’s Registration Statement on
Form S-8 filed on January 21, 2004, and incorporated herein by
reference).
|
|
4.2
|
Form
of Preferred Security Certificate evidencing the preferred securities
of
Reading International Trust I (filed as Exhibit 4.1 to the Company’s
report on Form 8-K dated February 5, 2007, and incorporated herein
by
reference).
|
|
4.3
|
Form
of Common Security Certificate evidencing common securities of Reading
International Trust I (filed as Exhibit 4.2 to the Company’s report
on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
4.4
|
Form
of Reading International, Inc. Floating Rate Junior Subordinated
Debt
Security due 2027 (filed as Exhibit 4.3 to the Company’s report on Form
8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
10.1
|
Tax
Disaffiliation Agreement, dated as of August 4, 1994, by and between
Citadel Holding Corporation and Fidelity Federal Bank (filed as Exhibit
10.27 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by
reference).
|
|
10.2
|
Standard
Office lease, dated as of July 15, 1994, by and between Citadel Realty,
Inc. and Fidelity Federal Bank (filed as Exhibit 10.42 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995,
and
incorporated herein by reference).
|
|
10.3
|
First
Amendment to Standard Office Lease, dated May 15, 1995, by and between
Citadel Realty, Inc. and Fidelity Federal Bank (filed as Exhibit
10.43 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, and incorporated herein by
reference).
|
|
10.4
|
Guaranty
of Payment dated May 15, 1995 by Citadel Holding Corporation in favor
of
Fidelity Federal Bank (filed as Exhibit 10.47 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated
herein by reference).
|
|
10.5
|
Exchange
Agreement dated September 4, 1996 among Citadel Holding Corporation,
Citadel Acquisition Corp., Inc. Craig Corporation, Craig Management,
Inc.,
Reading Entertainment, Inc., Reading Company (filed as Exhibit 10.51
to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by
reference).
|
|
10.6
|
Asset
Put and Registration Rights Agreement dated October 15, 1996 among
Citadel
Holding Corporation, Citadel Acquisition Corp., Inc., Reading
Entertainment, Inc., and Craig Corporation (filed as Exhibit 10.52
to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by
reference).
|
|
10.7
|
Articles
of Incorporation of Reading Entertainment, Inc., A Nevada Corporation
(filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 1999, and incorporated herein by reference).
|
|
10.7a
|
Certificate
of Designation of the Series A Voting Cumulative Convertible preferred
stock of Reading Entertainment, Inc. (filed as Exhibit 10.7a to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1999,
and incorporated herein by reference).
|
|
10.8
|
Lease
between Citadel Realty, Inc., Lesser and Disney Enterprises, Inc.,
Lessee
dated October 1, 1996 (filed as Exhibit 10.54 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference).
|
|
10.9
|
Second
Amendment to Standard Office Lease between Citadel Realty, Inc. and
Fidelity Federal Bank dated October 1, 1996 (filed as Exhibit 10.55
to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, and incorporated herein by
reference).
|
|
10.10
|
Citadel
1996 Non-employee Director Stock Option Plan (filed as Exhibit 10.57
to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by
reference).
|
|
10.11
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended
December
31, 1997 (filed as Exhibit 10.58 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein
by
reference).
|
|
10.12
|
Stock
Purchase Agreement dated as of April 11, 1997 by and between Citadel
Holding Corporation and Craig Corporation (filed as Exhibit 10.56
to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
|
|
10.13
|
Secured
Promissory Note dated as of April 11, 1997 issued by Craig Corporation
to
Citadel Holding Corporation in the principal amount of $1,998,000
(filed
as Exhibit 10.60 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
|
|
10.14
|
Agreement
for Purchase and Sale of Real Property between Prudential Insurance
Company of America and Big 4 Farming LLC dated August 29, 1997 (filed
as
Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
|
|
10.15
|
Second
Amendment to Agreement of Purchase and Sale between Prudential Insurance
Company of America and Big 4 Farming LLC dated November 5, 1997 (filed
as
Exhibit 10.62 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
|
|
10.16
|
Partnership
Agreement of Citadel Agricultural Partners No. 1 dated December
19, 1997
(filed as Exhibit 10.63 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.17
|
Partnership
Agreement of Citadel Agricultural Partners No. 2 dated December
19, 1997
(filed as Exhibit 10.64 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.18
|
Partnership
Agreement of Citadel Agricultural Partners No. 3 dated December 19,
1997
(filed as Exhibit 10.65 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.19
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 1 and Big 4 Farming LLC (filed as Exhibit 10.67 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.20
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 2 and Big 4 Farming LLC (filed as Exhibit 10.68 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.21
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 3 and Big 4 Farming LLC (filed as Exhibit 10.69 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.22
|
Line
of Credit Agreement dated December 29, 1997 between Citadel Holding
Corporation and Big 4 Ranch, Inc. (filed as Exhibit 10.70 to the
Company’s
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
|
|
10.23
|
Management
Services Agreement dated December 26, 1997 between Big 4 Farming
LLC and
Cecelia Packing (filed as Exhibit 10.71 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein
by
reference).
|
|
10.24
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 1 (filed as Exhibit 10.72 to
the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.25
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 2 (filed as Exhibit 10.73 to
the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.26
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 3 (filed as Exhibit 10.74 to
the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.27
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation
and
Citadel Agricultural Partners No. 1 (filed as Exhibit 10.75 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.28
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation
and
Citadel Agricultural Partners No. 2 (filed as Exhibit 10.76 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.29
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation
and
Citadel Agricultural Partners No. 3 (filed as Exhibit 10.77 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.30
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation
and
Citadel Agricultural Partnership No. 1 (filed as Exhibit 10.78 to
the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.31
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation
and
Citadel Agricultural Partnership No. 2 (filed as Exhibit 10.79 to
the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.32
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation
and
Citadel Agricultural Partnership No. 3 (filed as Exhibit 10.80 to
the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.33
|
Administrative
Services Agreement between Citadel Holding Corporation and Big 4
Ranch,
Inc. dated December 29, 1997 (filed as Exhibit 10.81 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
|
|
10.34
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended
December
31, 1998 (filed as Exhibit as 10.41 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein
by
reference).
|
|
10.35
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended
December
31, 1999 (filed by Reading Entertainment Inc. as Form 10-K for the
year
ended December 31, 1999 on April 14, 2000 and incorporated herein
by
reference).
|
|
10.36
|
Promissory
note dated December 20, 1999 between Citadel Holding Corporation
and
Nationwide Life Insurance 3 (filed as Exhibit 10.36 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
|
|
10.37*
|
Employment
Agreement between Citadel Holding Corporation and Andrzej Matyczynski
(filed as Exhibit 10.37 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
|
|
10.38
|
Citadel
1999 Employee Stock Option Plan (filed as Exhibit 10.38 to the
Company’s
Annual Report on Form 10-K for the year ended December 31, 1999
and
incorporated herein by reference).
|
|
10.39
|
Amendment
and Plan of Merger By and Among Citadel Holding Corporation and
Off-Broadway Theatres, Inc. (filed as Exhibit A to the Company’s Proxy
Statement and incorporated herein by
reference).
|
|
10.40
|
Amended
and Restated Lease Agreement dated as of July 28, 2000 as amended
and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C.
and
Citadel Cinemas, Inc. (filed as Exhibit 10.40 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
10.41
|
Amended
and Restated Citadel Standby Credit Facility dated as of July 28,
2000 as
amended and restated as of January 29, 2002 between Sutton Hill
Capital,
L.L.C. and Reading International, Inc. (filed as Exhibit 10.40
to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated herein by
reference).
|
|
10.42
|
Amended
and Restated Security Agreement dated as of July 28, 2000 as amended
and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C.
and
Reading International, Inc. (filed as Exhibit 10.40 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002
and
incorporated herein by reference).
|
|
10.43
|
Amended
and Restated Pledge Agreement dated as of July 28, 2000 as amended
and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C.
and
Reading International, Inc. (filed as Exhibit 10.40 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002
and
incorporated herein by
reference).
|
|
10.44
|
Amended
and Restated Intercreditor Agreement dated as of July 28, 2000
as amended
and restated as of January 29, 2002 between Sutton Hill Capital,
L.L.C.
and Reading International, Inc. and Nationwide Theatres Corp. (filed
as
Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by
reference).
|
|
10.45
|
Guaranty
dated July 28, 2000 by Michael R. Forman and James J. Cotter in
favor of
Citadel Cinemas, Inc. and Citadel Realty, Inc. (filed as Exhibit
10.40 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2002 and incorporated herein by
reference).
|
|
10.46
|
Amended
and Restated Agreement with Respect to Fee Option dated as of July
28,
2000 as amended and restated as of January 29, 2002 between Sutton
Hill
Capital, L.L.C. and Citadel Realty, Inc. (filed as Exhibit 10.40
to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated herein by
reference).
|
|
10.47
|
Theater
Management Agreement between Liberty Theaters, Inc. and OBI LLC
(filed
as Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference).
|
|
10.48*
|
Non-qualified
Stock Option Agreement between Reading International, Inc. and James
J.
Cotter (filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by
reference).
|
|
10.49
|
Omnibus
Agreement between Citadel Cinemas, Inc. and Sutton Hill Capital,
LLC,
dated October 22, 2003 (filed on Quarterly Report Form 10-Q for the
period
ended September 30, 2003 and incorporated herein by
reference).
|
|
10.50
|
Pledge
Agreement between Citadel Cinemas, Inc. and Sutton Hill Capital,
LLC,
dated October 22, 2003 (filed on Quarterly Report Form 10-Q for the
period
ended September 30, 2003 and incorporated herein by
reference).
|
|
10.51
|
Guarantee
of Lenders Obligation Under Standby Credit Agreement in favor of
Sutton
Hill Capital, LLC, dated October 22, 2003 (filed on Quarterly Report
Form
10-Q for the period ended September 30, 2003 and incorporated herein
by
reference).
|
|
10.52*
|
Employment
agreement between Reading International, Inc. and Wayne D. Smith
(filed as
exhibit 10.52 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2004, and incorporated herein by
reference).
|
|
10.53
|
Contract
of Sale between Sutton Hill Capital L.L.C. and Sutton Hill Properties,
LLC
dated as of September 19, 2005 (filed as exhibit 10.53 to the Company’s
report on Form 8-K filed on September 21, 2005, and incorporated
herein by
reference).
|
|
10.54
|
Installment
Sale Note dated as of September 19, 2005 (filed as exhibit 10.54
to the
Company’s report on Form 8-K filed on September 21, 2005, and incorporated
herein by reference).
|
|
10.55
|
Guaranty
by Reading International, Inc. dated as of September 1, 2005 (filed
as
exhibit 10.55 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.56
|
Assignment
and Assumption of Lease between Sutton Hill Capital L.L.C. and Sutton
Hill
Properties, LLC dated as of September 19, 2005 (filed as exhibit
10.56 to
the Company’s report on Form 8-K filed on September 21, 2005, and
incorporated herein by reference).
|
|
10.57
|
License
and Option Agreement between Sutton Hill Properties, LLC and Sutton
Hill
Capital L.L.C. dated as of September 19, 2005 (filed as exhibit 10.57
to
the Company’s report on Form 8-K filed on September 21, 2005, and
incorporated herein by reference).
|
|
10.58
|
Second
Amendment to Amended and Restated Master Operating Lease dated as
of
September 1, 2005 (filed as exhibit 10.58 to the Company’s report on Form
8-K filed on September 21, 2005, and incorporated herein by
reference).
|
|
10.59
|
Letter
from James J. Cotter dated August 11, 2005 regarding liens (filed
as
exhibit 10.59 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.60
|
Letter
amending effective date of transaction to September 19, 2005 (filed
as exhibit 10.60 to the Company’s report on Form 8-K filed on September
21, 2005, and incorporated herein by
reference).
|
|
10.61
|
Promissory
Note by Citadel Cinemas, Inc. in favor of Sutton Hill Capital L.L.C.
dated
September 14, 2004 (filed as exhibit 10.61 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2005, and incorporated
herein
by reference).
|
|
10.62
|
Guaranty
by Reading International, Inc. in favor of Sutton Hill Capital L.L.C.
dated September 14, 2004 (filed as exhibit 10.61 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005, and incorporated
herein by reference).
|
|
10.63
|
Purchase
Agreement, dated February 5, 2007, among Reading International, Inc.,
Reading International Trust I, and Kodiak Warehouse JPM LLC (filed as
Exhibit 10.1 to the Company’s report on Form 8-K dated February 5, 2007,
and incorporated herein by
reference).
|
|
10.64
|
Amended
and Restated Declaration of Trust, dated February 5, 2007, among
Reading
International Inc., as sponsor, the Administrators named therein,
and
Wells Fargo Bank, N.A., as property trustee, and Wells Fargo Delaware
Trust Company as Delaware trustee (filed as Exhibit 10.2 to the Company’s
report on Form 8-K dated February 5, 2007, and incorporated herein
by
reference).
|
|
10.65
|
Indenture
among Reading International, Inc., Reading New Zealand Limited, and
Wells
Fargo Bank, N.A., as indenture trustee (filed as Exhibit 10.4 to
the
Company’s report on Form 8-K dated February 5, 2007, and incorporated
herein by reference).
|
|
10.66*
|
Employment
Agreement between Reading International, Inc. and John Hunter (filed
herewith).
|
|
21
|
List
of Subsidiaries (filed herewith).
|
|
23
|
Consent
of Independent Auditors (filed
herewith).
|
|
31.1
|
Certification
of Principal Executive Officer dated March 28, 2007 pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
31.2
|
Certification
of Principal Financial Officer dated March 28, 2007 pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
32.1
|
Certification
of Principal Executive Officer dated March 28, 2007 pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002 (filed herewith).
|
|
32.2
|
Certification
of Principal Financial Officer dated March 28, 2007 pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002 (filed herewith).
|
*These
exhibits constitute the executive compensation plans and arrangements of the
Company.
|
(b)
|
Exhibits
Required by Item 601 of Regulation
S-K
|
See
Item
(3) above.
|
(c)
|
Financial
Statement Schedule
|
See
Item
(2) above.
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.
(Registrant)
|
Date:
March 28, 2007
|
By:
|
/s/
Andrzej Matyczynski
|
|
Andrzej
Matyczynski
|
||
|
Chief
Financial Officer and Treasurer
|
||
|
(Principal
Financial and Accounting
Officer)
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title(s)
|
Date
|
|
/s/
James J. Cotter
|
Chairman
of the Board and Director and Chief Executive Officer
|
March
28, 2007
|
|
James
J. Cotter
|
||
|
/s/
Eric Barr
|
Director
|
March
28, 2007
|
|
Eric
Barr
|
||
|
/s/
James J. Cotter, Jr.
|
Director
|
March
28, 2007
|
|
James
J. Cotter, Jr.
|
||
|
/s/
Margaret Cotter
|
Director
|
March
28, 2007
|
|
Margaret
Cotter
|
||
|
/s/
William D. Gould
|
Director
|
March
28, 2007
|
|
William
D. Gould
|
||
|
/s/
Edward L. Kane
|
Director
|
March
28, 2007
|
|
Edward
L Kane
|
||
|
/s/
Gerard P. Laheney
|
Director
|
March
28, 2007
|
|
Gerard
P. Laheney
|
||
|
/s/
Alfred Villaseñor
|
Director
|
March
28, 2007
|
|
Alfred
Villaseñor
|
-141-
December
28, 2006
Mr.
John
Hunter
01333
SW
Pomona Street
Portland,
Oregon 97219
Re:
Offer
of employment with Reading International, Inc.
Dear
John,
I
am
pleased to confirm our conversation and offer you a senior executive position
with Reading International, Inc. on the following terms:
|
Position:
|
Chief
Operating Officer of Reading International, Inc. and President
of all
Reading International, Inc subsidiaries in New Zealand and
Australia.
|
|
Start
Date:
|
January
2007
|
|
Base
Salary:
|
An
amount equal to Three Hundred and Fifty Thousand Dollars ($350,000
USD)
paid bi-weekly per company policy, plus a lump sum payment equal
to Fifty
Thousand Dollars ($50,000 USD) paid at calendar year end for a
total Base
Salary of Four Hundred Thousand ($400,000 USD) per annum.
|
|
Bonus:
|
You
will be eligible to receive incentive compensation, in addition
to your
Base Salary, from time to time, at the sole discretion of the CEO
and,
depending on the particular circumstances, the Board of Directors.
The
Company has awarded bonuses in the past to senior management when
it was
determined that they had performed beyond the level of their existing
compensation program.
|
|
Pension
Benefit:
|
A
lump sum vested Pension Benefit shall be earned in the amount and
on the
anniversary dates listed below. Vested Pension Benefits will be
paid to
you in a lump sum on the date you cease employment at Reading
International, Inc.
|
|
Anniversary
|
Amount
|
|||
|
Fourth
|
$
|
400,000
USD
|
||
|
Eight
|
$
|
800,000
USD
|
||
|
Tenth
|
$
|
1,000,000
USD
|
||
|
Thirteenth
|
$
|
2,000,000
USD
|
||
|
Restricted
Stock:
|
You
will receive a grant of One Hundred Thousand Dollars ($100,000
USD) worth
of restricted Class A Nonvoting Common Stock on the first date
of your
employment with the Company and an additional grant of One Hundred
Thousand Dollars ($100,000 USD) worth of restricted Class A Nonvoting
Common Stock on the first anniversary date of your employment with
the
Company. Each award of stock shall have a two year vesting period
(50%
vested at 12 months from date of grant and 100% vested 24 months
from date
of grant).
|
|
Vacation:
|
Per
company policy (plus an additional week subject to the approval
of the
CEO)
|
|
Sick/Personal
Time:
|
Per
company policy.
|
|
Fringe
Benefits:
|
You
shall be entitled to any other Fringe Benefits provided to employees
of
the company, per company policy and in no event shall such other
Fringe
Benefits provided to you be less than any such benefit offered to
any
other senior executive with the company (except the CEO). Notwithstanding
the foregoing, some executives have been provided with a car allowance
(generally in lieu of a salary increase) and you will not be eligible
for
this benefit at this time. Also, you may participate in the Company
401K
plan but you will not receive the Company match as you have a separate
pension benefit not available to other executives. Should you terminate
your employment with the Company prior to the first vesting date
(fourth
anniversary of your employment) for your Pension Benefit, whatever
benefits you would have been eligible for, you will receive from
the
Company.
|
|
Severance:
|
In
the event your employment with the company is terminated by the company
for any reason, you will receive Severance in an amount equal to
your
annual Base Salary (in addition to any other amounts due to you from
the
company) should the termination date fall prior to your vesting in
the
Pension Benefit in the 4th
year. Thereafter, Severance will be limited to 50% of your annual
Base
Salary (plus any other amounts due to you from the
company).
|
If
the
above terms reflect our understanding, please sign below and return a copy
of
this letter to my attention. This letter will serve as the basis of our
agreement until a more formal employment agreement is completed. I look forward
to your joining our company.
Sincerely,
|
James
J. Cotter
|
Agreed
& Accepted:
|
|
Chairman,
CEO & President
|
|
|
Reading
International, Inc.
|
John
Hunter
|
EXHIBIT
21
READING
INTERNATIONAL, INC. - LISTING OF SUBSIDIARIES
AHGP,
Inc.
AHLP,
Inc.
Angelika
Film Centers (Dallas), Inc.
Angelika
Film Centers LLC
Angelika
Film Centers (Plano), LP
Australia
Country Cinemas Pty Ltd
Australian
Equipment Supply Pty Ltd
Bayou
Cinemas LP
Big
4
Farming LLC
Burwood
Developments Pty Ltd
Citadel
57th
Street,
LLC
Citadel
Agriculture, Inc.
Citadel
Cinemas, Inc.
Citadel
Realty, Inc.
Copenhagen
Courtenay Central Ltd
Courtenay
Car Park Ltd
Craig
Corporation
Darnelle
Enterprises Ltd
Dimension
Specialty, Inc.
Epping
Cinemas Pty Ltd
Hope
Street Hospitality, LLC
Hotel
Newmarket Pty Ltd
Landplan
Property Partners New Zealand Ltd
Landplan
Property Partners Pty Ltd
Liberty
Live, LLC
Liberty
Theaters, LLC
Liberty
Theatricals, LLC
Minetta
Live, LLC
Movieland
Cinemas (NZ) Ltd
Newmarket
Properties Pty Ltd
Newmarket
Properties No. 2 Pty Ltd
Orpheum
Live, LLC
Port
Reading Railroad Company
Queenstown
Land Holdings Ltd
Reading
Arthouse Distribution Ltd
Reading
Arthouse Ltd
Reading
Capital Corporation
Reading
Center Development Corporation
Reading
Cinemas Courtenay Central Ltd
Reading
Cinemas Management Pty Ltd
Reading
Cinemas NJ, Inc.
Reading
Cinemas of Puerto Rico, Inc.
Reading
Cinemas Pty Ltd
Reading
Cinemas Puerto Rico LLC
Reading
Cinemas USA LLC
Reading
Colac Pty Ltd
Reading
Company
Reading
Courtenay Central Ltd
Reading
Elizabeth Pty Ltd
Reading
Entertainment Australia Pty Ltd
Reading
Exhibition Pty Ltd
Reading
Holdings, Inc.
Reading
International Cinemas LLC
Reading
Licenses Pty Ltd
Reading
Melton Pty Ltd
Reading
Moonee Ponds Pty Ltd
Reading
New Zealand Ltd
Reading
Pacific LLC
Reading
Properties Pty Ltd
Reading
Queenstown Ltd
Reading
Real Estate Company
Reading
Rouse Hill Pty Ltd
Reading
Royal George, LLC
Reading
Sunbury Pty Ltd
Reading
Theaters, Inc.
Reading
Wellington Properties Ltd
Rhodes
Peninsula Cinema Pty Ltd
Rialto
Brands Ltd
Rialto
Cinemas Ltd
Rialto
Entertainment Ltd
Ronwood
Investments Ltd
Rydal
Equipment Co.
Sutton
Hill Properties, LLC
Tobrooke
Holdings Ltd
Trenton-Princeton
Traction Company
Twin
Cities Cinemas, Inc.
US
Development, LLC
US
International Property Finance Pty Ltd
Washington
and Franklin Railway Company
Westlakes
Cinema Pty Ltd
EXHIBIT
23
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement
No. 333-36277 on Form S-8 of our reports dated March 29, 2007,
relating to the consolidated financial statements and financial statement
schedules of Reading International, Inc. and its subsidiaries and management’s
report on internal control over financial reporting (which report expresses
an
adverse opinion on the effectiveness of the Company's internal control over
financial reporting because of a material weakness), appearing in this Annual
Report on Form 10-K of Reading International, Inc. for the year ended
December 31, 2006.
DELOITTE
& TOUCHE LLP
Los
Angeles, California
March 29,
2007
CERTIFICATIONS
EXHIBIT
31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
James
J. Cotter, certify that:
| 1) |
I
have reviewed this Form 10-K of Reading International, Inc.;
|
| 2) |
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
| 3) |
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
| 4) |
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) |
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
|
| c) |
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
| d) |
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
| 5) |
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of registrant’s Board of
Directors (or persons performing the equivalent functions):
|
| a) |
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
/s/
James J. Cotter
James
J.
Cotter
Chief
Executive Officer
March
28,
2007
EXHIBIT
31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Andrzej Matyczynski, certify that:
| 1) |
I
have reviewed this Form 10-K of Reading International, Inc.;
|
| 2) |
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
| 3) |
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
| 4) |
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) |
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
|
| c) |
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
| d) |
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
| 5) |
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of registrant’s Board of
Directors (or persons performing the equivalent functions):
|
| a) |
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
/s/
Andrzej Matyczynski
Andrzej
Matyczynski
Chief
Financial Officer
March
28,
2007
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18
U.S.C. SECTION 1350)
In
connection with the accompanying Annual Report of Reading International,
Inc.
(the “Company”) on Form 10-K for the fiscal year ended December 31, 2006 (the
“Report”), I, James J. Cotter, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that:
| 1. |
The
Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
|
| 2. |
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/
James J. Cotter
James
J.
Cotter
Chief
Executive Officer
March
28,
2007
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18
U.S.C. SECTION 1350)
In
connection with the accompanying Annual Report of Reading International,
Inc.
(the “Company”) on Form 10-K for the fiscal year ended December 31, 2006 (the
“Report”), I, Andrzej Matyczynski, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
| 1. |
The
Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
|
| 2. |
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/
Andrzej Matyczynski
Andrzej
Matyczynski
Chief
Financial Officer
March
28,
2007