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
|
||