UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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þ
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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, 2007
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)
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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 þNo ¨
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, a non-accelerated
filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer þ Non-accelerated
filer ¨ Smaller
reporting company ¨
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 17, 2007, there were 20,992,909 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 $153,983,000
as of March 26, 2007.
READING INTERNATIONAL, INC.
ANNUAL
REPORT ON FORM 10-K
YEAR
ENDED DECEMBER 31, 2007
INDEX
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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.
We are an internationally diversified
company principally focused on the ownership and development of land and brick,
mortar entertainment and real property assets. Our businesses consist
primarily of:
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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.
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Recognizing that we are part of a world
economy, we endeavor to keep a balance between our US and overseas
assets. Taking into account acquisitions made in February 2008 as
described more fully below, we currently have approximately 35% of our assets
(based on book value) in the United States, 44% in Australia and 21% in New
Zealand.
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 even in a recessionary or inflationary
environment. 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 and from the acquisition of existing cinemas rather than
from the development of new 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, again, over time become the principal thrust of our
business. We also, from time to time, invest in the shares of other
companies, where we believe the business or assets of those companies to be
attractive or to offer synergies to our existing entertainment and real estate
businesses.
Consistent with this philosophy, on
February 22, 2008 we acquired from two commonly owned companies, Pacific
Theatres and Consolidated Amusement Theatres, substantially all of their cinema
assets in Hawaii, San Diego County, and Northern California for $69.3
million. In total, we acquired fourteen mature leasehold cinemas and
the management rights to one additional mature cinema, representing a total of
181 screens. In saying that these cinema are “mature” we mean that
they have been in operation for some years, and are, in our view, proven
performers in their markets. For the fiscal year ended December 28,
2007, we estimate that these theatres produced gross revenues of approximately
$78.0 million. We refer to these cinemas from time to time in this
report as Consolidated Cinemas. While this was a major acquisition
for us, we believe it to have been a reasonably conservative investment, given
the mature status of these assets and the fact that our Chairman and Chief
Operating Officer are both familiar with these assets and the markets in which
they operate due to their prior association with the sellers.
Our acquisition of the Consolidated
Cinemas was financed, principally with a combination of commercial lenders
institutional finance ($50.0 million) and seller finance ($21.0
million). Accordingly, our investment was approximately $2.2 million
to cover for transaction related costs and expenses such as attorneys’ fees,
financing fees,
and
transfer fees. Reading International, our parent company, has
provided a guarantee on the commercial lending up until the time when the
leverage ratio reaches a 2.75 to 1.00. The sellers financing is
recourse to companies having as their only assets the Consolidated Cinemas and
two of our domestic cinemas, our Manville and Angelika Dallas
cinemas.
While we have not yet completed a 2007
audit of the results of the operation of these cinema assets, we believe based
upon information provided to us by the sellers that these cinemas generated
approximately $78.0 million in gross revenue for the twelve months ended
December 31, 2007 as compared to gross revenues of approximately $76.7 million
for the twelve months ended December 31, 2006. This compares to
approximately $103.5 million in revenue for our existing cinemas for the year
ended December 31, 2007. While the ultimate purchase price is subject
to various downward adjustments (including adjustments to reflect currently
anticipated competition from announced cinema developments in the markets
serviced by Consolidated Cinemas), we believe that the purchase price represents
an approximately 5.5X EBITDA multiple, based upon the proforma EBITDA for these
cinemas (calculated without reference to general and administrative costs
incurred at levels above the cinema operating level) used in our evaluation of
the purchase of these assets. We believe that these cinemas
represented an approximately 70% market share of Hawaii and 12% market share of
the San Diego County cinema markets for this period. For book
purposes, we will carrying Consolidated Cinemas at an initial value of $69.3
million, but as previously noted, this price is subject to
adjustment. While no assurances can be given, we currently anticipate
a reduction in this amount of between $6.25 million and $22.7 million, depending
principally upon competitive developments over the next several
years.
We also acquired for 5.1 million
(AUS$6.0 million) a 20% interest in Becker Group Limited (“BGL”), which is in
the art film exhibition and distribution business in Australia and the
television remote and special event broadcast business in Australia and New
Zealand. In February, BGL announced that it had entered into an
agreement to sell its cinema and film distribution business for approximately
$18.4 million (AUS$21.0 million) in cash to Icon Film Distribution Pty Limited
(a company associated with Mel Gibson). BGL is controlled by Prime
Media Group Limited, which owns approximately 76% of the outstanding shares of
that company.
We are currently in discussions with
the owners of other cinema circuits as to the possible acquisition of one or
more of those circuits or in some cases, for portions of the cinema assets being
offered for sale. In New Zealand, SkyCity Cinemas has announced its
interest in selling its New Zealand circuit and we have made a non-binding
proposal to acquire a substantial portion of those assets. However,
no assurances can be given as to the ultimate outcome of those discussions, and
we are limited by our confidentiality arrangements from discussing the details
of our proposals. We are also in discussion with the owner of a
circuit in the United States, but again those discussions are subject to a
confidentiality agreement.
On the real estate front, we acquired
the long-term ground lease interest underlying our Tower Theatre in Sacramento,
we acquired directly fee interests in New Zealand representing some 16,000
square feet of land and some 25,000 square feet of improvements, and through our
affiliate, Landplan Property Partners, Ltd (“Landplan”) acquired two
developmental properties in New Zealand representing some 2.8 million square
feet of land, and 8,700 square feet of current improvements, for a total
purchase price of $20.6 million.
Financing
Historically,
we have endeavored to match the currency in which we have financed our
development with the jurisdiction within which these developments are
located. However, believing that the US Dollar was likely to
materially decrease in value versus the New Zealand and Australian Dollars, 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 and to pay down our
New Zealand and Australia Dollar denominated debt.
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 were used principally to retire all of our then outstanding 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).
Summary
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 including both entertainment and other types
of land, brick, and mortar assets. We are endeavoring to maintain a
reasonable balance between our domestic and overseas assets and operations, and
a reasonable balance between our cash generating cinema operations and our cash
consuming real estate development activities. We believe that by
blending the cash generating capabilities of a cinema company with the
investment and development opportunities of a real estate development company,
we are unique among public companies in our business plan.
At
December 31, 2007, our assets include:
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interests
in 44 cinemas comprising some 286
screens;
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fee
ownership of approximately 1.1 million square feet of developed commercial
real estate, and approximately 15.3 million square feet of land (including
approximately 5.2 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
$20.8 million;
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a
25% interest in the limited liability company that developed Place 57, the 36-story, 68-residential
unit mixed use condominium project on 57th Street near 3rd Avenue in
Manhattan, the principal remaining asset of which is approximately 3,700
square feet of retail space on the ground floor of that building onto 57th
Street;
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an
approximately 20% interest in BGL, described above;
and
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an
18.4% interest in Malulani Investments Limited (“MIL”), a private Hawaiian
corporation whose assets consist primarily of real estate, including
approximately 22,000 acres of land (a portion of which is improved with
the Guenoc Winery and vineyards), located in Napa and Lake Counties, in
California.
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At
December 31, 2007, the book value of our assets was approximately $346.1
million; and as of that same date, we had a consolidated stockholders’ book
equity of approximately $121.4 million. Calculated based on book
value, nearly 68% of our assets, or approximately $235.3 million, relates to our
real estate activities. Calculated based on book value, nearly 78% of
our assets, or approximately $270.9 million, represents assets located in
Australia and New Zealand. However, taking into account our
acquisition of Consolidated Cinemas, this allocation is now approximately 57%
and 65% respectively.
At
December 31, 2007, the allocation between our cinema assets and our non-cinema
assets was approximately 23% and 77%, respectively. However, taking
into account our acquisition of Consolidated Cinemas, this allocation is now
approximately 36% and 64%, 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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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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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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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, and believe
that we have taken advantage of one such opportunity through our purchase
of Consolidated Cinemas, 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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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. Our
former Sutton Theater, for example, provided the real estate base for our
Place 57 development.
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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
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New
Zealand
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9
cinemas
48
screens
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None
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6
cinemas5
30
screens
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None
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15
cinemas
78
screens
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United
States
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6
cinemas
41
screens
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1
cinema6
6
screens
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None
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2
cinemas
9
screens
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9
cinemas
56
screens
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Totals
without Consolidated Cinemas
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31
cinemas
209
screens
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4
cinemas
22
screens
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7
cinemas
46
screens
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2
cinemas
9
screens
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44
cinemas
286
screens
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Consolidated
Cinemas
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14
cinemas
173
screens
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None
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None
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1
cinemas
8
screens
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15
cinemas
181
screens
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Totals
with Consolidated Cinemas
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45
cinemas
382
screens
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4
cinemas
22
screens
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7
cinemas
46
screens
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3
cinemas
17
screens
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59
cinemas
467
screens
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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.
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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first,
modern stadium seating multiplex cinemas featuring conventional film
product;
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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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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.
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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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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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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.
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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.” As of December 31 2007, Landplan has acquired one
property in Australia and two properties in New Zealand for an aggregate
investment of $16.0 million.
In addition, we have acquired an
approximately 18.4% common equity interest in Malulani Investments Limited, a
closely held Hawaiian company which currently owns 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 proposed ETRC,
comprising some 100,000 square of development. The 100,000 square
feet of shopping center space in this fourth proposed ETRC is fully leased, and
it is anticipated that the cinema component will be completed in
2009.
Our US holdings include the fee
interest in three live theatres in Manhattan (the Union Square, Orpheum and
Minetta Lane) a multi-stage live theatre in Chicago (the Royal George) and a 75%
interest in the limited liability company that owns the fee interest in our
Cinemas 1, 2 & 3 property in Manhattan.
In total, taking into account the
acquisition of Consolidated Cinemas, on a consolidated basis, we own
approximately 15.3 million square feet of land and approximately 2.3 million
square feet of improvements, of which approximately 1.7 million square feet is
leased by us as tenant under various cinema leases.
Our real estate activities, holdings,
and development are described in more detail in the Item 2 –
Properties.
Certain Segment and
Geographical Distribution Information
Financial Information about our various
segments is set out in Note 22 – Business Segments and Geographic
Area Information.
The following table sets forth the book
value of our property and equipment by geographical area as of December 31, 2007
(dollars in thousands):
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December 31,
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2007
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2006
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Australia
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$ | 90,956 | $ | 86,317 | ||||
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New
Zealand
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44,030 | 38,772 | ||||||
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United
States
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43,188 | 45,578 | ||||||
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Property
and equipment
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$ | 178,174 | $ | 170,667 | ||||
The
following table sets forth our revenues by geographical area (dollars in
thousands):
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December 31,
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2007
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2006
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2005
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Australia
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$ | 63,657 | $ | 53,434 | $ | 47,181 | ||||||
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New
Zealand
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24,371 | 21,230 | 20,179 | |||||||||
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United
States
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31,207 | 31,461 | 30,745 | |||||||||
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Total
Revenues
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$ | 119,235 | $ | 106,125 | $ | 98,105 | ||||||
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, 2007, we had
outstanding 20,987,115 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 1,123,888
shares of our Class B Stock, representing approximately 70.4% of such
shares. In addition, Mr. Cotter, his affiliates, and members of his
immediate family are the fully diluted beneficial owners of 5,610,833 shares of
our Class A Stock. Collectively, their beneficial ownership
represents approximately 30.0% 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 our Company’s Board of Directors. Mr. James J. Cotter, Jr.
is the Vice-Chairman of our Company. Ms. Ellen Cotter, also a child
of Mr. Cotter, Sr., is the Chief Operating Officer for our Domestic Cinemas and
will be responsible for running the recently acquired Consolidated
Cinemas. A company wholly owned by Ms. Margaret Cotter manages our
live theater operations. Sutton Hill Capital (a partnership in which
Mr. Cotter (i) owns a 50% interest) owns a 25% interest in the limited liability
company that owns our Cinemas 1, 2 & 3 property in Manhattan, (ii) owns the
ground lease interest and is the sublandlord under our sublease of our Village
East property, also in Manhattan, and (iii) holds notes issued by RDI in the
amount of $14.0 million.
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 2007 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 15 cinemas
with 78 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 2007 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 42% of box
office revenues in Australia and in New Zealand.
Concession sales account for
approximately 24% and 22% of our total 2007 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 2007, we realized a gross margin on concession
sales of approximately 22% and 26% in Australia and New Zealand,
respectively.
Screen
advertising and other revenues contributed approximately 4% and 5% of our total
2007 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.
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.
Through
Rialto Entertainment, we are 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.
We also
own 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 is owned by the founders of the company, who have been in the art film
distribution business since 1993. While prior to our acquisition of
this interest in late 2005, 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 a 50/50 unincorporated joint
venture with Everard Entertainment. We also have 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. Our
interest in these joint ventures 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 20.4 million
people. This population is concentrated in a few coastal urban areas,
with approximately 4.1 million in the greater Sydney area, 3.9 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
550,000, is the capital and Auckland, with a population of approximately 1.3
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 68%
of the total cinema box office: Village/Greater Union/Birch Carroll and Coyle
45% and Hoyts Cinemas (“Hoyts”) 21%. Greater Union have 243 screens
nationally; Village 218 screens; Birch Carroll & Coyle (a subsidiary of
Greater Union) 230 screens and Hoyts 333 screens. By comparison, our
cinemas represent approximately 6% of the total box office.
The major players in New Zealand are
Sky Cinemas with 94 screens nationally, Reading with 59 screens (not including
partnerships), and Hoyts with 61 screens. The major exhibitors in New
Zealand control approximately 71% of the total box office: Sky Cinemas 31%,
Reading 21% and Hoyts 19%, (Sky and Reading market share figures again do not
include any partnership theaters). Sky has announced that it is
interested in selling its cinema assets and is currently conducting a controlled
auction of those assets. We have made a proposal to acquire a portion
of those assets. We understand that Hoyts is also interested in
acquiring all or some substantial portion of those assets. Due to
antitrust limitations, we believe it unlikely that either Hoyts or we would be
permitted by the New Zealand anti-trust authorities to acquire all of Sky’s New
Zealand cinema assets.
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 is 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 $709.8 million (AUS$808.8 billion) at
June 30, 2007. The Greater Union organization does not separately
publish financial reports, but its parent, Amalgamated Holdings, had a publicly
reported consolidated net worth of approximately $445.4 million (AUS$507.6
million) at June 30, 2007. Hoyts does not separately publish
financial reports. Hoyts is currently owned by Pacific Equity
Partners.
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 practicable, 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, 2007 are as follows (dollars in
thousands):
|
Net
Assets
|
||||
|
Reading
Australia
|
$ | 81,318 | ||
|
Reading
New Zealand
|
71,214 | |||
|
Net
Assets
|
$ | 152,532 | ||
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. Since February
5, 2007 through December 31, 2007, the US dollar has dropped vis-à-vis both the
Australian and the New Zealand dollar.
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.
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 23 full time
executive and administrative employees and approximately 707 cinema and property
employees. None of our Australia based employees is
unionized. Reading New Zealand has 8 full time executive and
administrative employees and approximately 261 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 237 screens in 24
cinemas in the United States (including 3 managed cinemas with 17
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 and the
Consolidated Cinemas. 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 is owned by a subsidiary in which we have a 75% interest) and three
cinemas 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. Three of our cinemas are held pursuant
to
ground
leases which in each case allow long-term renewal rights and provide us with
flexibility for altering the use of the property: our Manville 12 in New Jersey,
Kapolei 16 in Hawaii, and the Tower Theatre in Sacramento. A fourth
theatre, the Village East in Manhattan, is held pursuant to a sublease of a long
term ground lease, and we have an option under that sublease to acquire the
ground lease estate held by our sublandlord.
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
6,388 screens, in approximately 527 cinemas. AMC now has
approximately 5,138 screens in approximately 359 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 $2.3 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 36,165 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.
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 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.
Our domestic cinemas derive
approximately 40% 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 39% of
box office receipts for 2007.
Concession sales account for
approximately 20% of total revenues. 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 14% for 2007.
Screen
advertising and other revenues contribute approximately 8% of total revenues for
2007. 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.
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 we can. 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.
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, 2007, we employed
approximately 354 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. We negotiated a termination of our contract
with the union effective January 31, 2007. Our principal executive
and administrative offices are located in Commerce,
California. Approximately 7 executives and 23 other employees are
located at our executive offices in Commerce and Manhattan. We
believe our relations with our employees to be good.
With the acquisition of Consolidated
Cinemas, we took on an additional 580 employees in Hawaii and
California. We also assumed two union contracts, previously
negotiated by the sellers of those assets. These contracts have terms
through August 2008.
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.
Our real estate activities, holdings,
and development are described in more detail in the Item 2 –
Properties.
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%.
Malulani
Investments
In
addition, we have acquired an approximately 18.4% common equity interest in
Malulani Investments Limited (MIL), a closely held Hawaiian company which
currently owns developed real estate principally in California, and Hawaii, 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 rights
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.
In
January of this year, we contributed 100 shares of the Class A Common Stock
(representing approximately 0.04% of our interest in MIL) to the RDI Employee
Investment Fund, LLC (the “Employee Fund”). The Employee Fund
currently has 49 members, in addition to Reading.
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
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, which we consider
to be akin to an interest free loan, 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.
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.
With the
acquisition of Consolidated Cinemas we have taken on substantial additional
debt. This transaction was, in essence, 100% financed, resulting in
an increase in our debt for book purposes from $177.2 million at December 31,
2007 to $248.2 million as of February 22, 2008.
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 $17.9 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 $4.6 million.
Our
stock is thinly traded.
Our stock
is thinly traded, with an average daily volume in 2007 of only approximately
4,900 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 70.4% 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,
2007, Mr. Cotter controlled 70.4% 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.
Item 1B -
Unresolved Staff Comments
Not applicable.
Item 2 –
Properties
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
As of December 31, 2007, we lease
approximately 1.6 million square feet of completed cinema space in the United
States, Australia, and New Zealand as follows:
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Aggregate
Square Footage
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Approximate
Range of Remaining Lease Terms (including renewals)
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United
States
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339,000
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5 –
42 years
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Australia
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869,000
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29
– 40 years
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New
Zealand
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402,000
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5 –
10 years
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On
February 22, 2008, we acquired Consolidated Cinemas, comprising approximately
727,000 square feet of cinema improvements. This has increased our
worldwide aggregate square footage of property under lease to approximately 2.3
million square feet and our aggregate square footage of property under lease in
the United States of 1.1 million square feet.
Fee
Interests
In Australia, we owned as of December
31, 2008 approximately 3.2 million square feet of land at eight locations plus
one strata title estate consisting of 22,000 square feet. Most 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 2007, we acquired through our
Landplan subsidiary an approximately 64-acre parcel of land in the
transportation corridor between the Auckland airport and the Auckland central
business district. That land is currently zoned and used exclusively
for agricultural purposes, and we are working to rezone the property for
commercial/industrial use. Also through Landplan, we acquired a
1.0-acre property on Lake Taupo, a popular recreational
destination. At the time we acquired our Lake Taupo property, it was
improved as a motel. We are currently in the process of redeveloping
that property into condominiums.
Since the close of 2007, we have
acquired or entered into agreements to acquire approximately 50,000 square foot
of property in Taringa, Australia, comprising four contiguous properties, which
we intend to develop. The aggregate purchase price of these
properties is $11.3 million (AUS$12.9 million), of which $1.7 million (AUS$2.0
million) relates to the three properties that have been acquired and $9.6
million (AUS$10.9 million) relates to the one property that is still under
contract which is subject to certain rezoning conditions.
In the United States, we owned as of
December 31, 2007, on a consolidated basis, approximately 121,000 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 (held through a limited liability company in
which we have a 75% managing member interest), and a residential condominium
unit in Los Angeles, used as executive office and residential space by our
Chairman and Chief Executive Officer.
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:
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the
Minetta Lane (399 seats);
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the
Orpheum (364 seats); and
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the
Union Square (499 seats).
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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.
Joint Venture
Interests
We also hold real estate through
several unincorporated joint ventures, two 75% owned subsidiaries, 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. We also own a 75% managing member
interest in the limited liability company that owns our Cinemas 1, 2 &
3 property.
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Real Estate
Development
We are engaged through Reading
Australia and Reading New Zealand in real estate development. We have
to date developed three Entertainment-Themed Retail Center Developments
(so-called ETRCs) each of which consist of a multiplex cinema, complementary
restaurant and retail facilities, and convenient parking on land that we own or
control. These centers are located in Perth and Auburn (a suburb of
Sydney) in Australia and Wellington in New Zealand. We have completed
the retail portions of a fourth ETRC (located in a suburb of Brisbane in
Australia) and have completed the entitlement process for the construction of
the cinema component, which we are in the process of evaluating.
In addition, we are pursuing the
development of four additional sites in Australia and three sites in New
Zealand. The largest of these are our projects at Burwood and Moonee
Ponds, both located in the area of Melbourne, Victoria, and our projects at
Wellington and Manukau (a suburb of Auckland) in New Zealand.
Australia
Auburn,
New South Wales
We own 109,000 square foot ETRC in
Auburn anchored by a 10 screen, 57,000 square foot cinema commonly known as “Red
Yard.” Adjacent to this property, we own approximately 93,000 square
feet of the site that is currently unimproved, and is intended to provide
expansion space for phase II of our Red Yard project. The centre also
includes an 871 space subterranean parking garage. 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. This unimproved parcel is currently carried on our books at
$2.4 million (AUS$2.7 million). We are currently considering whether
to sell this property, and have to date received a number of offers which we are
actively considering.
Burwood,
Victoria
The biggest real estate project in our
pipeline is the development of our 50.6-acre Burwood Project, a suburban area
within the Melbourne metropolitan area. In December 1995, we acquired
the site 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. 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
are continuing to work to remediate environmental issues at the site and to
refine that zoning, so as to be able to achieve commercial levels of density on
the site.
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. 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 $42.0
million (AUS$47.8 million).
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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.
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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.
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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$570.0
million).
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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 our 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 $42.0 million (AUS$47.8
million).
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We
are currently working to refine our entitlements for the site, with the
intention of increasing densities to commercially reasonable
levels.
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as
the property was used by its prior owner as a brickworks, it has been
necessary to remove or encapsulate the contaminated soil that resulted
from those operations from the site before it can be used for
mixed-use
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retail,
entertainment, commercial and residential purposes. During
2007, we conducted further testing on the site and developed a plan to
address these environmental concerns. Substantially all of the
contaminated soil slated for removal has now been removed. As
of December 31, 2007, we estimate that the total site preparation costs
associated with the removal of this contaminated soil will be $7.9 million
(AUS$9.0 million) and accordingly are not, in our view, material to the
overall projected development costs for the
project.
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Indooroopilly,
Brisbane
In
September 2006, we acquired a land area of 11,000 square feet, and a two-story
3,000 square foot building. We paid US$1.8 million (AUS$2.3 million)
for the land. The site is zoned for commercial
purposes. We have obtained approval to develop the property to be a
28,000 square foot grade A commercial office building comprising six floors of
office space and two basement levels of parking with 33 parking
spaces. We expect to spend US$8 million (AUS$9.4 million) in
development costs. We plan to complete the project in December
2008.
Moonee
Ponds, Victoria
We are
also in the planning stages of the 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.” 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. 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). We intend to work towards the finalization of a
plan for the development of this site during 2008.
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.
New
Zealand
Lake
Taupo, New Zealand
In 2007,
through Landplan Property Partners, we acquired a 1.0-acre property on Lake
Taupo, a popular recreational destination, for approximately $4.9 million
(NZ$6.9 million).. At the time we acquired our Lake Taupo property,
it was improved as a motel. We are currently in the process of
redeveloping that property into condominiums.
Manukau,
New Zealand
This is an approximately 64-acre site
located in the transit corridor between Auckland Airport and the Auckland
central business district. We acquired the property in July 2007 for
$9.3 million (NZ$12.1 million). The property is currently zoned for
agricultural uses only and used for grazing. We intend to develop a
master land use plan for the property and to work to effect a zoning change
permitting a more intense use for the land. We believe that the
property can be rezoned and developed for a mixture of commercial/industrial
uses.
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 10 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. We are currently reviewing our options for the
second phase of our Wellington ETRC. While we were successful in
obtaining regulatory approval during 2006 for an approximately 162,000 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 $2.9 million (NZ$3.7 million), and is
being currently rented on a month-to-month basis as a car sales
yard. 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.
Real Estate
Holdings
Our current real estate holdings are
described in detail in Item 2, Properties, below. At December 31,
2007, we owned fee interests in approximately 920,000 square feet of income
producing properties (including certain properties principally occupied by our
cinemas). In the case of properties leased to our cinema operations,
these number include an internal allocation of “rent” for such
facilities.
|
Property1
|
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%
|
$31,380,000
|
|
Belmont
Knutsford
Ave and Fulham St
Belmont,
WA, Australia
|
19,000
/ 49,000
|
80%
|
$13,263,000
|
|
Cinemas
1, 2 & 32
1003
Third Avenue
Manhattan,
NY, USA
|
0 /
24,000
|
N/A
|
$23,674,000
|
|
Courtenay
Central
100
Courtenay Place
Wellington,
New Zealand
|
38,000
/ 68,000
Plus
a 245,000 square foot parking structure
|
76%
|
$24,343,000
|
|
Invercargill
Cinema
29
Dee Street
Invercargill,
New Zealand
|
7,000
/ 20,000
|
85%
|
$2,996,000
|
|
Maitland
Cinema
Ken
Tubman Drive
Maitland,
NSW, Australia
|
0 /
22,000
|
N/A
|
$2,088,000
|
|
Minetta
Lane Theatre
18-22
Minetta Lane
Manhattan,
NY, USA
|
0 /
9,000
|
N/A
|
$8,228,000
|
|
Napier
Cinema
154
Station Street
Napier,
New Zealand
|
5,000
/ 18,000
|
100%
|
$3,102,000
|
|
Newmarket3
Newmarket,
QLD, Australia
|
93,000
/ 0
|
99%
|
$37,874,000
|
|
Orpheum
Theatre
126
2nd
Street
Manhattan,
NY, USA
|
0 /
5,000
|
N/A
|
$3,256,000
|
|
Royal
George
1633
N. Halsted Street
Chicago,
IL, USA
|
37,000
/ 23,000
Plus
21,000 square feet of parking
|
91%
|
$3,306,000
|
|
Rotorua
Cinema
1281
Eruera Street
Rotorua,
New Zealand
|
0 /
19,000
|
N/A
|
$2,827,000
|
|
Union
Square Theatre
100
E. 17th
Street
Manhattan,
NY, USA
|
21,000
/ 17,000
|
100%
|
$8,971,000
|
1 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, 2007.
2 This
property is owned by a limited liability company in which we hold a 75% managing
interest. The remaining 25% is owned by Sutton Hill Investments, LLC,
a company owned in equal parts by our Chairman and Chief Executive Officer, Mr.
James J. Cotter, and Michael Forman, a major shareholder in our
Company.
3 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 until some time in 2009.
In
addition, in certain cases we have long-term leases which we view more akin to
real estate investments than cinema leases As of December 31, 2007, we had
approximately 179,000 square foot of space subject to such long-term
leases.
|
Property1
|
Square
Footage
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Manville
|
0 /
63,000
|
N/A
|
$1,642,000
|
|
Tower
|
0 /
16,000
|
N/A
|
$ 151,000
|
|
Village
East
|
5,000
/ 37,000
|
100%
|
$2,589,000
|
|
Waurn
Ponds
|
6,000
/ 52,000
|
100%
|
$6,177,000
|
1 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.
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 has developed the
site of our former Sutton Cinema on 57th Street
just east of 3rd Avenue
in Manhattan, as a 143,000 square foot residential condominium tower, with the
ground floor retail unit and the resident manager’s apartment. The
project is essentially sold out, as all of the residential units have been
conveyed and only the ground floor commercial unit is still available for
sale. We are currently looking for a tenant for the commercial space,
which faces on to 57th Street.
At December 31, 2007, all debt on the project had been repaid, and we had
received distributions totaling $9.8 million from this project, on an investment
of $3.0 million made in 2004.
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 and
California. MIL’s assets include the Guenoc Winery and approximately
22,000 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
the fee interest in 25 parcels comprising 195 acres in Pennsylvania and
Delaware. 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.
Item 3 –
Legal Proceedings
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
$17.9 million as of December 31, 2007. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $4.6 million as of December 31,
2007. Accordingly, this proposed change represented, as of December
31, 2007, an exposure of approximately $48.8 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 $52.8
million. We have accrued $4.5 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 $52.8 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. We are
currently in the discovery process, and do not anticipate a trial of this issue
before 2010.
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
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.
We are in
the process of remediating certain environmental issues with respect to our
50-acre Burwood site in Melbourne. That property was at one time used
as a brickwork, and we have discovered petroleum and asbestos at the
site. During 2007, we developed a plan for the remediation of these
materials, in some cases through removal and in other cases through
encapsulation. The total site preparation costs associated with the
removal of this contaminated soil is estimated to be $7.9 million (AUS$9.0
million). As of December 31, 2007, we had incurred a total of $7.1
million (AUS$8.1 million) of these costs. We do not believe that this
has added materially to the overall development cost of the site, as much of the
work is being done in connection with excavation and other development activity
already contemplated for the property.
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 damages. The
matter is currently on appeal. However, if the trial court is
ultimately sustained the result will be a payment from the Burstone Parties to
us of $1.1 million (AUS$1.2 million), as of December 31, 2007. That
amount continues to accrue interest at the rate of approximately
10%.
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). On 27 April 2007, we received payment from Khor &
Burr for those costs in the sum of $17,000 (AUS$19,000).
A
mediation was held in this matter on 12 July 2007, at which time the matter
failed to settle. Reading has subsequently made an offer of
compromise to Mackie Group in the sum of $150,000 plus party/party costs, which
has not been accepted. The matter has not yet been fixed for trial,
however orders have now been made for the preparation of material for trial, and
we expect that the matter will be set down for trial before the end of the
year.
Malulani Investments
Litigation
In December 2006, we commenced a
lawsuit against certain officers and directors of Malulani Investments Limited
(“MIL”) alleging various direct and derivative claims for breach of fiduciary
duty and waste and seeking, among other things, access to various company books
and records. As certain of these claims were brought derivatively,
MIL was also named as a defendant in that litigation. That case is
called Magoon Acquisition
& Development, LLC; a California limited liability company, Reading
International, Inc.; a Nevada corporation, and James J. Cotter vs. Malulani
Investments, Limited, a Hawaii Corporation, Easton T. Mason; John R. Dwyer, Jr.;
Philip Gray; Kenwei Chong (Civil No. 06-1-2156-12 (GWBC) and is currently
pending before Judge Chang in the circuit Court of the First circuit State of
Hawaii, in Honolulu.
On July 26, 2007, the Court granted
TMG’s motion to intervene in the Hawaii action. On March 24, 2008,
MIL filed a counter claim against us, alleging that we are green mailers, that
our purpose in bringing the lawsuit was to harass and harm MIL, and that we
should be liable to MIL for the damage resulting from our harassment, including
the bringing of our lawsuit (the “MIL Counterclaim”).
We do not believe that we have any
meaningful exposure with respect to the MIL Counterclaim, and intend to continue
to prosecute our claims against the Defendant Directors. We have
filed a counterclaim against TMG, alleging various breached of fiduciary duty on
its part, as the controlling shareholder of MIL, and are currently seeking
permission to amend our initial complaint to add additional allegations
principally growing out of the ongoing conduct by the Defendant Directors since
the filing of our initial complaint. The action is currently in its
discovery phase, with trail currently set for November of this
year.
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. At the end of 2006, we expected
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
expensed $1.2 million during the year ending December 31,
2006. During 2007, the majority of the credit card claims and
penalties were assessed and paid resulting in realized losses of $429,000 and
$160,000 for the years ending December 31, 2007 and 2006, respectively, and
returned restricted cash of $551,000 during 2007. The restricted cash
balance at December 31, 2007 was $59,000 relating to the remaining unresolved
credit card claims.
Item 4 –
Submission of Matters to a Vote of Security Holders
At our
2007, Annual Meeting of Stockholders held on May 10, 2007, 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 2008 Annual Meeting of
Stockholders:
|
|
Election
of Directors
|
For
|
Withheld
|
|
James
J. Cotter
|
1,117,201
|
28
|
|
Eric
Barr
|
1,117,201
|
28
|
|
James
J. Cotter, Jr.
|
1,117,201
|
28
|
|
Margaret
Cotter
|
1,117,201
|
28
|
|
William
D. Gould
|
1,117,201
|
28
|
|
Edward
L. Kane
|
1,117,201
|
28
|
|
Gerard
P. Laheney
|
1,117,201
|
28
|
|
Alfred
Villaseñor
|
1,117,201
|
28
|
PART
II
Item 5 – Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
|
(a)
|
Market Price of and
Dividends on the 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 2007 and 2006 as reported by
AMEX:
|
Class
A Nonvoting
|
Class
B Voting
|
||||||||||||||||
|
Common Stock
|
Common Stock
|
||||||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
2007:
|
Fourth
Quarter
|
$ | 10.22 | $ | 9.60 | $ | 10.50 | $ | 10.00 | ||||||||
|
Third
Quarter
|
$ | 10.64 | $ | 9.53 | $ | 10.75 | $ | 9.40 | |||||||||
|
Second
Quarter
|
$ | 9.34 | $ | 8.35 | $ | 9.57 | $ | 8.30 | |||||||||
|
First
Quarter
|
$ | 8.70 | $ | 8.18 | $ | 8.50 | $ | 8.00 | |||||||||
|
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 | |||||||||
Holders
of Record
The
number of holders of record of our Class A and Class B Stock in 2007 was
approximately 3,500 and 300, respectively. On March 26, 2007, the
closing price per share of our Class A Stock was $9.42, and the closing price
per share of our Class B Stock was $10.20.
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.
|
(b)
|
Recent Sales of
Unregistered Securities; Use of Proceeds from Registered
Securities
|
None.
|
(c)
|
Purchases of Equity
Securities by the Issuer and Affiliated
Purchasers
|
None.
Item 6 –
Selected Financial Data
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, 2007 (the “2007
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,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Revenue
|
$ | 119,235 | $ | 106,125 | $ | 98,105 | $ | 84,089 | $ | 73,911 | ||||||||||
|
Gain
(loss) from discontinued operations
|
$ | 1,912 | $ | -- | $ | 12,231 | $ | (469 | ) | $ | (288 | ) | ||||||||
|
Operating
income (loss)
|
$ | 5,149 | $ | 2,415 | $ | (6,372 | ) | $ | (6,322 | ) | $ | (5,839 | ) | |||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | $ | (8,463 | ) | $ | (5,928 | ) | |||||||
|
Basic
earnings (loss) per share – continuing operations
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | $ | (0.37 | ) | $ | (0.26 | ) | ||||||
|
Basic
earnings (loss) per share – discontinued operations
|
$ | 0.09 | $ | -- | $ | 0.55 | $ | (0.02 | ) | $ | (0.01 | ) | ||||||||
|
Basic
earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | $ | (0.39 | ) | $ | (0.27 | ) | |||||||
|
Diluted
earnings (loss) per share – continuing operations
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | $ | (0.37 | ) | $ | (0.26 | ) | ||||||
|
Diluted
earnings (loss) per share – discontinued operations
|
$ | 0.09 | $ | -- | $ | 0.55 | $ | (0.02 | ) | $ | (0.01 | ) | ||||||||
|
Diluted
earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | $ | (0.39 | ) | $ | (0.27 | ) | |||||||
|
Other
Information:
|
||||||||||||||||||||
|
Shares
outstanding
|
22,482,605 | 22,476,355 | 22,485,948 | 21,998,239 | 21,899,290 | |||||||||||||||
|
Weighted
average shares outstanding
|
22,478,145 | 22,425,941 | 22,249,967 | 21,948,065 | 21,860,222 | |||||||||||||||
|
Weighted
average dilutive shares outstanding
|
22,478,145 | 22,674,818 | 22,249,967 | 21,948,065 | 21,860,222 | |||||||||||||||
|
Total
assets
|
$ | 346,071 | $ | 289,231 | $ | 253,057 | $ | 230,227 | $ | 222,866 | ||||||||||
|
Total
debt
|
$ | 177,195 | $ | 130,212 | $ | 109,320 | $ | 72,879 | $ | 60,765 | ||||||||||
|
Working
capital (deficit)
|
$ | 6,345 | $ | (6,997 | ) | $ | (14,282 | ) | $ | (6,915 | ) | $ | (154 | ) | ||||||
|
Stockholders’
equity
|
$ | 121,362 | $ | 107,659 | $ | 99,404 | $ | 102,010 | $ | 108,491 | ||||||||||
|
EBIT
|
$ | 8,098 | $ | 12,734 | $ | 6,671 | $ | (4,339 | ) | $ | (2,650 | ) | ||||||||
|
Depreciation
and amortization
|
$ | 11,921 | $ | 13,212 | $ | 12,384 | $ | 11,823 | $ | 10,952 | ||||||||||
|
Add: Adjustments
for discontinued operations
|
$ | -- | $ | -- | $ | 567 | $ | 1,915 | $ | 1,907 | ||||||||||
|
EBITDA
|
$ | 20,019 | $ | 25,946 | $ | 19,622 | $ | 9,399 | $ | 10,209 | ||||||||||
|
Debt
to EBITDA
|
8.85 | 5.02 | 5.57 | 7.75 | 5.95 | |||||||||||||||
|
Capital
expenditure (including acquisitions)
|
$ | 42,414 | $ | 16,389 | $ | 53,954 | $ | 33,180 | $ | 5,809 | ||||||||||
|
Number
of employees at 12/31
|
1,383 | 1,451 | 1,523 | 1,677 | 1,453 | |||||||||||||||
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 we
do.
|
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 be ultimately 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):
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | $ | (8,463 | ) | $ | (5,928 | ) | |||||||
|
Add: Interest
expense, net
|
8,163 | 6,608 | 4,473 | 3,078 | 2,567 | |||||||||||||||
|
Add: Income
tax expense
|
2,038 | 2,270 | 1,209 | 1,046 | 711 | |||||||||||||||
|
EBIT
|
$ | 8,098 | $ | 12,734 | $ | 6,671 | $ | (4,339 | ) | $ | (2,650 | ) | ||||||||
|
Add:Depreciation
and amortization
|
11,921 | 13,212 | 12,384 | 11,823 | 10,952 | |||||||||||||||
|
Adjustments
for discontinued operations:
|
||||||||||||||||||||
|
Add: Interest
expense, net
|
-- | -- | 310 | 839 | 856 | |||||||||||||||
|
Add: Depreciation
and amortization
|
-- | -- | 257 | 1,076 | 1,051 | |||||||||||||||
|
EBITDA
|
$ | 20,019 | $ | 25,946 | $ | 19,622 | $ | 9,399 | $ | 10,209 | ||||||||||
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 2007 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, Consolidated Amusements,
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. 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 a greater percentage of our free cash flow in our general real
estate development. Over time, we anticipate that our cinema
operations will become an increasing 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 continuing 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.
These consolidations have adversely
affected our ability to get film in certain domestic markets where we compete
against major exhibitors. With the restructuring and consolidation
undertaken in the industry, and the emergence of increasingly attractive in-home
entertainment alternatives, strategic cinema acquisitions by our North American
operation can be a way to combat such a competitive disadvantage.
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, until recently, controlled interest
rates. New Zealand has enjoyed consistent growth in rentals and
values with some recent signs that this has plateaued in the short
term. Project commencements have declined with indications that
construction prices will tighten this year. There are continuing
signs that large Australian-based funds are actively seeking out opportunities
in New Zealand.
The Australian commercial sector of the
real estate market has remained buoyant in Australia during 2007. 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 has begun to 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, 2007 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
|
Consistent
with our philosophy to look for opportunities in the cinema exhibition industry,
on February 22, 2008 we acquired from two related companies, Pacific Theatres
and Consolidated Amusement Theatres, substantially all of their cinema assets in
Hawaii of nine complexes (98 screens), San Diego County of four complexes (51
screens), and Northern California of two complexes (32 screens). In
total, we acquired fourteen mature leasehold cinemas and the management rights
to one additional mature cinema with 8 screens. In saying that these
cinema are “mature” we mean that they have been in operation for some years, and
are, in our view, proven performers in their markets. We refer to
these cinemas from time to time in this report as Consolidated
Cinemas.
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 2007, 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;
|
|
|
·
|
a
New Zealand property rented to an unrelated third party, to be held for
current income and long-term
appreciation;
|
|
|
·
|
our
Lake Taupo property in New Zealand that is currently improved with a motel
which we are in the process of renovating its units to be
condominiums. A portion of this property includes unimproved
land that we do not intend to develop;
and
|
|
|
·
|
the
ancillary retail and commercial tenants at some of our non-ETRC cinema
properties.
|
In
addition, we have approximately 5.3 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 2007,
we acquired the following real property interests:
|
|
·
|
Manukau
Land. On July 27, 2007, we purchased through a Landplan
Property Partners property trust a 64.0 acre parcel of undeveloped
agricultural real estate for approximately $9.3 million (NZ$12.1
million). We intend to rezone the property from its current
agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can
be given that such rezoning will be achieved, or if achieved, that it will
occur in the near term.
|
|
|
·
|
New Zealand Commercial
Property. On June 29, 2007, we acquired a commercial
property for $5.9 million (NZ$7.6 million), rented to an unrelated third
party, to be held for current income and long-term
appreciation.
|
|
|
·
|
Cinemas 1, 2, & 3
Building. On June 28, 2007, we purchased the building
associated with our Cinemas 1, 2, & 3 for $100,000 from Sutton Hill
Capital (“SHC”). Our option to purchase that building has been
previously disclosed, and was granted to us by SHC at the time that we
acquired the underlying ground lease from SHC on June 1,
2005. As SHC is a related party to our corporation, our Board’s
Audit and Conflicts Committee, comprised entirely of outside independent
directors, and subsequently our entire Board of Directors unanimously
approved the purchase of the property. The Cinemas 1, 2 & 3
is located on 3rd Avenue between 59th and 60th
Streets.
|
|
|
·
|
Lake Taupo
Property. On February 14, 2007, we acquired, through a
Landplan Property Partners property trust, a 1.0 acre parcel of commercial
real estate for approximately $4.9 million (NZ$6.9
million). The property was improved with a motel, but we are
currently renovating the property’s units to be condominiums. A
portion of this property includes unimproved land that we do not intend to
develop. This land was determined to have a fair value of $1.8
million (NZ$2.6 million) at the time of purchase and is included on our
balance sheet as land held for sale. The remaining property and
its cost basis of $3.1 million (NZ$4.3 million) was included in property
under development. The operating activities of the motel are
not material.
|
|
|
·
|
Tower Ground
Lease. On February 8, 2007, we purchased the tenant’s
interest in the ground lease underlying the building lease for one of our
domestic cinemas for $493,000.
|
In 2006,
we acquired the following real property 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 Landplan
Property Partners initiative. We have obtained approval to
develop the property to be a 28,000 square foot grade A commercial office
building comprising six floors of office space and two basement levels of
parking with 33 parking spaces. We expect to spend US$8.2
million (AUS$9.4 million) in development costs. We plan to
complete the project in December
2008.
|
|
|
·
|
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 3.3 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.
|
|
|
·
|
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.
|
Property Held For or Under
Development
For fiscal 2007, 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 3.3 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 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 162,000 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 has been redeveloped as an approximately
100,000 square foot residential condominium project with ground floor
retail and marketed under the name “Place
57.” In 2006, the joint venture was able to close on the
sales of 59 condominiums resulting in gross sales of $117.7 million and
equity earnings from unconsolidated joint venture to us of $8.3
million. During 2007, this joint venture sold the remaining
eight residential condominiums resulting in gross sales of $25.7 million
and equity earnings from unconsolidated joint venture to us of $1.3
million. Only the commercial unit is still available for
sale;
|
|
|
·
|
a
0.3 acre property with a two-story 3,464 square foot building
Indooroopilly, Brisbane, Australia. We have obtained approval
to develop the property to be a 28,000 square foot grade A commercial
office building comprising six floors of office space and two basement
levels of parking with 33 parking spaces. We expect to spend
US$8 million (AUS$9.4 million) in development costs. We plan to
complete the project in December
2008;
|
|
|
·
|
the
Manukau land parcel was purchased on July 27, 2007 through a Landplan
Property Partners property trust a 64.0 acre parcel of undeveloped
agricultural real estate for approximately $9.3 million (NZ$12.1
million). We intend to rezone the property from its current
agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can
be given that such rezoning will be achieved, or if achieved, that it will
occur in the near term; and
|
|
|
·
|
a
1.0-acre parcel of commercial real estate located in Lake Taupo, New
Zealand. The property was improved with a motel, but we are
currently renovating the property’s units to be
condominiums.
|
Property Held For
Sale
At December 31, 2007, the adjacent
unimproved land to our recently purchased Lake Taupo property acquired in 2007
was held for sale.
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 acquire cinema assets 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:
|
·
|
Consolidated
Cinemas. On October 8, 2007, we entered into agreements
to acquire leasehold interests in 15 cinemas then owned by Pacific
Theatres Exhibition Corp. and its’ affiliates. The cinemas,
which are located in the United States, contain 181 screens with annual
revenue of approximately $78.0 million. The aggregate purchase
price of the cinemas and related assets is $69.3 million. This
acquisition closed on February 22,
2008.
|
|
·
|
Manukau
Land. On July 27, 2007, we purchased through a Landplan
Property Partners property trust a 64.0 acre parcel of undeveloped
agricultural real estate for approximately $9.3 million (NZ$12.1
million). We intend to rezone the property from its current
agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can
be given that such rezoning will be achieved, or if achieved, that it will
occur in the near term.
|
|
·
|
New Zealand Commercial
Property. On June 29, 2007, we acquired a commercial
property for $5.9 million (NZ$7.6 million), rented to an unrelated third
party, to be held for current income and long-term
appreciation. The purchase price allocation for this
acquisition is $1.2 million (NZ$1.6 million) allocated to land and $4.7
million (NZ$6.1 million) allocated to
building.
|
|
·
|
Lake Taupo
Property. On February 14, 2007, we acquired, through a
Landplan Property Partners property trust, a 1.0 acre parcel of commercial
real estate for approximately $4.9 million (NZ$6.9
million). The property was improved with a motel, but we are
currently renovating the property’s units to be condominiums. A
portion of this property includes unimproved land that we do not intend to
develop. This land was determined to have a fair value of $1.8
million (NZ$2.6 million) at the time of purchase and is included on our
balance sheet as land held for sale. The remaining property and
its cost basis of $3.1 million (NZ$4.3 million) was included in property
under development. The operating activities of the motel are
not material.
|
|
·
|
Cinemas 1, 2, & 3
Building. On June 28, 2007, we purchased the building
associated with our Cinemas 1, 2, & 3 for $100,000 from Sutton Hill
Capital (“SHC”). Our option to purchase that building has been
previously disclosed, and was granted to us by SHC at the time that we
acquired the underlying ground lease from SHC on June 1,
2005. As SHC is a related party to our corporation, our Board’s
Audit and Conflicts Committee, comprised entirely of outside independent
directors, and subsequently our entire Board of Directors unanimously
approved the purchase of the property. The Cinemas 1, 2 & 3
is located on 3rd Avenue between 59th and 60th
Streets.
|
|
·
|
Tower Ground
Lease. On February 8, 2007, we purchased the tenant’s
interest in the ground lease underlying the building lease for one of our
domestic cinemas. The purchase price of $493,000 was paid in
two installments; $243,000 was paid on February 8, 2007 and $250,000 was
paid on June 28, 2007.
|
|
·
|
Place 57,
Manhattan. We own a 25% membership interest in the
limited liability company that has been developing the site of our former
Sutton Cinema on 57th
Street just east of 3rd
Avenue in Manhattan, as a 143,000 square foot residential condominium
tower, with the ground floor retail unit and the resident manager’s
apartment. All of the residential units have now been sold and
only the commercial unit is still available for sale. As of
December 31, 2007, we had received distributions totaling $9.8 million
from the earnings of this project and we have received $1.9 million of
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. We have
obtained approval to develop the property to be a 28,000 square foot grade
A commercial office building comprising six floors of office space and two
basement levels of parking with 33 parking spaces. We expect to
spend US$8.2 million (AUS$9.4 million) in development costs. We
plan to complete the project in December
2008.
|
|
·
|
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 increased our
holdings at Moonee Ponds to 3.3 acres and gave 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 suburb 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.
|
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 recorded
an impairment loss for one of our cinema locations for the year ended December
31, 2007.
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, 2007, we had recorded approximately
$57.9 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 and an EPA claim in relation to one of our formerly
owned railroad sites. We intend to defend vigorously our positions,
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
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, 2007, 2006 and 2005 (dollars in
thousands).
|
Year
Ended December 31, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 103,467 | $ | 21,887 | $ | (6,119 | ) | $ | 119,235 | |||||||
|
Operating
expense
|
83,875 | 8,324 | (6,119 | ) | 86,080 | |||||||||||
|
Depreciation
& amortization
|
6,942 | 4,418 | -- | 11,360 | ||||||||||||
|
General
& administrative expense
|
3,195 | 831 | -- | 4,026 | ||||||||||||
|
Segment
operating income
|
$ | 9,455 | $ | 8,314 | $ | -- | $ | 17,769 | ||||||||
|
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
|
||||||||||||
|
Revenue
|
$ | 86,760 | $ | 16,523 | $ | (5,178 | ) | $ | 98,105 | |||||||
|
Operating
expense
|
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 | |||||||
|
Reconciliation
to net income:
|
2007
|
2006
|
2005
|
|||||||||
|
Total
segment operating income
|
$ | 17,769 | $ | 11,450 | $ | 4,132 | ||||||
|
Non-segment:
|
||||||||||||
|
Depreciation and amortization
expense
|
561 | 484 | 387 | |||||||||
|
General and administrative
expense
|
12,059 | 8,551 | 10,117 | |||||||||
|
Operating
income (loss)
|
5,149 | 2,415 | (6,372 | ) | ||||||||
|
Interest expense,
net
|
(8,163 | ) | (6,608 | ) | (4,473 | ) | ||||||
|
Other income
(expense)
|
(505 | ) | (1,998 | ) | 19 | |||||||
|
Minority
interest
|
(1,003 | ) | (672 | ) | (579 | ) | ||||||
|
Gain on disposal of discontinued
operations
|
1,912 | -- | 13,610 | 1 | ||||||||
|
Loss from discontinued
operations
|
-- | -- | (1,379 | ) | ||||||||
|
Income tax
expense
|
(2,038 | ) | (2,270 | ) | (1,209 | ) | ||||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
2,545 | 9,547 | 1,372 | |||||||||
|
Gain on sale of unconsolidated
joint venture
|
-- | 3,442 | -- | |||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | |||||
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 have been adjusted to conform to the current year
presentation.
The
following tables and discussion which follows detail our operating results for
our 2007, 2006 and 2005 cinema segment, adjusted to reflect the discontinuation,
in June 2005, of our Puerto Rico cinema operations, respectively (dollars in
thousands):
|
Year
Ended December 31, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,647 | $ | 41,722 | $ | 14,683 | $ | 75,052 | ||||||||
|
Concessions
revenue
|
5,314 | 13,577 | 4,302 | 23,193 | ||||||||||||
|
Advertising
and other revenues
|
2,043 | 2,277 | 902 | 5,222 | ||||||||||||
|
Total
revenues
|
26,004 | 57,576 | 19,887 | 103,467 | ||||||||||||
|
Cinema
costs
|
18,385 | 44,460 | 15,868 | 78,713 | ||||||||||||
|
Concession
costs
|
1,029 | 3,017 | 1,116 | 5,162 | ||||||||||||
|
Total
operating expense
|
19,414 | 47,477 | 16,984 | 83,875 | ||||||||||||
|
Depreciation
and amortization
|
2,003 | 3,212 | 1,727 | 6,942 | ||||||||||||
|
General
& administrative expense
|
2,140 | 1,036 | 19 | 3,195 | ||||||||||||
|
Segment
operating income
|
$ | 2,447 | $ | 5,851 | $ | 1,157 | $ | 9,455 | ||||||||
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,891 | $ | 36,564 | $ | 13,109 | $ | 68,564 | ||||||||
|
Concessions
revenue
|
5,472 | 11,288 | 4,001 | 20,761 | ||||||||||||
|
Advertising
and other revenues
|
1,710 | 2,098 | 915 | 4,723 | ||||||||||||
|
Total
revenues
|
26,073 | 49,950 | 18,025 | 94,048 | ||||||||||||
|
Cinema
costs
|
18,176 | 38,743 | 13,763 | 70,682 | ||||||||||||
|
Concession
costs
|
1,047 | 2,584 | 1,037 | 4,668 | ||||||||||||
|
Total
operating expense
|
19,223 | 41,327 | 14,800 | 75,350 | ||||||||||||
|
Depreciation
and amortization
|
1,890 | 5,445 | 1,313 | 8,648 | ||||||||||||
|
General
& administrative expense
|
2,614 | 1,027 | 17 | 3,658 | ||||||||||||
|
Segment
operating income (loss)
|
$ | 2,346 | $ | 2,151 | $ | 1,895 | $ | 6,392 | ||||||||
|
Year
Ended December 31, 2005
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 17,802 | $ | 33,142 | $ | 11,926 | $ | 62,870 | ||||||||
|
Concessions
revenue
|
4,979 | 10,505 | 3,618 | 19,102 | ||||||||||||
|
Advertising
and other revenues
|
1,646 | 2,233 | 909 | 4,788 | ||||||||||||
|
Total
revenues
|
24,427 | 45,880 | 16,453 | 86,760 | ||||||||||||
|
Cinema
costs
|
17,869 | 38,045 | 12,157 | 68,071 | ||||||||||||
|
Concession
costs
|
1,054 | 2,448 | 1,092 | 4,594 | ||||||||||||
|
Total
operating expense
|
18,923 | 40,493 | 13,249 | 72,665 | ||||||||||||
|
Depreciation
and amortization
|
1,822 | 5,537 | 964 | 8,323 | ||||||||||||
|
General
& administrative expense
|
5,839 | 982 | (19 | ) | 6,802 | |||||||||||
|
Segment
operating income (loss)
|
$ | (2,157 | ) | $ | (1,132 | ) | $ | 2,259 | $ | (1,030 | ) | |||||
Cinema Results for 2007
Compared to 2006
|
|
·
|
cinema
revenue increased in 2007 by $9.4 million or 10.0% compared to
2006. The geographic activity of our revenues can be summarized
as follows:
|
|
|
o
|
United
States - Revenues in the United States decreased by $69,000 or
0.3%. This decrease in revenues was attributable to a decrease
in admissions revenues of $244,000 and concessions revenues of $158,000
offset by in increase in advertising and other revenues of
$333,000. The decrease in admissions and concessions revenues
resulted from lower year-end holiday admissions compared to last
year. The increase in others revenues related to more screen
rentals during 2007 than in 2006.
|
|
|
o
|
Australia
- Revenues in Australia increased by $7.6 million or
15.3%. This increase in revenues was attributable to an
increase in admissions revenues of $5.2 million related to an increase in
box office admissions of 118,000 coupled with a $0.52 increase in average
ticket price, concessions revenues of $2.3 million, and advertising and
other revenues of $179,000. This increase in revenues was
primarily related to more appealing film product in late 2007 compared to
the film offerings in 2006 coupled with an increase in the average
admissions price of 5.3%.
|
|
|
o
|
New
Zealand - Revenues in New Zealand increased by $1.9 million or
10.3%. This increase in revenues was attributable to an
increase in admissions revenues of $1.6 million primarily related to a
$0.42 increase in average ticket price, an increase in concessions
revenues of $301,000, and a decrease in advertising and other revenues of
$13,000. This increase in revenues was primarily related to
improved film product in 2007 compared to
2006.
|
|
|
·
|
operating
expense increased in 2007 by $8.5 million or 11.3% compared to
2006. The year on year comparison of operating expenses held
steady in relation to revenues at 81% in 2007 compared to 80% in
2006.
|
|
|
o
|
United
States - Operating expenses in the United States increased by $191,000 or
1.0%.
|
|
|
o
|
Australia
- Operating expenses in Australia increased by $6.2 million or
14.9%. This increase was in line with the above-mentioned
increase in cinema revenues.
|
|
|
o
|
New
Zealand - Operating expenses in New Zealand increased by $2.2 million or
14.8%. This increase was somewhat in line with the increase in
revenues noted above.
|
|
|
·
|
depreciation
expense decreased in 2007 by $1.7 million or 19.7% compared to
2006. This decrease is primarily related to several Australia
cinema assets reaching the end of their depreciable lives as of December
31, 2006.
|
|
|
·
|
general
and administrative expense decreased in 2007 by $463,000 or 12.7% compared
to 2006. The change was primarily related to a decrease in
legal costs associated with our anti-trust claims against Regal and
certain distributors.
|
|
|
·
|
the
Australia and New Zealand annual average exchange rates have changed by
11.4% and 13.5%, respectively, since 2006, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income was
minimal.
|
|
|
·
|
cinema
segment operating income increased in 2007 by $3.1 million compared to
2006 primarily resulting from our improved cinema operations in each
region, our increased admissions from better film product, and a reduction
in general and administrative expense primarily associated with legal
expenses.
|
Cinema Results for 2006
Compared to 2005
|
|
·
|
cinema
revenue increased in 2006 by $7.3 million or 8.4% compared to
2005. The geographic activity of our revenues can be summarized
as follows:
|
|
|
o
|
United
States - Revenues in the United States increased by $1.6 million or
6.7%. This increase in revenues was attributable to an increase
in admissions revenues by $1.1 million, concessions revenues by $493,000,
and advertising and other revenues by $64,000. The significant
increase in admissions revenues resulted from higher admissions related in
part to more appealing film product in 2006 compared to the film offerings
in 2005.
|
|
|
o
|
Australia
- Revenues in Australia increased by $4.1 million or 8.9%. This
increase in revenues was attributable to an increase in admissions
revenues by $3.4 million, concessions revenues by $783,000, and
advertising offset by a decrease in other revenues of
$135,000. This increase in revenues was primarily related to
more appealing film product in 2006 compared to the film offerings in
2005.
|
|
|
o
|
New
Zealand - Revenues in New Zealand increased by $1.6 million or
9.6%. This increase in revenues was attributable to an increase
in admissions revenues by $1.2 million, concessions revenues by $383,000,
and advertising and other revenues by $6,000. This increase in
revenues was primarily related to the acquisition of the Queenstown cinema
in February 2006 and the inclusion of 100% of the revenues from the Palms
cinema after our purchase of the remaining 50% which we did not already
own, at the beginning of the second quarter of
2006.
|
|
|
·
|
operating
expense increased in 2006 by $2.7 million or 3.7% compared to
2005.
|
|
|
o
|
United
States - Operating expenses in the United States increased by only
$300,000 or 1.6%. This small increase was due to efforts to
hold operating costs steady even with increased
admissions.
|
|
|
o
|
Australia
- Operating expenses in Australia increased by only $834,000 or
2.1%. This small increase was due to efforts to hold operating
costs steady even with increased
admissions.
|
|
|
o
|
New
Zealand - Operating expenses in New Zealand increased by $1.6 million or
11.7%. This increase was due to higher admissions and
concessions predominately resulting from the addition of the Queenstown
and Palms cinemas in 2006.
|
|
|
·
|
depreciation
expense increased in 2006 by $325,000 or 3.9% compared to
2005. The increase was primarily from our 2006 acquisitions in
New Zealand of the Queenstown Cinema in February 2006 and the Palms Cinema
in early April 2006.
|
|
|
·
|
general
and administrative expense decreased in 2006 by $3.1 million or 46.2%
compared to 2005. The change was primarily related to a
decrease in legal costs associated with our anti-trust claims against
Regal and certain distributors.
|
|
|
·
|
cinema
segment operating income increased in 2006 by $7.4 million compared to
2005 primarily resulting from our improved cinema operations in each
region, our increased admissions from better film product, and a dramatic
reduction in general and administrative expense, driven by a reduction in
legal expenses.
|
Real Estate
Segment
As
discussed above, our other major business segment is the development and
management of real estate. These holdings include our rental live
theaters, certain fee owned properties used in our cinema business, and
unimproved real estate held for development. Effective the fourth
quarter of 2006, we have changed the presentation of our segment reporting such
that our intersegment revenues and expenses are reported separately from our
segments’ operating activity. The effect of this change is to include
intercompany rent revenues and rent expenses into their respective cinema and
real estate business segments. The revenues and expenses for 2005
have been adjusted to conform to the current year presentation. The
tables and discussion which follow detail our operating results for our 2007,
2006 and 2005 real estate segment adjusted to reflect the sale of our Glendale
property in May 2005 (dollars in thousands):
|
Year
Ended December 31, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theater rental and ancillary income
|
$ | 4,043 | $ | -- | $ | -- | $ | 4,043 | ||||||||
|
Property
rental income
|
1,534 | 9,336 | 6,974 | 17,844 | ||||||||||||
|
Total
revenues
|
5,577 | 9,336 | 6,974 | 21,887 | ||||||||||||
|
Live
theater costs
|
2,105 | -- | -- | 2,105 | ||||||||||||
|
Property
rental cost
|
1,210 | 3,076 | 1,933 | 6,219 | ||||||||||||
|
Total
operating expense
|
3,315 | 3,076 | 1,933 | 8,324 | ||||||||||||
|
Depreciation
and amortization
|
376 | 2,355 | 1,687 | 4,418 | ||||||||||||
|
General
& administrative expense
|
15 | 665 | 151 | 831 | ||||||||||||
|
Segment
operating income
|
$ | 1,871 | $ | 3,240 | ||||||||||||