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, 2008
or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _______ to ______
Commission
File 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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NYSE
Alternext US
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Class
B Voting Common Stock, $0.01 par value
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NYSE
Alternext US
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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 16, 2009, there were 20,987,115 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 $127,928,176 as of June 30,
2008.
READING INTERNATIONAL, INC.
ANNUAL
REPORT ON FORM 10-K
YEAR
ENDED DECEMBER 31, 2008
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. Our Class A Nonvoting Common Stock (“Class A Stock”) and
Class B Voting Common Stock (“Class B Stock”) are listed for trading on the NYSE
Alternext US 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 and
our website is www.readingrdi.com. It
is our practice to make available free of charge on our website our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Sections 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we have
electronically filed such material with or furnished it to the Securities and
Exchange Commission. 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 development, ownership and operation of
entertainment and real property assets in the United States, Australia, and New
Zealand. Currently, we operate in two business
segments:
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(1)
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Cinema Exhibition, through
our 58 multiplex theatres,
and
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(2)
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Real Estate, including real
estate development and the rental of retail, commercial and live theatre
assets.
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We
believe that these two business segments can complement one another, as the
comparatively consistent cash flows generated by our cinema operations can be
used to fund the front-end cash demands of our real estate development
business.
At December 31, 2008, the book value of
our assets was approximately $370.1 million; and as of that same date, we had a
consolidated stockholders’ book equity of approximately $65.8
million. Calculated based on book value, approximately $135.9 million
of our assets relate to our cinema activities and approximately $209.3 million
of our assets relate to our real estate activities. At December 31,
2008, the allocation between our cinema assets and our non-cinema assets was
approximately 37% and 63%, respectively.
For additional segment financial
information, please see Note 22 – Business Segments and Geographic
Area Information to our 2008 Consolidated Financial
Statements.
Recognizing that we are part of a world
economy, we have concentrated our assets in three countries: the United States,
Australia and New Zealand. We currently have approximately 38% of our
assets (based on net book value) in the United States, 44% in Australia and 18%
in New Zealand compared to 22%, 53% and 25% at the end of
2007. For
2008, our gross revenues in these jurisdictions were $99.8 million, $67.8
million, and $23.7 million, respectively, compared to $31.2 million, $57.8
million and $24.4 million for 2007. The principal reason for these
changes was the acquisition of the Consolidated circuit in Hawaii and the
California multiplex cinemas and the declining value of the Australian and New
Zealand dollars as compared to the US dollar, as discussed earlier.
For additional financial information
concerning the geographic distribution of our business, please see Note 22 –
Business Segments and
Geographic Area Information to our 2008 Consolidated Financial
Statements.
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. Also, in the current environment, we intend to be
opportunistic in identifying and endeavoring to acquire undervalued assets,
particularly assets with proven cash flow and which we believe to be resistant
to current recessionary trends.
Consistent with this philosophy, on
February 22, 2008 we acquired fifteen leasehold cinemas representing a total of
181 screens for $70.2 million. These cinemas are located in Hawaii
and California and, since the acquisition date through to December 31, 2008
produced gross revenues of $66.9 million. This acquisition was
financed, principally with a combination of institutional and seller financing
totaling $71.0 million. The purchase price is subject to downward
adjustment depending upon future circumstances, up to a maximum possible
downward adjustment of $21.0 million.
On September 16, 2008, we entered into
a sale option agreement to sell our Auburn real estate property and cinema for
$28.5 million (AUS$36.0 million). The sale option agreement calls for
an initial option payment of $948,000 (AUS$1.2 million), received on the
agreement date, and four option installment payments of $316,000 (AUS$400,000),
$316,000 (AUS$400,000), $316,000 (AUS$400,000), and $948,000 (AUS$1.2 million)
payable over the subsequent 9 months. As of December 31, 2008, we
have received $1.3 million (AUS$1.6 million) in payments associated with this
option agreement. The option comes to term on November 1, 2009 at
which time the balance of $25.6 million (AUS$32.4 million) is due and
payable. At any time during the 13-month option, the buyer may
decline to move further in the sale process resulting in a forfeiture of all
previous option payments.
During
2008, we have acquired or entered into agreements to acquire four contiguous
properties in Brisbane, Australia, of approximately 50,000 square feet, which we
intend to develop. The aggregate purchase price of these properties
is $10.1 million (AUS$13.7 million), of which $2.5 million (AUS$2.8 million)
relates to the three properties that have been acquired and $7.6 million
(AUS$10.9 million) relates to the one property that is under contract to
be
acquired. Our
obligation to close on the fourth property is subject to certain conditions
(which we may waive) including a rezoning of certain of the four
properties.
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, in February 2007 we broke with this policy and
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. 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.
However,
during the first quarter of 2009, we took advantage of current market
illiquidity for securities such as our Trust Preferred Securities to repurchase
$22.9 million in face value of those securities for $11.5 million. In
addition, in December 2008 we secured a waiver of all financial covenants with
respect to our Trust Preferred Securities for a period of nine years, in
consideration of the payment of $1.6 million, consisting of an initial payment
of $1.1 million and a contractual obligation to pay $270,000 in December 2011
and $270,000 in December 2014. In the event that the remaining
payments are not made, the only remedy is the termination of the
waiver. Because of this transaction, we once again have substantially
matched the currency in which we have financed our developments with the
jurisdictions in which these developments are located.
In summary, 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 asset
allocation between our domestic and overseas assets and operations, and 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, 2008, our principal assets included:
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interests
in 56 cinemas comprising some 459
screens;
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fee
interests in four live theatres (the Union Square, the Orpheum and Minetta
Lane in Manhattan and the Royal George in
Chicago);
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fee
ownership of approximately 1.2 million square feet of developed commercial
real estate, and approximately 15.3 million square feet of land (including
approximately 5.3 million square feet of land held for development),
located principally in urbanized areas of Australia, New Zealand and the
United States; and
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cash,
cash equivalents and investments in marketable securities aggregating
$34.0 million.
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Our Cinema Exhibition
Activities and Business
General
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
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purchase
of Consolidated Cinemas, we do not feel pressure to build or acquire
cinemas for the sake of simply adding on units. We 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 there is a higher and better use of our property, or to sell individual
assets, if we are presented with an attractive
opportunity.
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Our current cinema assets are as set
forth 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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18
cinemas
135
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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22
cinemas
167
screens
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New
Zealand
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9
cinemas
48
screens
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None
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3
cinemas5
16
screens
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None
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12
cinemas
64
screens
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United
States
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21
cinemas
222
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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24
cinemas
237
screens
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Totals
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48
cinemas
405
screens
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4
cinemas
22
screens
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4
cinemas
32
screens
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2
cinemas
9
screens
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58
cinemas
468
screens
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1 Cinemas
owned and operated through consolidated, but not wholly owned
subsidiaries.
2 Cinemas
owned and operated through unconsolidated
subsidiaries.
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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We also
offer premium class seating and amenities in certain of our cinemas and are in
the process of converting certain of our exiting cinemas to provide this premium
offering.
Although we operate cinemas in three
jurisdictions, the general nature of our operations and operating strategies do
not vary materially from jurisdiction to jurisdiction. In each
jurisdiction, our gross receipts derive essentially for box office receipts,
concession sales, and screen advertising. Our ancillary revenues
derive principally from theatre rentals (for example, for film festivals and
special events), ancillary programming (such as concerts and sporting events)
and internet advertising and ticket sales.
Our cinemas derive approximately
70.4% of their 2008 revenues from box office receipts. Ticket prices
vary by location, and provide for reduced rates for senior citizens and
children.
Show times and features are placed in
advertisements in local newspapers and on our various websites. In
the United States, film distributors may also advertise certain feature films in
various print, radio and television
media, as
well as on the internet and those costs are generally paid by
distributors. In Australia and New Zealand, the exhibitor typically
pays the costs of local newspaper film advertisements, while the distributors
are responsible for the cost of any national advertising campaign.
Concession sales account for
approximately 25.1% of our total 2008 revenues. Although certain
cinemas have licenses for the sale and consumption of alcoholic beverages,
concession products primarily include popcorn, candy, and soda.
Screen
advertising and other revenues contribute approximately 4.5% of our total 2008
revenues. With the exception of certain rights that we have retained
to sell to local advertisers, generally speaking, we are not in the screen
advertising business and have contracted with a national screen advertising
company to provide such advertising for us.
In New
Zealand, 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 2/3 interest is owned by the founders of the
company, who have been in the art film distribution business since
1993.
Management of
Cinemas
With two exceptions, we manage all of
our cinemas ourselves with executives located in Los Angeles, Manhattan,
Melbourne, Australia, and Wellington, New Zealand. Approximately
1,918 individuals were employed (on a full time or part time basis) in our
cinema operations in 2008. Our three New Zealand Rialto cinemas are
owned by a joint venture in which Reading New Zealand is a 50% joint venture
partner. While we are principally responsible for the booking of the
cinemas, our joint venture partner, SKY City Cinemas, manages the day-to-day
operations of these cinemas. In addition, we have a 1/3 interest in a
16-screen Brisbane cinema. Greater Union manages that
cinema.
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. In Australia and New Zealand, some of those major
distributors distribute through local unaffiliated distributors. 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
Miramax. Generally speaking, film payment terms are based upon an
agreed upon percentage of box office receipts which will vary from film to film
as films are licensed in Australia, New Zealand and the United States on a
film-by-film, theatre by theatre basis.
While in certain markets film may be
allocated by the distributor among competitive cinemas, typically in the markets
in which we operate, we have access to all conventional film
products. In the art and specialty markets, due to the limited number
of prints available, we from time to time are unable to license all of the films
that we might desire to play. In summary, while in some markets we
are subject to film allocation, on the whole, access to film product has not in
recent periods been a major impediment to our operations.
Competition
In each of the United States,
Australia, and New Zealand, film patrons typically select the cinema that they
are going to go to first by selecting the film they want to see, and then by
selecting the cinema in which they would prefer to see
it. Accordingly, 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.
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, because of the dramatic 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.
Once a patron has selected the film,
the choice of cinema is typically impacted by the quality of the cinema
experience offered weighed against convenience and cost. For example,
most cinema patrons seem to prefer a modern stadium design multiplex, to an
older sloped floor cinema, and to prefer a cinema that either offers convenient
access to free parking (or public transport) over a cinema that does
not. However, if the film they desire to see is only available at a
limited number of locations, they will typically chose the film over the quality
of the cinema and/or the convenience of the cinema. Generally
speaking, our cinemas are modern multiplex cinemas with good and convenient
parking. As discussed further below, the availability of 3D or
digital technology can also be a factor in the preference of one cinema over
another.
The film exhibition markets in
the United States, Australia, and New Zealand are to a certain extent dominated
by a limited number of major exhibition companies. The principal
exhibiters in the United States are Regal (with 6,801 screens in 552 cinemas),
AMC (with 4,628 screens in 309 cinemas), Cinemark (with 3,742 screens in 293
cinemas), and Carmike (with 2,276 screens in 250 cinemas). At the
present time, we are the 13th largest exhibitor with 1% of the box office in the
United States with 222 screens in 21 cinemas.
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 has 243 screens
nationally; Village 218 screens; Birch Carroll & Coyle (a subsidiary of
Greater Union) 230 screens and Hoyts 333 screens. By comparison, our
151 screens 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).
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 $746.8 million (AUS$781.0 million) at
June 30, 2008. The Greater Union organization does not separately
publish financial reports, but its parent, Amalgamated Holdings, had a publicly
reported consolidated net worth of approximately $540.3 million (AUS$565.0
million) at June 30, 2008. Hoyts is privately held and does not
publish financial reports. Hoyts is currently owned by Pacific Equity
Partners.
In Australia, 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 is also involved in film production and
distribution.
Digital and
3D
There is currently
considerable uncertainty as to the future of digital and 3D exhibition and
in-the-home entertainment alternatives and the impact of these technologies on
cinema exhibition. The industry continues to address issues relating
to the benefits and detriments of moving from conventional film projection to
digital projection technology as well as 3D technology, including:
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when
it will be available on an economically attractive
basis;
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who
will pay for the conversion from conventional to digital and 3D technology
between exhibitors and
distributors;
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what
the impact will be on film licensing expense;
and
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how
to deal with security and potential pirating issues if film is distributed
in a digital format.
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Several
major exhibitors have now announced plans to convert their cinemas to digital
projection, along with 3D for some of their screens at their various
cinemas. 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. At the present time, we estimate that it would likely cost in
the range of $47.0 million for us to convert our wholly owned cinemas to digital
distribution on a worldwide basis. We have begun the process of
converting some of our theatres in the locations where we feel it is best suited
and most helpful against the competition.
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.
Competitive issues are discussed in
greater detail below under the caption, Competition, and under the
caption, Item 1A - Risk Factors.
Seasonality
Major films are generally released to
coincide with holidays. With the exception of Christmas and New
Years, this fact provides some balancing of our revenues because there is no
material overlap between holidays in the United States and those in Australia
and New Zealand. Distributors will delay, in certain cases, releases
in Australia and New Zealand to take advantage of Australia and New Zealand
holidays that are not celebrated in the United States.
Employees
We have 68 full time executive and
administrative employees and approximately 1,918 cinema
employees. Our cinema employees in Hawaii and Wellington, New Zealand
are unionized, while our cinema employees in California, New York, New Jersey,
and Texas are not. Our one union contract with respect to our Hawaii
cinemas expires on March 31, 2009. Our union contracts with respect
to New Zealand expire on January 31, 2009 and October 1, 2009. None
of our Australia based employees is unionized. Overall, we are of the
view that the existence of these contracts does not materially increase our
costs of labor or our ability to compete. We believe our relations
with our employees to be generally good.
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 activities or which were acquired for the
development of cinemas or cinema based real estate development
projects;
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the
acquisition of fee interests for general real estate
development;
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the
leasing to shows of our live theatres;
and
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the
redevelopment of existing cinema sites to their highest and best
use.
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While we report our real estate as a
separate segment, it has historically operated as an integral portion of our
overall business and has principally been in support of that
business. Accordingly, our senior executives oversee and participate
in both the cinema and real estate aspects of our business. We also
employ a number of full time real estate
professionals
to assist us in our non-cinema real estate development activities and non-cinema
property management activities.
Our real estate activities, holdings
and developments are described in greater detail in Item 2 – Properties, and
that discussion is not repeated here.
Item 1A
– Risk
Factors
Investing
in our securities involves risk. Set forth below is a summary of
various risk factors that 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 that 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.
Competition
from less expensive in-home entertainment alternatives may be intensified as a
result of the current economic recession.
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.
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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·
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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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·
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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
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development
loans with roll over or other provisions mitigating our need to refinance
immediately upon completion of
construction.
|
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 (including, without limitation, environmental laws and
requirements to remediate environmental contamination that may exist on a
property (such as, by way of example, asbestos), 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. However, we do have debt at
our parent company level that is serviced by our overseas cash flow and
our ability to service this debt could be adversely impacted by declines
in the relative value of the Australian and New Zealand Dollar compared to
the US Dollar. Set forth below is a chart of the exchange
ratios between these three currencies over the past twenty
years:
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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
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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.
|
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
From
time to time, we may have negative working capital.
In recent
years, as we have invested our cash in new acquisitions and the development of
our existing properties, and from time to time we have had negative working
capital. 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.
We
have substantial short to medium term debt.
Generally
speaking, we have historically 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. In the first quarter of 2009, we
repurchased $22.9 million of our Trust Preferred Securities at a 50%
discount.
In
connection with the financing of 15 additional cinemas in 2008, 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. As of December 31, 2008, this total debt had been reduced to
$239.2 million.
At the
present time, the corporate borrowers both domestically and internationally are
facing a severe shortage of liquidity. No assurances can be given
that we will be able to refinance our debt as it becomes due.
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 $19.6 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 $5.8 million.
Our
stock is thinly traded.
Our stock
is thinly traded, with an average daily volume in 2008 of only approximately
4,600 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 68.5% 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,
2008, Mr. Cotter controlled 68.5% 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 NYSE Alternext US from the corporate
governance rules adopted by that Exchange.
Generally
speaking, the NYSE Alternext US 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 NYSE Alternext US 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.
None.
Executive and Administrative
Offices
We lease approximately 8,582 square
feet of office space in Commerce, California to serve as our executive
headquarters. We own a 9,000 square foot office building in
Melbourne, Australia, which serves as the headquarters for our Australia and New
Zealand operations. We occupy approximately 2,000 square feet at our
Village East leasehold property for administrative purposes. We also
own a residential condominium unit in Los Angeles, used as executive office and
residential space by our Chairman and Chief Executive Officer.
Entertainment
Properties
Entertainment Use Leasehold
Interests
As of December 31, 2008, we lease
approximately 2.16 million square feet of completed cinema space in the United
States, Australia, and New Zealand as follows:
|
Aggregate
Square Footage
|
Approximate
Range of Remaining Lease Terms (including renewals)
|
|
|
United
States
|
1,002,625
|
2010
– 2049
|
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Australia
|
817,820
|
2016
– 2049
|
|
New
Zealand
|
340,000
|
2023
– 2034
|
On
February 22, 2008, we acquired 15 pre-existing cinemas from a third party,
comprising approximately 727,000 square feet of cinema improvements in the
United States. This space is reflected in the above
table.
Entertainment Use Fee
Interests
In Australia, we own 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 that we
are holding for development and which is anticipated to include a cinema
component. Of these fee interests, approximately 809,000 square feet
is currently improved with cinemas.
In New Zealand, we own as of December
31, 2008 a 152,000 square foot site, which includes an existing 335,000 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 that incorporates the existing parking
garage. The remaining land is currently leased and is slated for
development as phase two of our Wellington ETRC. We own the fee
interests underlying three additional cinemas in New Zealand, which properties
include approximately 12,000 square feet of ancillary retail space.
In the United States, we own as of
December 31, 2008, on a consolidated basis, approximately 126,000 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).
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
primarily in the business of leasing theatre space. However, we may
from time to time participate as an investor in a play, which can help
facilitate the production of the 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 Cinema
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 three
cinemas with 22 screens in the New Zealand cities of Auckland,
Christchurch, and Dunedin.
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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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Income Producing Real Estate
Holdings
We own, as of December 31, 2008 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 numbers include an internal allocation of “rent” for such
facilities.
|
Property7
|
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
|
81%
|
$23,561,000
|
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Belmont
Knutsford
Ave and
Fulham
St
Belmont,
WA, Australia
|
19,000
/ 49,000
|
76%
|
$10,558,000
|
|
Cinemas
1, 2 & 38
1003
Third Avenue
Manhattan,
NY, USA
|
0 /
24,000
|
N/A
|
$23,812,000
|
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Courtenay
Central
100
Courtenay Place
Wellington,
New Zealand
|
38,000
/ 68,000
Plus
a 245,000 square foot parking structure
|
76%
|
$18,455,000
|
|
Invercargill
Cinema
29
Dee Street
Invercargill,
New Zealand
|
7,000
/ 20,000
|
85%
|
$ 1,916,000
|
|
Lake
Taupo Motel
138-140
Lake Terrace Road
Taupo,
New Zealand
|
22,000
/ 0
|
Short-term
rentals
|
$ 2,397,000
|
|
Maitland
Cinema
Ken
Tubman Drive
Maitland,
NSW, Australia
|
0 /
22,000
|
N/A
|
$ 1,661,000
|
|
Minetta
Lane Theatre
18-22
Minetta Lane
Manhattan,
NY, USA
|
0 /
9,000
|
N/A
|
$ 8,299,000
|
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Napier
Cinema
154
Station Street
Napier,
New Zealand
|
5,000
/ 18,000
|
100%
|
$ 2,148,000
|
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Newmarket
Newmarket,
QLD, Australia
|
93,000
/ 0
|
100%
|
$30,164,000
|
|
Orpheum
Theatre
126
2nd
Street
Manhattan,
NY, USA
|
0 /
5,000
|
N/A
|
$ 3,282,000
|
|
Royal
George
1633
N. Halsted Street
Chicago,
IL, USA
|
37,000
/ 23,000
Plus
21,000 square feet of parking
|
91%
|
$ 3,403,000
|
|
Rotorua
Cinema
1281
Eruera Street
Rotorua,
New Zealand
|
0 /
19,000
|
N/A
|
$ 2,088,000
|
|
Union
Square Theatre
100
E. 17th
Street
Manhattan,
NY, USA
|
21,000
/ 17,000
|
100%
|
$
9,217,000
|
7 A number
of our real estate holdings include entertainment components rented to one or
more of our subsidiaries. The rental area to such subsidiaries is
noted under the entertainment square footage. Rental square footage
refers to the amount of area available to be rented to third parties and the
percentage leased is the amount of rental square footage currently leased to
third parties. The gross book value refers to the gross carrying cost
of the land and buildings of the property. Book value and rental
information are as of December 31, 2008.
8 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.
Long-Term Leasehold Real
Estate Holdings
In
addition, in certain cases we have long-term leases that we view more akin to
real estate investments than cinema leases. As of December 31, 2008,
we had approximately 179,000 square foot of space subject to such long-term
leases.
|
Property9
|
Square
Footage
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Manville
|
0 /
46,000
|
N/A
|
$1,873,000
|
|
Tower
|
0 /
16,000
|
N/A
|
$ 260,000
|
|
Village
East
|
5,000
/ 37,000
|
100%
|
$3,086,000
|
|
Waurn
Ponds
|
6,000
/ 52,000
|
100%
|
$4,915,000
|
9 A number
of our long-term leasehold real estate properties include entertainment
components rented to one or more of our subsidiaries. The rental area
to such subsidiaries is noted under the entertainment square footage.
Rental square footage refers to the amount of area available to be rented to
third parties, and the percentage leased is the amount of rental square footage
currently leased to third parties. Book value includes the entire
investment in the leased property, including any cinema
fit-out. Rental and book value information is as of December 31,
2008.
Real Estate Development
Properties
We are engaged in several real estate
development projects:
|
Property10
|
Square
Footage/ Acreage
|
Gross
Book Value
(in
U.S. Dollars)
|
Status
|
|||
|
Auburn,
Sydney, Australia
Land
adjacent to our existing development
|
2.1
acres
|
$ | 1,415,000 |
Currently
held for sale with the rest of the ETRC and cinema under a 13 month option
contract that ends in October 2009
|
||
|
Burwood,
Victoria, Australia
|
50.6
acres
|
$ | 38,026,000 |
Development
Overlay Plan approved in December 2008 for 394,000 sq ft retail, 211,000
sq ft service/ noncore retail, 215,000 sq ft Commercial office, 700
dwellings. Next steps are determining staging and Town planning
applications. Land filling works on hold.
|
||
|
Courtenay
Central, Wellington, New Zealand
Land
adjacent to our existing development
|
0.9
acre
|
$ | 2,504,000 |
Have
regulatory approval for expansion; on hold pending demand for retail space
to improve.
|
||
|
Indooroopilly,
Brisbane, Australia
|
11,162
sq ft
|
$ | 7,810,000 |
28,000
square foot grade A commercial office building under
construction. Anticipated completion date: March 23,
2009.
|
||
|
Moonee
Ponds, Victoria, Australia
|
3.3
acres
|
$ | 9,664,000 |
In
planning stages of determining best use depending on factors including
development of adjacent properties. Zoned for high-density as a
“Principal Activity Area.”
|
||
|
Taringa,
Queensland, Australia
|
Own
1.2 acres, and under contract for a further 1.5 acres
|
$ | 3,056,000 |
Working
on plans to develop 225,000 to 350,000 square feet of a commercial,
retail, and residential development conditional upon obtaining a rezoning
approval.
|
||
|
Newmarket,
Queensland, Australia
Land
adjacent to our existing development
|
13,390
sq. ft.
|
$ | 1,886,000 |
Analyzing
if plans for cinema should be replaced with plans for additional retail
space.
|
||
|
Lake
Taupo, Taupo, New Zealand
Land
adjacent to our existing development
|
0.5
acre
|
$ | 582,000 |
A
20,000 square foot residential development site that is currently subject
to development review.
|
||
|
Manakau,
Auckland, New Zealand
|
64.0
acres
|
$ | 7,234,000 |
Zoned
for agriculture, currently used for horticulture commercial
purposes. We have formed a consortium with adjacent landowners
and have completed a master plan to rezone our land and the neighbors’
lands into a distribution and manufacturing industrial
park.
|
||
10 A
number of our real estate holdings include additional land held for
development. In addition, we have acquired certain parcels for future
development. The gross book value includes, as applicable, the land,
building, development costs, and capitalized interest.
Other
Property Interests and Investments
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 sold out. At December 31, 2008, all debt on the project
had been repaid, and we had received distributions totaling $11.7 million from
this project, on an investment of $3.0 million made in 2004. The
remaining commercial unit was sold in February 2009 for approximately $4.0
million.
Malulani
Investments, Limited
In 2006,
we acquired 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. Incident to the settlement of
certain litigation, we have agreed to sell this interest to MIL’s controlling
shareholder, See Item 3, Legal
Proceedings.
Landplan
Property Partners, Ltd
In 2006,
we formed Landplan Property Partners, Ltd (“Reading Landplan”) to identify,
acquire and develop or redevelop properties on an opportunistic basis in
Australia and New Zealand. These properties are held in separate
special purpose entities, which are collectively referred to “Reading
Landplan”. The Chief Executive Officer of Reading Landplan has, as a
part of his compensation arrangement, what is now a 15% incentive interest in
each of the various special purpose entities. That incentive interest
is (i) subordinated to our right to receive an 11% compounded return on
investment and (ii) calculated on a aggregate or pooled basis taking into
account the performance of all of the properties held by these special purpose
entities.
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 that is used for offsite corporate meetings and by
our Chief Executive Officer when he is in town. These properties are
unencumbered with any debt and lien free.
Tax
Audit/Litigation
The
Internal Revenue Service (the “IRS”) has 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. These companies are each now wholly
owned subsidiaries of RDI, but for the time periods under audit, were not
consolidated with RDI for tax purposes. 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”). The Stater Stock was 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 an equipment-leasing transaction
entered into by RDGE (discussed below) has been conceded by RDGE resulting in a
net tax refund.
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
$19.6 million as of December 31, 2008. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $5.8 million as of December 31,
2008. Accordingly, this proposed change represented, as of December
31, 2008, an exposure of approximately $51.7 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 $55.7
million. We have accrued $5.5 million in accordance with the
cumulative probability approach prescribed in FIN 48 in relation to this
exposure and believe that the possible total settlement amount will be between
$5.5 million and $55.7 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 the Stater matter 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 the trial is
scheduled for September 2009.
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 RDI, 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 RDI. At the present
time, the assets of these subsidiaries are comprised
principally
of RDI 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. However, the
satisfaction of any such adverse judgment would result in a material dilution to
existing stockholder interests.
The N/D
issued to RDGE was conceded by RDGE in August 2008. The net result is
expected to be approximately $70,000 in refunds of federal and state income
taxes.
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 that 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 brickworks 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. As of December 31, 2008, we estimate that the total
site preparation costs associated with the removal of this contaminated soil
will be $8.1 million (AUS$9.6 million) and as of that date we had incurred a
total of $6.2 million (AUS$7.4 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”). 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. On May 10, 2005, a mixed judgment was entered by the trial
court. Appeal rights have been exhausted and the net result of that
judgment has been the payment to us by the defendants during the 2008 first
quarter of $830,000 (AUS$901,000) and $314,000 (AUS$333,000) during the 2008
second quarter. These payments are each included in other
income.
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.
In a hearing conducted on November 22
and 29, 2006, we successfully defended an application for summary judgment
brought by Mackie and were awarded costs for part of the preparation of our
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 April 27, 2007, we received payment for those
costs in the sum of $17,000 (AUS$19,000).
Attempts
to mediate the dispute have not been successful. 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. We believe that we have adequate support
for our position and that a reserve for these claims is not required as the
likelihood of an unfavorable outcome is not probable and reasonably capable of
being estimated.
Malulani Investments
Litigation
In December 2006, we and Magoon
Acquisition and Development, LLC, another minority shareholder in Malulani
Investments, Limited (“MIL”) commenced a lawsuit against certain officers and
directors of 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 was brought in the Circuit Court of the First
Circuit Hawaii, in Honolulu, and 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).
On July 26, 2007, the Court granted the
motion of The Malulani Group, Limited, the controlling shareholder of MIL
(“TMG”), to intervene in the Hawaii action. On March 24, 2008, MIL
filed a counter claim against us, alleging 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”).
On March 11, 2009, we and Magoon LLC
agreed to terms of settlement (the “Settlement Terms”) with respect to this
lawsuit. Under the Settlement Terms, we and Magoon LLC will receive
$2.5 million in cash, a $6.75 million three-year 6.25% secured promissory note
(issued by TMG), and a ten year “tail interest” in MIL and TMG which allows us,
in effect, to participate in certain distributions made or received by MIL, TMG
and/or, in certain cases, the shareholders of TMG. However, the tail
interest continues only for a period of ten years and no assurances can be given
that we will in fact receive any distributions with respect to this Tail
Interest.
Pursuant to the Settlement Terms, we
will transfer all of our interests in MIL to TMG and Magoon LLC will transfer
all of its interest in MIL and TMG to TMG, and there will be a mutual release of
claims. Mr. Cotter, our Chairman, Chief Executive Officer and
principal shareholder and a director of MIL, is simultaneously settling his
related claims for mutual general releases and resigning from the Board of
Directors of MIL.
Under the terms of our agreement with
Magoon LLC, we are, generally speaking, entitled to receive, on a priority
basis, 100% of any proceeds from any disposition of the shares in MIL and TMG
held by us or Magoon LLC until we (Reading) have recouped the cost of our
investment in MIL and all of our litigation costs. Accordingly, we
will receive virtually all of the cash proceeds of the settlement, plus
virtually all distribution with respect to the promissory note, until such time
as we have recouped both the cost of our investment in MIL and all of our
litigation costs. Thereafter, Magoon LLC will receive distributions
under the promissory note and the Tail Interest (if any) until it has recouped
its investment in MIL and TMG. Thereafter, any distributions under
the Tail Interest, if any, will be shared between us and Magoon LLC in
accordance with the sharing formula set forth in the Amended and Restated
Shareholder Agreement between ourselves and Magoon LLC. Given the
secured nature of the promissory note, we are reasonably comfortable that we
will recoup the full amount of our investment in MIL and all of our litigation
costs from the proceeds of this settlement. (See Note 27 – Subsequent
Events).
Item 4
– Submission
of Matters to a Vote of Security Holders
At our
2008, Annual Meeting of Stockholders held on May 15, 2008, 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 2009 Annual Meeting of
Stockholders:
|
|
Election
of Directors
|
For
|
Withheld
|
||||||
|
James
J. Cotter
|
1,420,553 | 66,048 | ||||||
|
Eric
Barr
|
1,486,551 | 50 | ||||||
|
James
J. Cotter, Jr.
|
1,420,491 | 66,110 | ||||||
|
Margaret
Cotter
|
1,420,711 | 65,890 | ||||||
|
William
D. Gould
|
1,420,753 | 65,848 | ||||||
|
Edward
L. Kane
|
1,486,529 | 72 | ||||||
|
Gerard
P. Laheney
|
1,486,551 | 50 | ||||||
|
Alfred
Villaseñor
|
1,486,529 | 72 | ||||||
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”). Following the consolidation, we changed
our name to Reading International, Inc. and were listed on the American Stock
Exchange (AMEX). Effective January 2, 2002, our common stock traded
on the AMEX under the symbols RDI.A and RDI.B. In March 2004, we
changed our nonvoting stock symbol from RDI.A to RDI. Due to the 2008
purchase of the AMEX by the NYSE Alternext US, we are now listed on that
exchange.
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 2008 and 2007 as reported by NYSE
Alternext US:
|
Class
A Nonvoting
|
Class
B Voting
|
||||||||||||||||
|
Common Stock
|
Common Stock
|
||||||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
2008:
|
Fourth
Quarter
|
$ | 6.90 | $ | 3.70 | $ | 8.00 | $ | 3.90 | ||||||||
|
Third
Quarter
|
$ | 8.00 | $ | 6.55 | $ | 9.25 | $ | 7.90 | |||||||||
|
Second
Quarter
|
$ | 9.70 | $ | 7.75 | $ | 10.50 | $ | 9.25 | |||||||||
|
First
Quarter
|
$ | 10.00 | $ | 9.34 | $ | 10.50 | $ | 10.00 | |||||||||
|
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 | |||||||||
Holders of
Record
The
number of holders of record of our Class A and Class B Stock in 2008 was
approximately 3,500 and 300, respectively. On March 11, 2009, the
closing price per share of our Class A Stock was $2.95, and the closing price
per share of our Class B Stock was $4.06.
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.
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, 2008 (the “2008
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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Revenue
|
$ | 191,286 | $ | 113,404 | $ | 100,850 | $ | 92,142 | $ | 77,231 | ||||||||||
|
Gain
(loss) from discontinued operations
|
$ | 562 | $ | 1,893 | $ | (249 | ) | $ | 12,325 | $ | (464 | ) | ||||||||
|
Operating
income (loss)
|
$ | (4,576 | ) | $ | 5,166 | $ | 2,653 | $ | (6,520 | ) | $ | (6,735 | ) | |||||||
|
Net
income (loss)
|
$ | (18,535 | ) | $ | (2,103 | ) | $ | 3,856 | $ | 989 | $ | (8,463 | ) | |||||||
|
Basic
earnings (loss) per share – continuing operations
|
$ | (0.84 | ) | $ | (0.18 | ) | $ | 0.18 | $ | (0.51 | ) | $ | (0.37 | ) | ||||||
|
Basic
earnings (loss) per share – discontinued operations
|
$ | 0.02 | $ | 0.09 | $ | (0.01 | ) | $ | 0.55 | $ | (0.02 | ) | ||||||||
|
Basic
earnings (loss) per share
|
$ | (0.82 | ) | $ | (0.09 | ) | $ | 0.17 | $ | 0.04 | $ | (0.39 | ) | |||||||
|
Diluted
earnings (loss) per share – continuing operations
|
$ | (0.84 | ) | $ | (0.18 | ) | $ | 0.18 | $ | (0.51 | ) | $ | (0.37 | ) | ||||||
|
Diluted
earnings (loss) per share – discontinued operations
|
$ | 0.02 | $ | 0.09 | $ | (0.01 | ) | $ | 0.55 | $ | (0.02 | ) | ||||||||
|
Diluted
earnings (loss) per share
|
$ | (0.82 | ) | $ | (0.09 | ) | $ | 0.17 | $ | 0.04 | $ | (0.39 | ) | |||||||
|
Other
Information:
|
||||||||||||||||||||
|
Shares
outstanding
|
22,482,605 | 22,482,605 | 22,476,355 | 22,485,948 | 21,998,239 | |||||||||||||||
|
Weighted
average shares outstanding
|
22,477,471 | 22,478,145 | 22,425,941 | 22,249,967 | 21,948,065 | |||||||||||||||
|
Weighted
average dilutive shares outstanding
|
22,477,471 | 22,478,145 | 22,674,818 | 22,249,967 | 21,948,065 | |||||||||||||||
|
Total
assets
|
$ | 370,076 | $ | 346,071 | $ | 289,231 | $ | 253,057 | $ | 230,227 | ||||||||||
|
Total
debt
|
$ | 239,162 | $ | 177,195 | $ | 130,212 | $ | 109,320 | $ | 72,879 | ||||||||||
|
Working
capital (deficit)
|
$ | 12,516 | $ | 6,345 | $ | (6,997 | ) | $ | (14,282 | ) | $ | (6,915 | ) | |||||||
|
Stockholders’
equity
|
$ | 65,836 | $ | 121,362 | $ | 107,659 | $ | 99,404 | $ | 102,010 | ||||||||||
|
EBIT
|
$ | (696 | ) | $ | 8,096 | $ | 12,723 | $ | 6,614 | $ | (4,339 | ) | ||||||||
|
Depreciation
and amortization
|
$ | 17,868 | $ | 10,737 | $ | 11,912 | $ | 11,166 | $ | 10,776 | ||||||||||
|
Add: Adjustments
for discontinued operations
|
$ | 690 | $ | 1,186 | $ | 1,311 | $ | 1,842 | $ | 2,962 | ||||||||||
|
EBITDA
|
$ | 17,862 | $ | 20,019 | $ | 25,946 | $ | 19,622 | $ | 9,399 | ||||||||||
|
Debt
to EBITDA
|
13.39 | 8.85 | 5.02 | 5.57 | 7.75 | |||||||||||||||
|
Capital
expenditure (including acquisitions)
|
$ | 75,167 | $ | 42,414 | $ | 16,389 | $ | 53,954 | $ | 33,180 | ||||||||||
|
Number
of employees at 12/31
|
1,986 | 1,383 | 1,451 | 1,523 | 1,677 | |||||||||||||||
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:
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|
·
|
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.
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|
|
·
|
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 that, 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):
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Net
income (loss)
|
$ | (18,535 | ) | $ | (2,103 | ) | $ | 3,856 | $ | 989 | $ | (8,463 | ) | |||||||
|
Add: Interest
expense, net
|
15,740 | 8,161 | 6,597 | 4,416 | 3,078 | |||||||||||||||
|
Add: Income
tax expense
|
2,099 | 2,038 | 2,270 | 1,209 | 1,046 | |||||||||||||||
|
EBIT
|
$ | (696 | ) | $ | 8,096 | $ | 12,723 | $ | 6,614 | $ | (4,339 | ) | ||||||||
|
Add:
Depreciation and amortization
|
17,868 | 10,737 | 11,912 | 11,166 | 10,776 | |||||||||||||||
|
Adjustments
for discontinued operations:
|
||||||||||||||||||||
|
Add: Interest
expense, net
|
-- | 2 | 11 | 367 | 839 | |||||||||||||||
|
Add: Depreciation
and amortization
|
690 | 1,184 | 1,300 | 1,475 | 2,123 | |||||||||||||||
|
EBITDA
|
$ | 17,862 | $ | 20,019 | $ | 25,946 | $ | 19,622 | $ | 9,399 | ||||||||||
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 2008 Annual Report. Historical results and percentage
relationships do not necessarily indicate operating results for any future
periods.
Overview
We are an internationally diversified
company principally focused on the development, ownership and operation of
entertainment and real property assets in the United States, Australia, and New
Zealand. Currently, we operate in two business segments:
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|
·
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Cinema
Exhibition, through our 58 multiplex
theatres,
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·
|
and
Real Estate, including real estate development and the rental of retail,
commercial and live theatre assets.
|
We
believe that these two business segments can complement one another, as the
comparatively consistent cash flows generated by our cinema operations can be
used to fund the front-end cash demands of our real estate development
business.
We manage
our worldwide cinema businesses under various different brands:
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|
·
|
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 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 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. Also, in the current environment, we intend to be
opportunistic in identifying and endeavoring to acquire undervalued assets,
particularly assets with proven cash flow and which we believe to be resistant
to current recessionary trends.
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. We have begun the process of converting some of our theatres
in the locations where we feel it is best suited and most helpful against the
competition. 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
megaplex cinemas, while the independent exhibitors typically have older and
smaller cinemas. Accordingly, we believe it likely that the Major
Exhibitors may control upwards of 70% 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.
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
Although
there has been a noted decrease in real estate market activity, commercial and
retail property values have remained somewhat stable in Australia and mildly
impacted the market in New Zealand. Both countries have relatively
stable economies with varying degrees of economic growth that are mostly
influenced by global trends. During the latter half of 2008 and into
early 2009 interest rates have materially decreased to 40-year lows in Australia
and New Zealand. Up until recently, New Zealand has had consistent
growth in rentals and values although project commencements have slowed with
indications that construction prices will tighten this year.
The
Australian commercial sector of the real estate market has slowed in Australia
during 2008. 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 prime
areas such as Brisbane is driving demand. Sydney and Melbourne
residential vacancy rates remain low (approximately 1%) meaning rental
properties remain in short supply, which is influencing in a positive way demand
and the development activity in that sector.
Real Estate – North
America
Commercial
real estate prices fell 15% in 2008 and commercial values are down more than 16%
from levels in 2007. These values are an average of the broad U.S.
real estate market, and we believe that the value of the real estate we own
would be less impacted than the national average. The commercial real estate
market has followed the larger economy into a downturn that is likely to last
through 2009. We believe that our real estate is well located in
large urban environments and will be the first to see signs of recovery when the
U.S. economy starts to recover.
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, 2008 we:
|
|
·
|
directly
operated 52 cinemas with 427
screens;
|
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|
·
|
had
interests in certain unconsolidated joint ventures in which we have
varying interests, which own an additional 4 cinemas with 32 screens;
and
|
|
|
·
|
managed
2 cinemas with 9 screens.
|
As part
of the above cinemas that we directly operated during 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) for $70.2
million. 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 Entertainment cinemas. In addition, during
2008, we opened our Rouse Hill and Dandenong leasehold cinemas in Australia that
collectively have 15 screens.
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.
Real
Estate
For fiscal 2008, our rental generating
real estate holdings consisted of the following properties:
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|
·
|
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;
|
|
|
·
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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;
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·
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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
that we have recently renovated 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.
On
September 16, 2008, we entered into a sale option agreement to sell our Auburn
real estate property and cinema for $28.5 million (AUS$36.0
million). The sale option agreement calls for an initial option
payment of $948,000 (AUS$1.2 million), received on the agreement date, and four
option installment payments of $316,000
(AUS$400,000),
$316,000 (AUS$400,000), $316,000 (AUS$400,000), and $948,000 (AUS$1.2 million)
payable over the subsequent 9 months. As of December 31, 2008, we
have received $1.3 million (AUS$1.6 million) in payments associated with this
option agreement. The option comes to term on November 1, 2009 at
which time the balance of $25.6 million (AUS$32.4 million) is due and
payable. At any time during the 13-month option, the buyer may
decline to move further in the sale process resulting in a forfeiture of all
previous option payments.
In 2008,
we acquired the following real property interests:
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·
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Taringa
Land. During the first quarter of 2008, we acquired or
entered into agreements to acquire four contiguous properties of
approximately 50,000 square feet, for which we are in the planning stages
for a mixed-use development project. The aggregate purchase
price of these properties is $10.1 million (AUS$13.7 million), of which
$2.5 million (AUS$2.8 million) relates to the three properties that have
been acquired and $7.6 million (AUS$10.9 million) relates to the one
property that is under contract to be acquired. Our obligation
to close on the fourth property is subject to certain conditions (which we
may waive) including a rezoning condition. We have made a
$237,000 (AUS$300,000) deposit on this
property.
|
In 2007,
we acquired the following real property interests:
|
|
·
|
Manukau
Land. On July 27, 2007, we purchased through a Landplan
Property Partners Ltd. (“Reading Landplan”) 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
Reading Landplan 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, which we renovated 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.
|
Property Held For or Under
Development
For fiscal 2008, 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;
|
|
|
·
|
we
acquired or entered into agreements to acquire four contiguous properties
in the Taringa area of Brisbane, Australia of approximately 50,000 square
feet, for which we are in the planning stages for a mixed-use development
project;
|
|
|
·
|
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. As of December 31, 2008, we had received distributions
totaling $9.5 million from the earnings of this project and we have
received $2.1 million of return of capital investment. The
remaining commercial unit was sold in February 2009 for approximately $4.0
million;
|
|
|
·
|
a
0.3 acre property with a two-story 3,464 square foot building
Indooroopilly, Brisbane, Australia. We are currently developing
this 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 anticipate this project to
be completed by March 2009;
|
|
|
·
|
the
Manukau land parcel was purchased on July 27, 2007 through a Reading
Landplan 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 in which we
recently renovated the property’s units to be
condominiums.
|
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, at the end of the third 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. Based on
calculations of current value, we recorded impairment losses of $6.1 million
relating to certain of our property and cinema locations for the year ended
December 31, 2008.
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, 2008, we had recorded approximately
$60.6 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.
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 that 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.
From time
to time, we are involved with claims and lawsuits arising in the ordinary course
of our business that 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 ETRC’s.
The
tables below summarize the results of operations for our principal business
segments for the years ended December 31, 2008, 2007, and 2006 (dollars in
thousands).
|
Year
Ended December 31, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 177,256 | $ | 20,705 | $ | (6,675 | ) | $ | 191,286 | |||||||
|
Operating
expense
|
148,436 | 8,754 | (6,675 | ) | 150,515 | |||||||||||
|
Depreciation
& amortization
|
13,651 | 3,561 | -- | 17,212 | ||||||||||||
|
Impairment
expense
|
2,078 | 3,967 | -- | 6,045 | ||||||||||||
|
General
& administrative expense
|
3,834 | 1,116 | -- | 4,950 | ||||||||||||
|
Segment
operating income
|
$ | 9,257 | $ | 3,307 | $ | -- | $ | 12,564 | ||||||||
|
Year
Ended December 31, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 99,703 | $ | 18,702 | $ | (5,001 | ) | $ | 113,404 | |||||||
|
Operating
expense
|
79,052 | 7,365 | (5,001 | ) | 81,416 | |||||||||||
|
Depreciation
& amortization
|
6,595 | 3,581 | -- | 10,176 | ||||||||||||
|
General
& administrative expense
|
3,195 | 824 | -- | 4,019 | ||||||||||||
|
Segment
operating income
|
$ | 10,861 | $ | 6,932 | $ | -- | $ | 17,793 | ||||||||
|
Year
Ended December 31, 2006
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 90,504 | $ | 14,578 | $ | (4,232 | ) | $ | 100,850 | |||||||
|
Operating
expense
|
70,968 | 6,558 | (4,232 | ) | 73,294 | |||||||||||
|
Depreciation
& amortization
|
8,125 | 3,304 | -- | 11,429 | ||||||||||||
|
General
& administrative expense
|
3,658 | 782 | -- | 4,440 | ||||||||||||
|
Segment
operating income
|
$ | 7,753 | $ | 3,934 | $ | -- | $ | 11,687 | ||||||||
|
Reconciliation
to net income:
|
2008
|
2007
|
2006
|
|||||||||
|
Total
segment operating income
|
$ | 12,564 | $ | 17,793 | $ | 11,687 | ||||||
|
Non-segment:
|
||||||||||||
|
Depreciation and amortization
expense
|
656 | 561 | 483 | |||||||||
|
General and administrative
expense
|
16,484 | 12,066 | 8,551 | |||||||||
|
Operating
income (loss)
|
(4,576 | ) | 5,166 | 2,653 | ||||||||
|
Interest expense,
net
|
(15,740 | ) | (8,161 | ) | (6,597 | ) | ||||||
|
Other income
(expense)
|
991 | (505 | ) | (1,998 | ) | |||||||
|
Minority
interest
|
(620 | ) | (1,003 | ) | (672 | ) | ||||||
|
Gain on disposal of discontinued
operations
|
-- | 1,912 | -- | |||||||||
|
Income (loss) from discontinued
operations
|
562 | (19 | ) | (249 | ) | |||||||
|
Income tax
expense
|
(2,099 | ) | (2,038 | ) | (2,270 | ) | ||||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
497 | 2,545 | 9,547 | |||||||||
|
Gain on sale of unconsolidated
joint venture
|
2,450 | -- | 3,442 | |||||||||
|
Net
income (loss)
|
$ | (18,535 | ) | $ | (2,103 | ) | $ | 3,856 | ||||
Cinema
Segment
The
following tables and discussion which follows detail our operating results for
our 2008, 2007 and 2006 cinema segment, adjusted to reflect the held for sale
status of our Auburn cinema (dollars in thousands):
|
Year
Ended December 31, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 64,881 | $ | 45,717 | $ | 14,141 | $ | 124,739 | ||||||||
|
Concessions
revenue
|
25,097 | 15,240 | 4,166 | 44,503 | ||||||||||||
|
Advertising
and other revenues
|
4,760 | 2,384 | 870 | 8,014 | ||||||||||||
|
Total
revenues
|
94,738 | 63,341 | 19,177 | 177,256 | ||||||||||||
|
Cinema
costs
|
77,455 | 46,806 | 15,242 | 139,503 | ||||||||||||
|
Concession
costs
|
4,476 | 3,409 | 1,048 | 8,933 | ||||||||||||
|
Total
operating expense
|
81,931 | 50,215 | 16,290 | 148,436 | ||||||||||||
|
Depreciation
and amortization
|
9,174 | 2,780 | 1,697 | 13,651 | ||||||||||||
|
Impairment
expense
|
-- | -- | 2,078 | 2,078 | ||||||||||||
|
General
& administrative expense
|
2,735 | 1,094 | 5 | 3,834 | ||||||||||||
|
Segment
operating income (loss)
|
$ | 898 | $ | 9,252 | $ | (893 | ) | $ | 9,257 | |||||||
|
Year
Ended December 31, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,647 | $ | 39,076 | $ | 14,683 | $ | 72,406 | ||||||||
|
Concessions
revenue
|
5,314 | 12,589 | 4,302 | 22,205 | ||||||||||||
|
Advertising
and other revenues
|
2,043 | 2,147 | 902 | 5,092 | ||||||||||||
|
Total
revenues
|
26,004 | 53,812 | 19,887 | 99,703 | ||||||||||||
|
Cinema
costs
|
18,385 | 39,856 | 15,868 | 74,109 | ||||||||||||
|
Concession
costs
|
1,029 | 2,798 | 1,116 | 4,943 | ||||||||||||
|
Total
operating expense
|
19,414 | 42,654 | 16,984 | 79,052 | ||||||||||||
|
Depreciation
and amortization
|
2,003 | 2,865 | 1,727 | 6,595 | ||||||||||||
|
General
& administrative expense
|
2,140 | 1,036 | 19 | 3,195 | ||||||||||||
|
Segment
operating income
|
$ | 2,447 | $ | 7,257 | $ | 1,157 | $ | 10,861 | ||||||||
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,891 | $ | 34,008 | $ | 13,109 | $ | 66,008 | ||||||||
|
Concessions
revenue
|
5,472 | 10,398 | 4,001 | 19,871 | ||||||||||||
|
Advertising
and other revenues
|
1,710 | 2,000 | 915 | 4,625 | ||||||||||||
|
Total
revenues
|
26,073 | 46,406 | 18,025 | 90,504 | ||||||||||||
|
Cinema
costs
|
18,176 | 34,568 | 13,763 | 66,507 | ||||||||||||
|
Concession
costs
|
1,047 | 2,377 | 1,037 | 4,461 | ||||||||||||
|
Total
operating expense
|
19,223 | 36,945 | 14,800 | 70,968 | ||||||||||||
|
Depreciation
and amortization
|
1,890 | 4,922 | 1,313 | 8,125 | ||||||||||||
|
General
& administrative expense
|
2,614 | 1,027 | 17 | 3,658 | ||||||||||||
|
Segment
operating income
|
$ | 2,346 | $ | 3,512 | $ | 1,895 | $ | 7,753 | ||||||||
Cinema Results for 2008
Compared to 2007
|
|
·
|
cinema
revenue increased in 2008 by $77.6 million or 77.8% compared to
2007. The geographic activity of our revenues can be summarized
as follows:
|
|
|
o
|
United
States - Revenues in the United States increased by $68.7 million or
264.3% primarily from our newly acquired Consolidated Entertainment
cinemas.
|
|
|
o
|
Australia
- Revenues in Australia increased by $9.5 million or
17.7%. This increase in revenues was attributable to an
increase in admissions revenues of $6.6 million related to an increase in
box office admissions of 392,000 coupled with a $0.28 increase in average
ticket price, concessions revenues of $2.7 million, and advertising and
other revenues of $237,000. This increase in revenues was
primarily related to more appealing film product in late 2008 compared to
the film offerings in 2007 coupled with an increase in the average
admissions price of 3.2%.
|
|
|
o
|
New
Zealand - Revenues in New Zealand decreased by $710,000 or
3.6%. This decrease in revenues was attributable to a drop in
admissions revenues of $542,000, a decrease in concessions revenues of
$136,000, and a decrease in advertising and other revenues of
$32,000. These decreases in revenues were primarily related to
a drop in admits by 152,000 since
2007.
|
|
|
·
|
operating
expense increased in 2008 by $69.4 million or 87.8% compared to
2007. The year on year comparison of operating expenses
increased in relation to revenues from 79% to 84%. This
increase in cinema costs was driven by the US and primarily related to
higher film rent expense associated with our newly acquired Consolidated
Entertainment cinemas whose film product is primarily wide release films
resulting in higher film rent cost compared to our predominately
pre-acquisition art cinemas in the United States, which generally have
lower film rent costs.
|
|
|
o
|
United
States - Operating expenses in the United States increased by $62.5
million or 322.0% due to the aforementioned newly acquired Consolidated
Entertainment cinemas.
|
|
|
o
|
Australia
- Operating expenses in Australia increased by $7.6 million or
17.7%. This increase was in line with the above-mentioned
increase in cinema revenues.
|
|
|
o
|
New
Zealand - Operating expenses in New Zealand decreased by $694,000 or
4.1%. This decrease was in line with the above-mentioned
decrease in cinema revenues.
|
|
|
·
|
depreciation
expense increased in 2008 by $7.1 million or 107.0% compared to
2007. This increase is primarily from our newly acquired
Consolidated Entertainment cinemas.
|
|
|
·
|
general
and administrative expense increased in 2008 by $639,000 or 20.0% compared
to 2007. The change was primarily related to the purchase and
operations of our newly acquired Consolidated Entertainment cinemas and
legal matters associated with our cinema
assets.
|
|
|
·
|
we
recorded a one-time $2.1 million impairment charge related to certain New
Zealand cinema assets during 2008. This impairment expense did
not occur previously in 2007.
|
|
|
·
|
the
Australia annual average exchange rates have increased by 1.6% and the New
Zealand annual average exchange rates have decreased by 3.0% since 2007,
which have 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 decreased in 2008 by $1.6 million compared to
2007 primarily from our lower operating income in the United States and
New Zealand due to the aforementioned higher depreciation, general and
administrative expense in the U.S., and the one time impairment charge in
New Zealand. These decreases in operating income were offset in
part by improved cinema operations in
Australia.
|
Cinema Results for 2007
Compared to 2006
|
|
·
|
cinema
revenue increased in 2007 by $9.2 million or 10.2% 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
2006. The increase in other revenues related to more screen
rentals during 2007 than in 2006.
|
|
|
o
|
Australia
- Revenues in Australia increased by $7.4 million or
16.0%. This increase in revenues was attributable to an
increase in admissions revenues of $5.1 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 $2.2 million, and advertising and
other revenues of $147,000. 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 $8.1 million or 11.4% compared to
2006. The year on year comparison of operating expenses held
somewhat steady in relation to revenues at 79% 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 $5.7 million or
15.5%. 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 $1.5 million or 18.8% 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 changed by 11.4%
and 13.5%, respectively, from 2007 to 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.
|
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. The tables and
discussion which follow detail our operating results for our 2008, 2007, and
2006 real estate segment adjusted to reflect the held for sale status of our
Auburn property (dollars in thousands):
|
Year
Ended December 31, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theater rental and ancillary income
|
$ | 3,583 | $ | -- | $ | -- | $ | 3,583 | ||||||||
|
Property
rental income
|
3,332 | 6,701 | 7,089 | 17,122 | ||||||||||||
|
Total
revenues
|
6,915 | 6,701 | 7,089 | 20,705 | ||||||||||||
|
Live
theater costs
|
1,892 | -- | -- | 1,892 | ||||||||||||
|
Property
rental cost
|
2,913 | 2,225 | 1,724 | 6,862 | ||||||||||||
|
Total
operating expense
|
4,805 | 2,225 | 1,724 | 8,754 | ||||||||||||
|
Depreciation
and amortization
|
351 | 1,550 | 1,660 | 3,561 | ||||||||||||
|
Impairment
expense
|
-- | 3,090 | 877 | 3,967 | ||||||||||||
|
General
& administrative expense
|
14 | 1,014 | 88 | 1,116 | ||||||||||||
|
Segment
operating income (loss)
|
$ | 1,745 | $ | (1,178 | ) | $ | 2,740 | $ | 3,307 | |||||||
|
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 | 6,151 | 6,974 | 14,659 | ||||||||||||
|
Total
revenues
|
5,577 | 6,151 | 6,974 | 18,702 | ||||||||||||
|
Live
theater costs
|
2,105 | -- | -- | 2,105 | ||||||||||||
|
Property
rental cost
|
1,210 | 2,117 | 1,933 | 5,260 | ||||||||||||
|
Total
operating expense
|
3,315 | 2,117 | 1,933 | 7,365 | ||||||||||||
|
Depreciation
and amortization
|
376 | 1,518 | 1,687 | 3,581 | ||||||||||||
|
General
& administrative expense
|
15 | 658 | 151 | 824 | ||||||||||||
|
Segment
operating income
|
$ | 1,871 | $ | 1,858 | $ | 3,203 | $ | 6,932 | ||||||||
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theater rental and ancillary income
|
$ | 3,667 | $ | -- | $ | -- | $ | 3,667 | ||||||||
|
Property
rental income
|
1,720 | 3,626 | 5,565 | 10,911 | ||||||||||||
|
Total
revenues
|
5,387 | 3,626 | 5,565 | 14,578 | ||||||||||||
|
Live
theater costs
|
2,193 | -- | -- | 2,193 | ||||||||||||
|
Property
rental cost
|
1,164 | 1,851 | 1,350 | 4,365 | ||||||||||||
|
Total
operating expense
|
3,357 | 1,851 | 1,350 | 6,558 | ||||||||||||
|
Depreciation
and amortization
|
427 | 1,353 | 1,524 | 3,304 | ||||||||||||
|
General
& administrative expense
|
-- | 782 | -- | 782 | ||||||||||||
|
Segment
operating income (loss)
|
$ | 1,603 | $ | (360 | ) | $ | 2,691 | $ | 3,934 | |||||||
Real Estate Results for 2008
Compared to 2007
|
|
·
|
revenue
increased by $2.0 million or 10.7% when compared 2007. The
increase was primarily related to real estate associated with our newly
acquired Consolidated Entertainment cinemas, higher rental revenues from
the majority of our Australia tenancies, and our newly acquired properties
in New Zealand. These increases were offset in part due to
decreases in live theater rental revenue compared to the same period in
2007.
|
|
|
·
|
operating
expense increased by $1.4 million or 18.9% when compared to
2007. This increase in expense was primarily related to our
newly acquired Consolidated Entertainment cinemas that have ancillary real
estate, coupled with increasing utility and other operating costs
primarily in our U.S. properties.
|
|
|
·
|
depreciation expense decreased by
$20,000 or 0.6% when compared to
2007.
|
|
|
·
|
we
recorded a one-time $4.0 million impairment charge related to certain
Australia and New Zealand real estate assets during 2008. This
impairment expense did not occur previously in
2007.
|
|
|
·
|
general
and administrative expense increased by $292,000 when compared to 2007
primarily due to increased property activities related to our acquisitions
in Australia.
|
|
|
·
|
the
Australia annual average exchange rates have increased by 1.6% and the New
Zealand annual average exchange rates have decreased by 3.0% since 2007,
which have had an impact on the individual components of the income
statement. However, the overall effect of the foreign currency
change on operating income was
minimal.
|
|
|
·
|
as
a result of the above, real estate segment income decreased during 2008 by
$3.6 million compared to 2007.
|
Real Estate Results for 2007
Compared to 2006
|
|
·
|
revenue
increased by $4.1 million or 28.3% when compared 2006. The
increase was primarily related to an enhanced rental stream from our
Australia Newmarket shopping center, opened in 2006, and our New Zealand
properties. This increase in rents was offset in part by
decreased rents from our domestic live theatres due to fewer shows in 2007
compared to 2006.
|
|
|
·
|
operating
expense increased by $807,000 or 12.3% when compared to
2006. This increase in expense was primarily due to higher
operating costs related to our recently opened Australia Newmarket
shopping center.
|
|
|
·
|
depreciation
expense increased by $277,000 or 8.4% when compared to
2006. The majority of this increase was attributed to the
Newmarket shopping center assets in Australia that were put into service
during the first quarter 2006.
|
|
|
·
|
general
and administrative expense increased by $42,000 when compared to 2006
primarily due to increased property activities related to our acquisitions
in New Zealand.
|
|
|
·
|
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.
|
|
|
·
|
real
estate segment operating income increased by $3.0 million when compared to
2006 mostly related to an increase in revenues in Australia from our
Newmarket shopping centre offset by a decrease in domestic live theater
income.
|
Non-Segment
Activity
2008 Compared to
2007
Non-segment
expense/income includes expense and/or income that is not directly attributable
to our other operating segments.
During
2008, the increase of $4.4 million in corporate General and Administrative
expense was primarily made up of:
|
|
·
|
$1.4
million in increased corporate compensation expense primarily related to
executive restricted stock and option grants, a new in-house legal
counsel, and pension and bonus compensation for our chief operating
officer;
|
|
|
·
|
$891,000
of professional fees; and
|
|
|
·
|
$2.1
million of legal fees associated principally with our tax litigation and
Malulani Investments Limited cases.
|
Also
during 2008:
|
|
·
|
our
net interest expense increased by $7.6 million primarily related to a
higher outstanding loan balances in 2008 compared to 2007 primarily
relating to our current year Consolidated Cinemas
acquisition;
|
|
|
·
|
our
other income increased by $1.5 million primarily due to our Burstone
litigation settlement receipts totaling $1.2 million; insurance proceeds
of $910,000 related to damage caused by Hurricane George in 1998 to one of
our previously owned cinemas in Puerto Rico; recovered credit card losses
of $385,000; and a $950,000 mark-to-market expense in 2007 not repeated in
2008. This income was offset by 2008 write-off and impairment
expenses of $303,000;
|
|
|
·
|
our
minority interest expense decreased by $383,000 compared to 2007 primarily
due to reduced projected value of the Reading Landplan
projects;
|
|
|
·
|
equity
earnings from unconsolidated joint ventures and entities decreased by $2.1
million primarily due to lower earnings from our investment in 205-209 East 57th Street
Associates, LLC, that has completed the majority of the development
of a residential condominium complex in midtown Manhattan, called Place
57. During 2007 and 2006, all of the residential
condominiums were sold and only the retail condominium was still available
for sale. During 2007, the limited liability company closed on
the sale of the remaining eight residential condominiums resulting in
gross sales of $26.0 million and equity earnings from unconsolidated joint
ventures and entities to us of $1.6 million. The remaining
retail space was sold in February 2009 for approximately $4.0 million;
and
|
|
|
·
|
in
addition to the aforementioned equity earnings, during 2008, we recorded a
gain on sale of an unconsolidated entity of $2.5 million (NZ$3.2 million),
from the sale of our interest in the cinema at Botany Downs in Auckland,
New Zealand.
|
2007 Compared to
2006
Non-segment
expense/income includes expense and/or income that is not directly attributable
to our other operating segments.
During
2007, the increase of $3.5 million in corporate General and Administrative
expense was primarily made up of:
|
|
·
|
$320,000
in increased corporate compensation expense related to the granting of
70,000 fully vested options to our directors coupled with an $85,000
increase in director fees;
|
|
|
·
|
$437,000
in increased corporate compensation expense related to the
granting of 844,255 options that are vesting over a 24 month
period;
|
|
|
·
|
$413,000
of compensation for our Chief Operating Officer appointed in February
2007;
|
|
|
·
|
$840,000
of legal and professional fees associated principally with our real estate
acquisition and investment activities;
and
|
|
|
·
|
$342,000
related to our newly adopted Supplemental Executive Retirement
Plan.
|
During
2007:
|
|
·
|
our
net interest expense increased by $1.6 million primarily related to a
higher outstanding loan balances in 2007 compared to
2006;
|
|
|
·
|
our
other expense decreased by $1.5 million primarily due to lower
mark-to-market charges relating to an option liability held by Sutton Hill
Capital LLC to acquire a 25% non-managing membership interest in our
Cinemas 1, 2 & 3 property which option they exercised in July
2007;
|
|
|
·
|
our
minority interest expense increased by $331,000 compared to 2006 due to an
improvement in cinema admission sales particularly in our Australia, joint
venture cinemas and an increased activity in Reading
Landplan;
|
|
|
·
|
the
recording of a deferred gain on the sale of a discontinued operation upon
the fulfillment of our commitment of $1.9 million associated with a
previously sold property;
|
|
|
·
|
income
tax expense decreased by $232,000 primarily related less tax expense
incurred for our equity earnings from our investment in 205-209 East 57th Street
Associates, LLC;
|
|
|
·
|
equity
earnings from unconsolidated joint ventures and entities decreased by $7.0
million primarily due to lower earnings from our investment in 205-209 East 57th Street
Associates, LLC, that has completed most of the development of a
residential condominium complex in midtown Manhattan, called Place
57. The joint venture closed on the sale of 59
condominiums during 2006, resulting in gross sales of $117.7 million and
equity earnings from unconsolidated joint ventures and entities to us of
$8.3 million compared to eight condominiums during the year ended December
31, 2007 resulting in gross sales of $25.4 million and net equity earnings
from this unconsolidated joint venture of $1.3 million. All of
the residential condominiums have been sold and the remaining retail
condominium was sold in February 2009;
and
|
|
|
·
|
in
addition to the aforementioned equity earnings, we recorded a gain on sale
of an unconsolidated joint venture of $3.4 million (NZ$5.4 million) during
2006 which was not repeated in 2007, from the sale of our 50% interest in
the cinemas at Whangaparaoa, Takapuna and Mission Bay, New
Zealand.
|
Income
taxes
We are
subject to income taxation in several jurisdictions throughout the
world. Our effective tax rate and income tax liabilities will be
affected by a number of factors, such as:
|
|
·
|
the
amount of taxable income in particular
jurisdictions;
|
|
|
·
|
the
tax rates in particular
jurisdictions;
|
|
|
·
|
tax
treaties between jurisdictions;
|
|
|
·
|
the
extent to which income is repatriated;
and
|
|
|
·
|
future
changes in law.
|
Generally,
we file consolidated or combined tax returns in jurisdictions that permit or
require such filings. For jurisdictions that do not permit such a
filing, we may owe income, franchise, or capital taxes even though, on an
overall basis, we may have incurred a net loss for the tax year.
Consolidated Net Income
(Loss)
For the
years ending 2008 and 2007, our consolidated business units produced net losses
of $18.5 million and $2.1 million, respectively. For 2006, we
achieved net income of $3.9 million. For many of the years prior to
2006, we consistently experienced net losses. However, as explained
in the Cinema and Real Estate segment sections above, we have generally noted
improvements in our segment operating income such that we have a positive
segment operating income for each of the years of 2008, 2007, and 2006 that in
years past has typically been negative. Although we cannot assure
that this trend will continue, we are committed to the overall improvement of
earnings through good fiscal management.
Business Plan, Liquidity and
Capital Resources of the Company
Business
Plan
Our business plan has evolved from a
belief that while cinema exhibition is not a growth business at this time, we do
believe it to be a business that will likely continue to generate fairly
consistent cash flows in the years ahead 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. Also, in the current environment, we intend to be
opportunistic in identifying and endeavoring to acquire undervalued assets,
particularly assets with proven cash flow and which we believe to be resistant
to current recessionary trends.
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 asset
allocation between our domestic and overseas assets and operations, and 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.
Liquidity and Capital
Resources
Our ability to generate sufficient cash
flows from operating activities in order to meet our obligations and commitments
drives our liquidity position. This is further affected by our
ability to obtain adequate, reasonable financing and/or to convert
non-performing or non-strategic assets into cash.
Currently,
our liquidity needs continue to arise mainly from:
|
|
·
|
working
capital requirements;
|
|
|
·
|
capital
expenditures including the acquisition, holding and development of real
property assets; and
|
|
|
·
|
debt
servicing requirements.
|
With the
recent changes to the worldwide credit markets, the business community is
concerned that credit will be more difficult to obtain especially for
potentially risky ventures like business and asset
acquisitions. However, we believe that our acquisitions over the past
few years coupled with our strengthening operational cash flows
demonstrate our ability to improve our profitability. We believe that
this business model will help us to demonstrate to lending institutions our
ability not only to do new acquisitions but also to service the associated
debt.
Discussion of Our Statement
of Cash Flows
The following discussion compares the
changes in our cash flows over the past three years.
Operating
Activities
2008 Compared to
2007. Cash provided by operations was $24.3 million in 2008
compared to $13.3 million in 2007. The increase in cash provided by
operations of $11.0 million was primarily related to
|
|
·
|
increased
cinema operational cash flow primarily from our Australia and domestic
acquisition operations;
|
|
|
·
|
increased
real estate operational cash flow predominately from our Australia and New
Zealand operations; and
|
|
|
·
|
one
time cash receipts related to litigation and other claims of $1.6
million;
|
offset
by
|
|
·
|
a
decrease in distributions from predominately our Place 57 joint venture
(the assets of which have now been substantially monetized) of $3.7
million.
|
2007 Compared to
2006. Cash provided by operations was $13.3 million in 2007
compared to $11.9 million in 2006. The increase in cash provided by
operations of $1.4 million was primarily related to
|
|
·
|
increased
cinema operational cash flow primarily from our Australia
operations;
|
|
|
·
|
increased
real estate operational cash flow predominately from our Australia
operations. This increase can be particularly attributed to our
Newmarket shopping center in Brisbane, Australia; offset
by
|
|
|
·
|
a
decrease in distributions from unconsolidated joint ventures and entities
of $1.8 million was predominately related to lower distributions from our
Place 57 joint venture.
|
Investing
Activities
Cash used in investing activities for
2008 was $69.5 million compared to $38.3 million in 2007, and $23.4 million in
2006. The following summarizes our investing activities for each of
the three years ending December 31, 2008:
The $69.5
million cash used in 2008 was primarily related to:
|
|
·
|
$49.2
million to purchase the assets of the Consolidated Cinemas
circuit;
|
|
|
·
|
$2.5
million to purchase other real estate
assets;
|
|
|
·
|
$1.9
million in restricted cash primarily related to construction deposits for
repair work on one of our cinemas;
and
|
|
|
·
|
$23.4
million in property enhancements to our existing
properties;
|
offset
by
|
|
·
|
$2.0
million of deposit returned upon acquisition of the Consolidated Cinema
circuit;
|
|
|
·
|
$1.3
million of sale option proceeds for our Auburn
property;
|
|
|
·
|
$910,000
of proceeds from insurance settlement;
and
|
|
|
·
|
$3.3
million of cash received from the sale of our interest in the Botany Downs
cinema in New Zealand.
|
The $38.3 million cash used in 2007 was
primarily related to:
|
|
·
|
$15.7
million to purchase marketable
securities;
|
|
|
·
|
$22.6
million to purchase real estate assets
including
|
|
|
o
|
$20.1
million for real estate purchases in New
Zealand,
|
|
|
o
|
$100,000
for the purchase of the Cinemas 1, 2 & 3
building,
|
|
|
o
|
$2.0
million acquisition deposit for our acquisition of Consolidated
Entertainment cinemas, and
|
|
|
o
|
$493,000
for the purchase of the ground lease of our Tower Cinema in Sacramento,
California;
|
|
|
·
|
$2.8
million in property enhancements to our existing
properties;
|
|
|
·
|
$19.0
million in development costs associated with our properties under
development; and
|
|
|
·
|
$1.5
million in our investment in Reading International Trust I securities (the
issuer of our Trust Preferred
Securities);
|
offset
by
|
|
·
|
$19.9
million in cash provided by the sale of marketable
securities;
|
|
|
·
|
$981,000
decrease in restricted cash related to settled claims by our credit card
companies; and
|
|
|
·
|
$2.4
million in distributions from our investment in joint
ventures.
|
The $23.4 million cash used in 2006 was
primarily related to:
|
|
·
|
$8.1
million in acquisitions including:
|
|
|
o
|
$939,000
in cash used to purchase the Queenstown Cinema in New
Zealand,
|
|
|
o
|
$2.6
million in cash used to purchase the 50% share that we did not already own
of the Palms cinema located in Christchurch, New
Zealand,
|
|
|
o
|
$1.8
million for the Australia Indooroopilly property,
and
|
|
|
o
|
$2.5
million for the adjacent parcel to our Moonee Ponds
property;
|
|
|
·
|
$8.3
million in cash used to complete the Newmarket property and for property
enhancements to our Australia, New Zealand and U.S.
properties;
|
|
|
·
|
$2.7
million in cash used to invest in unconsolidated joint ventures and
entities including $1.8 million paid for Malulani Investments Limited
stock and $876,000 additional cash invested in Rialto Cinemas used to pay
off their bank debt;
|
|
|
·
|
$844,000
increase in restricted cash related to potential claims by our credit card
companies; and
|
|
|
·
|
$8.1
million in cash used to purchase marketable
securities.
|
offset
by
|
|
·
|
$4.6
million cash received from the sale of our interest the cinemas at
Whangaparaoa, Takapuna and Mission Bay, New
Zealand.
|
Financing
Activities
Cash provided by financing activities
for 2008 was $60.2 million compared to $33.9 million in 2007, and $13.9 million
in 2006. The following summarizes our financing activities for each
of the three years ending December 31, 2008:
The $60.2
million cash used in 2008 was primarily related to:
|
|
·
|
$48.0
million of net proceeds from our new GE Capital Term Loan used to finance
the Consolidated Entertainment
transaction;
|
|
|
·
|
$7.1
million of net proceeds from our new Liberty Theatres
loan;
|
|
|
·
|
$4.5
million of borrowing on the Nationwide Loans;
and
|
|
|
·
|
$13.2
million of borrowing on our Australia and New Zealand credit
facilities;
|
offset
by
|
|
·
|
$9.4
million of loan repayments including $9.0 million to pay down on our GE
Capital loan;
|
|
|
·
|
$1.1
million waiver fee on our trust preferred securities;
and
|
|
|
·
|
$1.6
million in distributions to minority
interests.
|
The $33.9
million cash used in 2007 was primarily related to:
|
|
·
|
$49.9
million of net proceeds from our Trust Preferred
Securities;
|
|
|
·
|
$14.4
million of net proceeds from our Euro-Hypo
loan;
|
|
|
·
|
$3.1
million of proceeds from our margin account on marketable securities;
and
|
|
|
·
|
$27.9
million of additional borrowing on our Australia and New Zealand credit
facilities;
|
offset
by
|
|
·
|
$57.6
million of cash used to retire bank indebtedness which primarily includes
$34.4 million (NZ$50.0 million) to pay off our New Zealand term debt, $5.8
million (AUS$7.4 million) to retire a portion of our bank indebtedness in
Australia, $3.1 million to pay off our margin account on marketable
securities, $12.1 million (NZ$15.7 million) to pay down our New Zealand
Westpac line of credit in August 2007, and $1.7 million for the final
balloon payment on the Royal George Theater Term Loan;
and
|
|
|
·
|
$3.9
million in distributions to minority
interests.
|
The $13.9
million cash used in 2006 was primarily related to:
|
|
·
|
$19.1
million of net borrowings which includes $11.8 million from our existing
Australian Corporate Credit Facility and $7.3 million of net proceeds from
a renegotiated mortgage on our Union Square Property;
and
|
|
|
·
|
$3.0
million of a deposit received from Sutton Hill Capital, LLC for the option
to purchase a 25% non-managing membership interest in the limited
liability company that owns the Cinemas 1, 2 &
3;
|
offset
by
|
|
·
|
$6.2
million of cash used to pay down long-term debt which was primarily
related to the payoff of $3.2 million on the mortgage on our Union Square
Property as part of a renegotiation of the loan; the payoff of our
Movieland purchase note payable of approximately $512,000; the payoff of
the Palms – Christchurch Cinema bank debt of approximately $1.9 million;
and on the pay down of our Australian Corporate Credit Facility by
$280,000;
|
|
|
·
|
$791,000
of cash used to repurchase the Class A Nonvoting Common Stock (these
shares were previously issued to the Movieland sellers who exercised their
put option during 2006 to sell back to us the shares they had received in
partial consideration for the sale of the Movieland cinemas);
and
|
|
|
·
|
$1.2
million in distributions to minority
interests.
|
Future Liquidity and Capital
Resources
We
believe that we have sufficient borrowing capacity to meet our short-term
working capital requirements (see discussion below regarding our Trust Preferred
Securities).
During
the past 24 months, we have put into place several measures that have already
had a positive effect on our overall liquidity, including:
|
|
·
|
on
February 5, 2007, we issued $51.5 million in Trust Preferred Securities
through our wholly owned trust subsidiary. We used the funds
principally to payoff our bank indebtedness in New Zealand by $34.4
million (AUS$50.0 million) and to pay down our indebtedness in Australia
by $5.8 million (AUS$7.4 million). On December 31, 2008, we
secured a waiver of all financial covenants with respect to our Trust
Preferred Securities for a period of nine years, in consideration of the
payment of
|
|
|
$1.6
million, consisting of an initial payment of $1.1 million and a
contractual obligation to pay $270,000 in December 2011 and $270,000 in
December 2014. In the event that these payments are not made,
the only remedy is the termination of the waiver. Additionally,
in January 2009, we took advantage of current market illiquidity for
securities such as our Trust Preferred Securities to repurchase $22.9
million of those securities for $11.5
million.
|
|
|
·
|
As
part of the Consolidated Entertainment acquisition, we secured bank
financing of $50.0 million and seller financing of $21.0
million. We have successfully paid down $9.0 million of the
bank financing and decreased the seller’s note associated with the
acquisition by $6.3 million. Aside from the acquisition, we
drew down on a seller’s line of credit of $4.5 million. Built
into the purchase agreement of the acquisition are reductions in the
seller’s note based on certain operational results and other criteria that
may result in no balance or interest being owed to the
seller.
|
|
|
·
|
on
March 17, 2008, we entered into a $7.1 million loan agreement with a
financial institution, secured by our Royal George Theatre in Chicago,
Illinois and our Minetta and Orpheum Theatres in New York. The
loan agreement requires only monthly principal and interest payments along
with self-reported annual financial
statements.
|
|
|
·
|
on
June 28, 2007, Sutton Hill Properties, LLC (“SHP”), one of our
consolidated subsidiaries, entered into a $15.0 million loan that is
secured by SHP’s interest in the Cinemas 1, 2 & 3 land and
building. SHP is owned 75% by Reading and 25% by Sutton Hill
Capital, LLC (“SHC”), a joint venture indirectly wholly owned by Mr. James
J. Cotter, our Chairman and Chief Executive Officer, and Mr. Michael
Forman.
|
Potential
uses for funds during 2009 that would reduce our liquidity, other than those
relating to working capital needs and debt service requirements
include:
|
|
·
|
the
selective and potentially slowed development of our currently held for
development projects;
|
|
|
·
|
the
acquisition of undeveloped assets with proven cash flow that we believe to
be resistant to the current recessionary trends;
and
|
|
|
·
|
the
possible further investments in
securities.
|
Based
upon the current levels of the consolidated operations, further anticipated cost
savings and future growth, we believe our cash flow from operations, together
with both the existing and anticipated lines-of-credit and other sources of
liquidity (including future potential asset sales) will be adequate to meet our
anticipated requirements for interest payments and other debt service
obligations, working capital, capital expenditures and other operating
needs.
The
current economic climate has necessitated a review of the timing of all our
development projects. Our development in Burwood, Australia, with
cost estimates in excess of $0.4 billion (AUS$0.6 billion) will clearly not be
funded from normal working capital even in a phased approach. We
continue to investigate all options available to us including debt financing,
equity financing, and joint venture partnering to achieve the optimal financing
structure for this most significant development.
In late
February 2007, it became apparent that our cost estimates with respect to the
Burwood site preparation were low, as the extent of the contaminated soil
present at the site – a former brickworks – was greater than we had originally
believed. Our previous estimated cost of $500.0 million included
approximately $1.4 million (AUS$1.8 million) of estimated cost to remove the
contaminated soil. As we were not the source of this contamination,
we are not currently under any legal obligation to remove this contaminated soil
from the site. However, as a practical matter, we intend to address
these issues in connection with our planned redevelopment of this site as a
mixed-use retail, entertainment, commercial and residential
complex. As of December 31, 2008, we estimate that the total site
preparation costs associated with the removal of this contaminated soil will be
$8.1 million (AUS$9.6 million) and as of that date we had incurred a total of
$6.2 million (AUS$7.4 million) of these costs. In accordance with
Emerging Issues Task Force (EITF) 90-8 “Capitalization of Costs to Treat
Environmental Contamination,” contamination clean up costs that improve
the property from its original acquisition state are capitalized as part of the
property’s overall development costs.
There can
be no assurance, however, that the business will continue to generate cash flow
at or above current levels or that estimated cost savings or growth can be
achieved. Future operating performance and our
ability
to service or refinance existing indebtedness will be subject to future economic
conditions and to financial and other factors, such as access to first-run
films, many of which are beyond our control. If our cash flow from
operations and/or proceeds from anticipated borrowings should prove to be
insufficient to meet our funding needs, our current intention is
either:
|
|
·
|
to
defer construction of projects currently slated for land presently owned
by us;
|
|
|
·
|
to
take on joint venture partners with respect to such development projects;
and/or
|
|
|
·
|
to
sell assets.
|
Contractual
Obligations
The
following table provides information with respect to the maturities and
scheduled principal repayments of our secured debt and lease obligations at
December 31, 2008 (in thousands):
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|||||||||||||||||||
|
Long-term
debt
|
$ | 1,347 | $ | 16,598 | $ | 73,628 | $ | 15,921 | $ | 62,592 | $ | 3,529 | ||||||||||||
|
Long-term
debt to related parties
|
-- | 14,000 | -- | -- | -- | -- | ||||||||||||||||||
|
Subordinated
notes
|
-- | -- | -- | -- | -- | 51,547 | ||||||||||||||||||
|
Pension
liability
|
6 | 11 | 17 | 23 | 29 | 2,480 | ||||||||||||||||||
|
Lease
obligations
|
27,335 | 26,895 | 26,354 | 24,914 | 22,452 | 92,390 | ||||||||||||||||||
|
Interest
on long-term debt
|
15,930 | 15,756 | 16,040 | 9,385 | 5,003 | 34,229 | ||||||||||||||||||
|
Total
|
$ | 44,618 | $ | 73,260 | $ | 116,039 | $ | 50,243 | $ | 90,076 | $ | 184,175 | ||||||||||||
Estimated interest on long-term debt is
based on the anticipated loan balances for future periods calculated against
current fixed and variable interest rates.
We
adopted FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes on January 1, 2007. As of adoption, the total amount of
gross unrecognized tax benefits for uncertain tax positions was $12.5 million
increasing to $13.7 million and to $14.5 million as of December 31, 2007 and
December 31, 2008, respectively. We do not expect a significant tax
payment related to these obligations within the 12 months.
Unconsolidated Joint Venture
Debt
Total debt of unconsolidated joint
ventures was $1.2 million and $4.2 million as of December 31, 2008 and December
31, 2007, respectively. Our share of unconsolidated debt, based on
our ownership percentage, was $785,000 and $2.0 million as of December 31, 2008
and December 31, 2007, respectively. Each loan is without recourse to
any assets other than our interests in the individual joint
venture.
Off-Balance Sheet
Arrangements
There are
no off-balance sheet transactions, arrangements or obligations (including
contingent obligations) that have, or are reasonably likely to have, a current
or future material effect on our financial condition, changes in the financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Financial Risk
Management
Our
internally developed risk management procedure, seeks to minimize the
potentially negative effects of changes in foreign exchange rates and interest
rates on the results of operations. Our primary exposure to
fluctuations in the financial markets is currently due to changes in foreign
exchange rates between U.S and Australia and New Zealand, and interest
rates.
In 2006, we determined that it would be
beneficial to have a layer of long-term fully subordinated debt financing to
help support our long-term real estate assets. On February 5, 2007 we
issued $51.5 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).
If our
operational focus shifts more to Australia and New Zealand, unrealized foreign
currency translation gains and losses could materially affect our financial
position. Historically, we managed our currency exposure by creating
natural hedges in Australia and New Zealand. This involves local
country sourcing of goods and services as well as borrowing in local
currencies. However, by paying off our New Zealand debt and paying
down on our Australia debt with the proceeds of our Trust Preferred Securities,
we have added an increased element of currency risk to our
Company. We believe that this currency risk is mitigated by the
long-term nature of the fully subordinated notes and our recent ability to
repurchase, at a discount, some of these securities.
However,
in the first quarter 2009, we took advantage of current market illiquidity for
securities such as our Trust Preferred Securities to repurchase $22.9 million of
those securities for $11.5 million. In addition, in December 2008 we
secured a waiver of all financial covenants with respect to our Trust Preferred
Securities for a period of nine years, in consideration of the payment of $1.6
million, consisting of an initial payment of $1.1 million and a contractual
obligation to pay $270,000 in December 2011 and $270,000 in December
2014. In the event that the remaining payments are not made, the only
remedy is the termination of the waiver. Because of this transaction,
which was partially funded with borrowings against our New Zealand
line-of-credit, we once again have substantially matched the currency in which
we have financed our developments with the jurisdictions in which these
developments are located.
Our
exposure to interest rate risk arises out of our long-term debt
obligations. Consistent with our internally developed guidelines, we
seek to reduce the negative effects of changes in interest rates by changing the
character of the interest rate on our long-term debt, converting a fixed rate
into a variable rate and vice versa. Our internal procedures allow us
to enter into derivative contracts on certain borrowing transactions to achieve
this goal. Our Australian Credit Facility provides for floating
interest rates based on the Bank Bill Swap Bid Rate (BBSY bid rate), but
requires that not less than 70% of the loan be swapped into fixed rate
obligations. Additionally, under our GE Capital Term Loan, we are
required to swap no less than 50% of our variable rate drawdowns for the first
two years of the loan agreement.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 133 -
Accounting for Derivative
Instruments and Hedging Activities, we marked our interest swap
instruments to market on the consolidated balance sheet resulting in a $2.1
million increase to interest expense during 2008, an $320,000 decrease to
interest expense during 2007, and a $845,000 decrease to interest expense during
2006.
Inflation
We
continually monitor inflation and the effects of changing
prices. Inflation increases the cost of goods and services
used. Competitive conditions in many of our markets restrict our
ability to recover fully the higher costs of acquired goods and services through
price increases. We attempt to mitigate the impact of inflation by
implementing continuous process improvement solutions to enhance productivity
and efficiency and, as a result, lower costs and operating
expenses. In our opinion, the effects of inflation have been managed
appropriately and as a result, have not had a material impact on our operations
and the resulting financial position or liquidity.
Recent Accounting
Pronouncements
SFAS No. 141(R) and No.
160
In
December 2007, the FASB issued SFAS No. 141(R) Business Combinations (“SFAS
No. 141(R)”) and SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS No.
160”). SFAS No. 141(R) requires an acquiring entity to recognize acquired assets
and assumed liabilities in a transaction at fair value as of the acquisition
date and changes the accounting treatment for certain items, including
acquisition costs, which will be required to be expensed as
incurred. SFAS No. 160 requires that noncontrolling interests be
presented as a component of consolidated stockholders’ equity and eliminates
“minority interest accounting” such that the amount of net income attributable
to the noncontrolling interests will be presented as part of consolidated net
income on the consolidated statement of operations. SFAS No. 141(R)
and SFAS No. 160 require concurrent adoption and are to be applied prospectively
for the first annual reporting period beginning
on or
after December 15, 2008. Early adoption of either standard is
prohibited. Management believes that these statements may have a
material impact on the Company’s consolidated results of operations or cash
flows. However, management is currently evaluating whether the adoption of SFAS
No. 160 could have a material impact on the consolidated balance sheets and
statements of shareholders’ equity.
FASB Staff Position EITF No.
03-6-1
In June
2008, the FASB issued FASB Staff Position (FSP) EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF No. 03-6-1”). This new standard requires that nonvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents be treated as participating securities in the computation
of earnings per share pursuant to the two-class method. We believe
that FSP EITF No. 03-6-1 will not have a material impact on our consolidated
financial statements and results of operations. FSP EITF No. 03-6-1 will be
applied retrospectively to all periods presented for fiscal years beginning
after December 15, 2008.
SFAS No.
161
In March
2008, the Financial Accounting Standards Board issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS No. 161”). This new
standard enhances disclosure requirements for derivative instruments in order to
provide users of financial statements with an enhanced understanding of (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and its related interpretations and
(iii) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No.
161 is to be applied prospectively for the first annual reporting period
beginning on or after November 15, 2008. We believe that the adoption
of SFAS No. 161 will not have a material impact on our consolidated financial
statement disclosures since we solely have interest rate swap agreements not
formally designated as cash flow hedges at the inception of the derivative
contract.
FSP
142-3
In April
2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 is to be applied
prospectively for fiscal years beginning after December 15, 2008. We
are currently evaluating the impact of FSP 142-3 on our consolidated financial
position, results of operations and cash flows but currently does not believe it
will have a material impact on our consolidated financial
statements.
Forward-Looking
Statements
Our
statements in this annual report contain a variety of forward-looking statements
as defined by the Securities Litigation Reform Act of
1995. Forward-looking statements reflect only our expectations
regarding future events and operating performance and necessarily speak only as
of the date the information was prepared. No guarantees can be given
that our expectation will in fact be realized, in whole or in
part. You can recognize these statements by our use of words such as,
by way of example, “may,” “will,” “expect,” “believe,” and “anticipate” or other
similar terminology.
These
forward-looking statements reflect our expectation after having considered a
variety of risks and uncertainties. However, they are necessarily the
product of internal discussion and do not necessarily completely reflect the
views of individual members of our Board of Directors or of our management
team. Individual Board members and individual members of our
management team may have different view as to the risks and uncertainties
involved, and may have different views as to future events or our operating
performance.
Among the
factors that could cause actual results to differ materially from those
expressed in or underlying our forward-looking statements are the
following:
|
|
·
|
with
respect to our cinema operations:
|
|
|
o
|
the
number and attractiveness to movie goers of the films released in future
periods;
|
|
|
o
|
the
amount of money spent by film distributors to promote their motion
pictures;
|
|
|
o
|
the
licensing fees and terms required by film distributors from motion picture
exhibitors in order to exhibit their
films;
|
|
|
o
|
the
comparative attractiveness of motion pictures as a source of entertainment
and willingness and/or ability of consumers (i) to spend their dollars on
entertainment and (ii) to spend their entertainment dollars on movies in
an outside the home environment;
|
|
|
o
|
the
extent to which we encounter competition from other cinema exhibitors,
from other sources of outside of the home entertainment, and from inside
the home entertainment options, such as “home theaters” and competitive
film product distribution technology such as, by way of example, digital
and 3D technology, cable, satellite broadcast, DVD and VHS rentals and
sales, and so called “movies on demand;”
and
|
|
|
o
|
the
extent to and the efficiency with which, we are able to integrate
acquisitions of cinema circuits with our existing
operations.
|
|
|
·
|
with
respect to our real estate development and operation
activities:
|
|
|
o
|
the
rental rates and capitalization rates applicable to the markets in which
we operate and the quality of properties that we
own;
|
|
|
o
|
the
extent to which we can obtain on a timely basis the various land use
approvals and entitlements needed to develop our
properties;
|
|
|
o
|
the
risks and uncertainties associated with real estate
development;
|
|
|
o
|
the
availability and cost of labor and
materials;
|
|
|
o
|
competition
for development sites and tenants;
|
|
|
o
|
environmental
remediation issues; and
|
|
|
o
|
the
extent to which our cinemas can continue to serve as an anchor tenant who
will, in turn, be influenced by the same factors as will influence
generally the results of our cinema
operations.
|
|
|
·
|
with
respect to our operations generally as an international company involved
in both the development and operation of cinemas and the development and
operation of real estate; and previously engaged for many years in the
railroad business in the United
States:
|
|
|
o
|
our
ongoing access to borrowed funds and capital and the interest that must be
paid on that debt and the returns that must be paid on such
capital;
|
|
|
o
|
the
relative values of the currency used in the countries in which we
operate;
|
|
|
o
|
changes
in government regulation, including by way of example, the costs resulting
from the implementation of the requirements of
Sarbanes-Oxley;
|
|
|
o
|
our
labor relations and costs of labor (including future government
requirements with respect to pension liabilities, disability insurance and
health coverage, and vacations and
leave);
|
|
|
o
|
our
exposure from time to time to legal claims and to uninsurable risks such
as those related to our historic railroad operations, including potential
environmental claims and health related claims relating to alleged
exposure to asbestos or other substances now or in the future recognized
as being possible causes of cancer or other health related
problems;
|
|
|
o
|
changes
in future effective tax rates and the results of currently ongoing and
future potential audits by taxing authorities having jurisdiction over our
various companies; and
|
|
|
o
|
changes
in applicable accounting policies and
practices.
|
The above
list is not necessarily exhaustive, as business is by definition unpredictable
and risky, and subject to influence by numerous factors outside of our control
such as changes in government regulation or policy, competition, interest rates,
supply, technological innovation, changes in consumer taste and fancy, weather,
and the extent to
which consumers in our markets have the economic wherewithal to spend money on
beyond-the-home entertainment.
Given the
variety and unpredictability of the factors that will ultimately influence our
businesses and our results of operation, it naturally follows that no guarantees
can be given that any of our forward-looking statements will ultimately prove to
be correct. Actual results will undoubtedly vary and there is no
guarantee as to how our securities will perform either when considered in
isolation or when compared to other securities or investment
opportunities.
Finally,
please understand that we undertake no obligation to update publicly or to
revise any of our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable law. Accordingly, you should always note the date to which
our forward-looking statements speak.
Additionally,
certain of the presentations included in this annual report may contain
“non-GAAP financial measures.” In such case, a reconciliation of this
information to our GAAP financial statements will be made available in
connection with such statements.
Item 7A
– Quantitative
and Qualitative Disclosure about Market Risk
The
Securities and Exchange Commission requires that registrants include information
about potential effects of changes in currency exchange and interest rates in
their Form 10-K filings. Several alternatives, all with some
limitations, have been offered. The following discussion is based on
a sensitivity analysis, which models the effects of fluctuations in currency
exchange rates and interest rates. This analysis is constrained by
several factors, including the following:
|
|
·
|
it
is based on a single point in time.
|
|
|
·
|
it
does not include the effects of other complex market reactions that would
arise from the changes modeled.
|
Although
the results of such an analysis may be useful as a benchmark, they should not be
viewed as forecasts.
At December 31, 2008, approximately 44%
and 18% of our assets (determined by the book value of such assets) were
invested in assets denominated in Australian dollars (Reading Australia) and New
Zealand dollars (Reading New Zealand), respectively, including approximately
$19.6 million in cash and cash equivalents. At December 31, 2007,
approximately 51% and 25% of our assets were invested in assets denominated in
Australian and New Zealand dollars, respectively, including approximately $10.3
million in cash and cash equivalents.
Our policy in Australia and New Zealand
is to match revenue and expenses, whenever possible, in local
currencies. As a result, a majority of our expenses in Australia and
New Zealand have been procured in local currencies. Due to the
developing nature of our operations in Australia and New Zealand, our revenue is
not yet significantly greater than our operating expense. The
resulting natural operating hedge has led to a negligible foreign currency
effect on our earnings. As we continue to progress our acquisition
and development activities in Australia and New Zealand, we cannot assure you
that the foreign currency effect on our earnings will be insignificant in the
future.
Historically,
our policy has been to borrow in local currencies to finance the development and
construction of our entertainment complexes in Australia and New Zealand
whenever possible. As a result, the borrowings in local currencies
have provided somewhat of a natural hedge against the foreign currency exchange
exposure. Even so, approximately 42% and 82% of our Australian and
New Zealand assets (based on book value), respectively, remain subject to such
exposure unless we elect to hedge our foreign currency exchange between the U.S.
and Australian and New Zealand dollars. If the foreign currency rates
were to fluctuate by 10% the resulting change in Australian and New Zealand
assets would be $6.6 million and $5.3 million, respectively, and the change in
annual net income would be $32,000 and $313,000, respectively. At the
present time, we have no plan to hedge such exposure. On February 5,
2007 we issued $51.5 million in 20-year fully subordinated notes and paid off
our bank indebtedness in New Zealand $34.4 million (NZ$50.0 million) and retired
a portion of our bank indebtedness in Australia $5.8 million (AUS$7.4
million). By paying off our New Zealand debt and paying down on our
Australia debt with the proceeds of our Trust Preferred Securities, we have
added an increased element of currency risk to our Company. We
believe that this currency risk is mitigated by the long-term nature of the
fully subordinated notes and our recent ability to repurchase, at a discount,
some of these securities.
We record unrealized foreign currency
translation gains or losses that could materially affect our financial
position. We have accumulated unrealized foreign currency translation
gains of approximately $8.8 million and $48.2 million as of December 31, 2008
and 2007, respectively.
Historically,
we maintained most of our cash and cash equivalent balances in short-term money
market instruments with original maturities of six months or
less. Some of our money market investments may decline in value if
interest rates increase. Due to the short-term nature of such
investments, a change of 1% in short-term interest rates would not have a
material effect on our financial condition.
The
majority of our U.S. bank loans have fixed interest rates; however, one of our
domestic loans has a variable interest rate and a change of approximately 1% in
short-term interest rates would have resulted in approximately $226,000 increase
or decrease in our 2008 interest expense.
Item 8
– Financial Statements and
Supplementary Data
TABLE OF
CONTENTS
Report of Independent Registered Public
Accountants
To the
Board of Directors and Stockholders of
Reading
International, Inc.
Los
Angeles, California
We have audited the accompanying
consolidated balance sheets of Reading International, Inc. and subsidiaries
(the "Company") as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31,
2008. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Reading International, Inc. and
subsidiaries at December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As
discussed in Note 14 to the Consolidated Financial Statements, effective
January 1, 2007, the Company adopted Financial Accounting Standards Board,
or FASB, Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement
No. 109.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 16, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Deloitte
& Touche LLP
Los
Angeles, California
March 16,
2009
Reading International, Inc. and Subsidiaries
Consolidated
Balance Sheets as of December 31, 2008 and 2007
(U.S.
dollars in thousands)
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 30,874 | $ | 20,782 | ||||
|
Receivables
|
7,868 | 5,671 | ||||||
|
Inventory
|
797 | 654 | ||||||
|
Investment
in marketable securities
|
3,100 | 4,533 | ||||||
|
Restricted
cash
|
1,656 | 59 | ||||||
|
Assets
held for sale
|
20,119 | 25,941 | ||||||
|
Prepaid
and other current assets
|
2,324 | 3,800 | ||||||
|
Total
current assets
|
66,738 | 61,440 | ||||||
|
Land
held for sale
|
-- | 1,984 | ||||||
|
Property
held for development
|
9,005 | 9,289 | ||||||
|
Property
under development
|
58,595 | 66,787 | ||||||
|
Property
& equipment, net
|
153,165 | 154,012 | ||||||
|
Investment
in unconsolidated joint ventures and entities
|
11,643 | 15,480 | ||||||
|
Investment
in Reading International Trust I
|
1,547 | 1,547 | ||||||
|
Goodwill
|
34,964 | 19,100 | ||||||
|
Intangible
assets, net
|
25,118 | 8,448 | ||||||
|
Other
assets
|
9,301 | 7,984 | ||||||
|
Total
assets
|
$ | 370,076 | $ | 346,071 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 13,170 | $ | 12,331 | ||||
|
Film
rent payable
|
7,315 | 3,275 | ||||||
|
Notes
payable – current portion
|
1,347 | 395 | ||||||
|
Note
payable to related party – current portion
|
-- | 5,000 | ||||||
|
Taxes
payable
|
6,425 | 4,770 | ||||||
|
Deferred
current revenue
|
5,645 | 3,214 | ||||||
|
Other
current liabilities
|
201 | 169 | ||||||
|
Total
current liabilities
|
34,103 | 29,154 | ||||||
|
Notes
payable – long-term portion
|
172,268 | 111,253 | ||||||
|
Notes
payable to related party – long-term portion
|
14,000 | 9,000 | ||||||
|
Subordinated
debt
|
51,547 | 51,547 | ||||||
|
Noncurrent
tax liabilities
|
6,347 | 5,418 | ||||||
|
Deferred
non-current revenue
|
554 | 566 | ||||||
|
Other
liabilities
|
23,604 | 14,936 | ||||||
|
Total
liabilities
|
302,423 | 221,874 | ||||||
|
Commitments
and contingencies (Note 19)
|
||||||||
|
Minority
interest in consolidated affiliates
|
1,817 | 2,835 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Class
A Nonvoting Common Stock, par value $0.01, 100,000,000 shares authorized,
35,564,339 issued and 20,987,115 outstanding at December 31, 2008 and at
December 31, 2007
|
216 | 216 | ||||||
|
Class
B Voting Common Stock, par value $0.01, 20,000,000 shares authorized and
1,495,490 issued and outstanding at December 31, 2008 and at December 31,
2007
|
15 | 15 | ||||||
|
Nonvoting
Preferred Stock, par value $0.01, 12,000 shares authorized and no issued
or outstanding shares at December 31, 2008 and 2007
|
-- | -- | ||||||
|
Additional
paid-in capital
|
133,906 | 131,930 | ||||||
|
Accumulated
deficit
|
(71,205 | ) | (52,670 | ) | ||||
|
Treasury
shares
|
(4,306 | ) | (4,306 | ) | ||||
|
Accumulated
other comprehensive income
|
7,210 | 46,177 | ||||||
|
Total
stockholders’ equity
|
65,836 | 121,362 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 370,076 | $ | 346,071 | ||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and
Subsidiaries
Consolidated
Statements of Operations for the Three Years Ended December 31,
2008
(U.S.
dollars in thousands, except per share amounts)
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Operating
revenue
|
||||||||||||
|
Cinema
|
$ | 177,256 | $ | 99,703 | $ | 90,504 | ||||||
|
Real estate
|
14,030 | 13,701 | 10,346 | |||||||||
|
Total operating
revenue
|
191,286 | 113,404 | 100,850 | |||||||||
|
Operating
expense
|
||||||||||||
|
Cinema
|
141,761 | 74,051 | 66,736 | |||||||||
|
Real estate
|
8,754 | 7,365 | 6,558 | |||||||||
|
Depreciation and
amortization
|
17,868 | 10,737 | 11,912 | |||||||||
|
Impairment expense
|
6,045 | -- | -- | |||||||||
|
General and
administrative
|
21,434 | 16,085 | 12,991 | |||||||||
|
Total operating
expense
|
195,862 | 108,238 | 98,197 | |||||||||
|
Operating
income (loss)
|
(4,576 | ) | 5,166 | 2,653 | ||||||||
|
Interest
income
|
1,009 | 798 | 306 | |||||||||
|
Interest
expense
|
(16,749 | ) | (8,959 | ) | (6,903 | ) | ||||||
|
Net
loss on sale of assets
|
-- | (185 | ) | (45 | ) | |||||||
|
Other
income (expense)
|
991 | (320 | ) | (1,953 | ) | |||||||
|
Loss
before minority interest, discontinued operations, income tax
expense and equity earnings of unconsolidated joint ventures and
entities
|
(19,325 | ) | (3,500 | ) | (5,942 | ) | ||||||
|
Minority
interest
|
(620 | ) | (1,003 | ) | (672 | ) | ||||||
|
Loss
before discontinued operations, income tax expense, and equity earnings of
unconsolidated joint ventures and entities
|
(19,945 | ) | (4,503 | ) | (6,614 | ) | ||||||
|
Gain
on sale of a discontinued operation, net of tax
|
-- | 1,912 | -- | |||||||||
|
Income
(loss) from discontinued operations, net of tax
|
562 | (19 | ) | (249 | ) | |||||||
|
Loss
before income tax expense and equity earnings of unconsolidated joint
ventures and entities
|
(19,383 | ) | (2,610 | ) | (6,863 | ) | ||||||
|
Income
tax expense
|
(2,099 | ) | (2,038 | ) | (2,270 | ) | ||||||
|
Loss
before equity earnings of unconsolidated joint ventures and
entities
|
(21,482 | ) | (4,648 | ) | (9,133 | ) | ||||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
497 | 2,545 | 9,547 | |||||||||
|
Gain
on sale of unconsolidated joint venture
|
2,450 | -- | 3,442 | |||||||||
|
Net
income (loss)
|
$ | (18,535 | ) | $ | (2,103 | ) | $ | 3,856 | ||||
|
Earnings
(loss) per common share – basic:
|
||||||||||||
|
Earnings
(loss) from continuing operations
|
$ | (0.84 | ) | $ | (0.18 | ) | $ | 0.18 | ||||
|
Earnings
(loss) from discontinued operations, net
|
0.02 | 0.09 | (0.01 | ) | ||||||||
|
Basic
earnings (loss) per share
|
$ | (0.82 | ) | $ | (0.09 | ) | $ | 0.17 | ||||
|
Weighted
average number of shares outstanding – basic
|
22,477,471 | 22,478,145 | 22,425,941 | |||||||||
|
Earnings
(loss) per common share – diluted:
|
||||||||||||
|
Earnings
(loss) from continuing operations
|
$ | (0.84 | ) | $ | (0.18 | ) | $ | 0.18 | ||||
|
Earnings
(loss) from discontinued operations, net
|
0.02 | 0.09 | (0.01 | ) | ||||||||
|
Diluted
earnings (loss) per share
|
$ | (0.82 | ) | $ | (0.09 | ) | $ | 0.17 | ||||
|
Weighted
average number of shares outstanding – diluted
|
22,477,471 | 22,478,145 | 22,674,818 | |||||||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and
Subsidiaries
Consolidated
Statements of Stockholders’ Equity for the Three Years Ended December 31,
2008
(U.S.
dollars in thousands)
|
Common
Stock
|
|||||||||
|
Class
A Shares
|
Class
A Par Value
|
Class
B Shares
|
Class
B
Par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income/(Loss)
|
Total
Stockholders’
Equity
|
|
|
At
January 1, 2006
|
20,990
|
$215
|
1,495
|
$15
|
$128,028
|
$(3,515)
|
$(53,914)
|
$28,575
|
$99,404
|
|
Net
income
|
--
|
--
|
--
|
--
|
--
|
--
|
3,856
|
--
|
3,856
|
|
Other
comprehensive income:
|
|
|
|||||||
|
Cumulative
foreign exchange rate adjustment
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
4,928
|
4,928
|
|
Unrealized
loss on securities
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(110)
|
(110)
|
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
8,674
|
|
Stock
option and restricted stock compensation expense
|
16
|
--
|
--
|
--
|
284
|
--
|
--
|
--
|
284
|
|
Class
A common stock received upon exercise of put option
|
(99)
|
--
|
--
|
--
|
--
|
(791)
|
--
|
--
|
(791)
|
|
Class
A common stock issued for stock options exercised
|
74
|
1
|
--
|
--
|
87
|
--
|
--
|
--
|
88
|
|
At
December 31, 2006
|
20,981
|
216
|
1,495
|
15
|
128,399
|
(4,306)
|
(50,058)
|
33,393
|
107,659
|
|
Net
loss
|
--
|
--
|
--
|
--
|
--
|
--
|
(2,103)
|
--
|
(2,103)
|
|
Other
comprehensive income:
|
|
|
|
|
|
||||
|
Cumulative
foreign exchange rate adjustment
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
14,731
|
14,731
|
|
Accrued
pension service costs
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(2,063)
|
(2,063)
|
|
Unrealized
gain on securities
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
116
|
116
|
|
Total
comprehensive income
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
10,681
|
|
Stock
option and restricted stock compensation expense
|
--
|
--
|
--
|
--
|
994
|
--
|
--
|
--
|
994
|
|
Adjustment
to accumulated deficit for adoption of FIN 48
|
--
|
--
|
--
|
--
|
--
|
--
|
(509)
|
--
|
(509)
|
|
Exercise
of Sutton Hill Properties option
|
--
|
--
|
--
|
--
|
2,512
|
--
|
--
|
--
|
2,512
|
|
Class
A common stock issued for stock options exercised
|
6
|
--
|
--
|
--
|
25
|
--
|
--
|
--
|
25
|
|
At
December 31, 2007
|
20,987
|
216
|
1,495
|
15
|
131,930
|
(4,306)
|
(52,670)
|
46,177
|
121,362
|
|
Net
loss
|
--
|
--
|
--
|
--
|
--
|
--
|
(18,535)
|
--
|
(18,535)
|
|
Other
comprehensive income:
|
|
|
|
|
|||||
|
Cumulative
foreign exchange rate adjustment
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(39,264)
|
(39,264)
|
|
Accrued
pension service costs
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
318
|
318
|
|
Unrealized
loss on securities
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(21)
|
(21)
|
|
Total
comprehensive loss
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(57,502)
|
|
Stock
option and restricted stock compensation expense
|
--
|
--
|
--
|
--
|
1,976
|
--
|
--
|
--
|
1,976
|
|
At
December 31, 2008
|
20,987
|
$216
|
1,495
|
$15
|
$133,906
|
$(4,306)
|
$(71,205)
|
$
7,210
|
$65,836
|
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows for the Three Years Ended December 31,
2008
(U.S.
dollars in thousands)
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
income (loss)
|
$ | (18,535 | ) | $ | (2,103 | ) | $ | 3,856 | ||||
|
Adjustments
to reconcile net income( loss) to net cash provided by operating
activities:
|
||||||||||||
|
Realized
(gain) loss on foreign currency translation
|
574 | (131 | ) | 38 | ||||||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
(497 | ) | (2,545 | ) | (9,547 | ) | ||||||
|
Distributions
of earnings from unconsolidated joint ventures and
entities
|
951 | 4,619 | 6,647 | |||||||||
|
Gain
on the sale of unconsolidated joint venture or entity
|
(2,450 | ) | -- | (3,442 | ) | |||||||
|
Gain
on sale of Glendale Building
|
-- | (1,912 | ) | -- | ||||||||
|
(Gain)
loss on sale of marketable securities
|
-- | (773 | ) | -- | ||||||||
|
Actuarial
gain on pension plan
|
-- | 385 | -- | |||||||||
|
Loss
provision on marketable securities
|
607 | 779 | -- | |||||||||
|
Loss
provision on impairment of asset
|
6,045 | 89 | -- | |||||||||
|
Loss
on extinguishment of debt
|
-- | 99 | 167 | |||||||||
|
Loss
on sale of assets, net
|
-- | 185 | 45 | |||||||||
|
Gain
on insurance settlement
|
(910 | ) | -- | -- | ||||||||
|
Depreciation
and amortization
|
18,558 | 11,921 | 13,212 | |||||||||
|
Amortization
of prior service costs related to pension plan
|
318 | 253 | -- | |||||||||
|
Amortization
of above and below market lease
|
637 | -- | -- | |||||||||
|
Amortization
of deferred financing costs
|
1,235 | -- | -- | |||||||||
|
Amortization
of straight-line rent
|
1,459 | -- | -- | |||||||||
|
Stock
based compensation expense
|
1,976 | 994 | 284 | |||||||||
|
Minority
interest
|
620 | 1,003 | 672 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
(Increase) decrease in
receivables
|
(3,152 | ) | 1,377 | (556 | ) | |||||||
|
(Increase) decrease in prepaid
and other assets
|
784 | (1,753 | ) | (1,914 | ) | |||||||
|
Increase in payable and accrued
liabilities
|
4,677 | 307 | 1,108 | |||||||||
|
Increase (decrease) in film rent
payable
|
4,856 | (1,631 | ) | (103 | ) | |||||||
|
Increase in deferred revenues
and other liabilities
|
6,562 | 2,121 | 1,442 | |||||||||
|
Net
cash provided by operating activities
|
24,315 | 13,284 | 11,909 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Proceeds from sale of
unconsolidated joint venture
|
3,267 | -- | 4,573 | |||||||||
|
Acquisitions of real estate and
leasehold interests
|
(51,746 | ) | (20,633 | ) | (8,087 | ) | ||||||
|
Acquisition
deposit
|
2,000 | (2,000 | ) | -- | ||||||||
|
Purchases of and additions to
property and equipment
|
(23,420 | ) | (21,781 | ) | (8,302 | ) | ||||||
|
Investment in Reading
International Trust I
|
-- | (1,547 | ) | -- | ||||||||
|
Distributions of investment in
unconsolidated joint ventures and entities
|
311 | 2,445 | -- | |||||||||
|
Investment in unconsolidated
joint ventures and entities
|
(372 | ) | -- | (2,676 | ) | |||||||
|
(Increase) decrease in
restricted cash
|
(1,852 | ) | 981 | (844 | ) | |||||||
|
Option proceeds related to
property held for sale
|
1,363 | -- | -- | |||||||||
|
Purchases of marketable
securities
|
-- | (15,651 | ) | (8,109 | ) | |||||||
|
Sale of marketable
securities
|
-- | 19,900 | -- | |||||||||
|
Proceeds from insurance
settlement
|
910 | -- | -- | |||||||||
|
Net
cash used in investing activities
|
(69,539 | ) | (38,286 | ) | (23,445 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Repayment of long-term
borrowings
|
(9,414 | ) | (57,560 | ) | (6,242 | ) | ||||||
|
Proceeds from
borrowings
|
74,734 | 97,632 | 19,274 | |||||||||
|
Capitalized borrowing
costs
|
(3,581 | ) | (2,334 | ) | (223 | ) | ||||||
|
Option deposit
received
|
-- | -- | 3,000 | |||||||||
|
Proceeds from exercise of stock
options
|
-- | 25 | 88 | |||||||||
|
Repurchase of Class A Nonvoting
Common Stock
|
-- | -- | (791 | ) | ||||||||
|
Proceeds from contributions to
minority interest
|
-- | 50 | -- | |||||||||
|
Minority interest
distributions
|
(1,585 | ) | (3,870 | ) | (1,167 | ) | ||||||
|
Net
cash provided by financing activities
|
60,154 | 33,943 | 13,939 | |||||||||
|
Effect
of exchange rate on cash
|
(4,838 | ) | 833 | 57 | ||||||||
|
Increase
in cash and cash equivalents
|
10,092 | 9,774 | 2,460 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
20,782 | 11,008 | 8,548 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 30,874 | $ | 20,782 | $ | 11,008 | ||||||
|
Supplemental
Disclosures
|
||||||||||||
|
Cash paid during the period
for:
|
||||||||||||
|
Interest
on borrowings
|
$ | 18,018 | $ | 12,389 | $ | 8,731 | ||||||
|
Income
taxes
|
$ | 319 | $ | 282 | $ | 585 | ||||||
|
Non-Cash
Transactions
|
||||||||||||
|
Note
payable due to Seller issued for acquisition (Note 12)
|
14,750 | -- | -- | |||||||||
|
Increase
(decrease) in cost basis of Cinemas 1, 2 & 3 related to the purchase
price adjustment of the call option liability to a related
party
|
-- | (2,100 | ) | 1,087 | ||||||||
|
Adjustment to retained earnings
related to adoption of FIN 48 (Note 10)
|
-- | 509 | -- | |||||||||
|
Decrease in deposit payable and
increase in minority interest liability related to the exercise of the
Cinemas 1, 2 & 3 call option by a related party (Note
15)
|
-- | (3,000 | ) | -- | ||||||||
|
Decrease in call option liability
and increase in additional paid in capital related to the exercise of the
Cinemas 1, 2 & 3 call option by a related party (Note
15)
|
-- | (2,512 | ) | -- | ||||||||
|
Accrued addition to property and
equipment
|
-- | 385 | -- | |||||||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2008
Note 1 – Nature of
Business
Reading International, Inc., a Nevada
corporation (“RDI” and collectively with our consolidated subsidiaries and
corporate predecessors, the “Company,” “Reading” and “we,” “us,” or “our”), was
incorporated in 1999 and, following the consummation of a consolidation
transaction on December 31, 2001 (the “Consolidation”), is now the owner of the
consolidated businesses and assets of Reading Entertainment, Inc. (“RDGE”),
Craig Corporation (“CRG”), and Citadel Holding Corporation
(“CDL”). Our businesses consist primarily of:
|
|
·
|
the
development, ownership and operation of multiplex cinemas in the United
States, Australia, and New Zealand;
and
|
|
|
·
|
the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United
States.
|
Note 2 – Summary of
Significant Accounting Policies
Basis of
Consolidation
The consolidated financial statements
of RDI and its subsidiaries include the accounts of CDL, RDGE and
CRG. Also consolidated are Angelika Film Center LLC (“AFC”), in which
we own a 50% controlling membership interest and whose only asset is the
Angelika Film Center in Manhattan; Australia Country Cinemas Pty, Limited
(“ACC”), a company in which we own a 75% interest, and whose only assets are our
leasehold cinemas in Townsville and Dubbo, Australia; and the Elsternwick
Classic, an unincorporated joint venture in which we own a 66.6% interest and
whose only asset is the Elsternwick Classic cinema in Melbourne,
Australia.
With the
exception of one other investment, we have concluded that all other investment
interests are appropriately accounted for as unconsolidated joint ventures and
entities, and accordingly, our unconsolidated joint ventures and entities in 20%
to 50% owned companies are accounted
for on the equity method. These investment interests include
our
|
|
·
|
33.3%
undivided interest in the unincorporated joint venture that owns the Mt.
Gravatt cinema in a suburb of Brisbane,
Australia;
|
|
|
·
|
our
25% undivided interest in the unincorporated joint venture that owns
205-209 East 57th
Street Associates, LLC (Place 57) a limited
liability company formed to redevelop our former cinema site at 205 East
57th
Street in Manhattan;
|
|
|
·
|
our
33.3% undivided interest in Rialto Distribution, an unincorporated joint
venture engaged in the business of distributing art film in New Zealand
and Australia; and
|
|
|
·
|
our
50% undivided interest in the unincorporated joint venture that owns
Rialto Cinemas.
|
We also
had, at December 31, 2008, an 18% direct undivided interest and an additional
11.3% indirect interest in a private real estate company. We have
been in contact with Malulani Investments, Limited (“MIL”) and requested
quarterly or annual operating financials. To date, MIL has not
responded to our request for relevant financial information (see Note 19 – Commitments and
Contingencies). Based on this situation, we do not believe
that we can assert significant influence over the dealings of this
entity. As such and in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. 35 – Criteria for Applying the Equity
Method of Accounting for Investments in Common Stock – an Interpretation of APB
Opinion No. 18, we are treating this investment on a cost basis by
recognizing earnings as they are distributed to us. As of March 11,
2009, we sold that interest. (See Note 27 – Subsequent
Events)
Accounting
Principles
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).
Cash and Cash
Equivalents
We
consider all highly liquid investments with original maturities of three months
or less when purchased to be cash equivalents for which cost approximates fair
value.
Receivables
Our
receivables balance is composed primarily of credit card receivables,
representing the purchase price of tickets or coupon books sold at our various
businesses. Sales charged on customer credit cards are collected when
the credit card transactions are processed. The remaining receivables
balance is primarily made up of the goods and services tax (“GST”) refund
receivable from our Australian taxing authorities and the management fee
receivable from the managed cinemas. We have no history of
significant bad debt losses and we establish an allowance for accounts that we
deem uncollectible.
Inventory
Inventory
is composed of concession goods used in theater operations and is stated at the
lower of cost (first-in, first-out method) or net realizable value.
Investment in Marketable
Securities
We
account for investments in marketable debt and equity securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (SFAS No. 115). Our
investment in Marketable Securities includes equity instruments that are
classified as available for sale and are recorded at market using the specific
identification method. In accordance with SFAS No. 115,
available for sale securities are carried at their fair market value and any
difference between cost and market value is recorded as unrealized gain or loss,
net of income taxes, and is reported as accumulated other comprehensive income
in the consolidated statement of stockholders’ equity. Premiums and
discounts of debt instruments are recognized in interest income using the
effective interest method. Realized gains and losses and declines in
value expected to be other-than-temporary on available for sale securities are
included in other expense. We evaluate our available for sale
securities for other than temporary impairments at the end of each reporting
period. During 2008 and 2007, we realized losses of $607,000 and
$779,000, respectively, on certain marketable securities due to an other than
temporary decline in market price. There were no unrealized gains or
losses during 2006. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
classified as available for sale are included in interest income.
Restricted
Cash
We
classify restricted cash as those cash accounts for which the use of funds is
restricted by contract or bank covenant. At December 31, 2008, our
restricted cash balance was $1.7 million, which was primarily funds held in
escrow for the renovation of one of our cinemas.
Fair Value of Financial
Instruments
The
carrying amounts of our cash and cash equivalents, restricted cash and accounts
payable approximate fair value due to their short-term
maturities. See Note 16 – Fair Value of Financial
Instruments.
Derivative Financial
Instruments
In
accordance with SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities, as subsequently amended by SFAS No.
138 - Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of SFAS No.
133, we carry all derivative financial instruments on our Consolidated
Balance Sheets at fair value. Derivatives are generally executed for
interest rate management purposes but are not designated as hedges in accordance
with SFAS No. 133 and SFAS No. 138. Therefore, changes in market
values are recognized in current earnings.
Property Held for
Development
Property
held for development consists of land (including land acquisition costs)
initially acquired for the potential development of multiplex cinemas and/or
ETRC’s. Property held for development is carried at
cost. At the time construction of the related multiplex cinema, ETRC,
or other development commences, the property is transferred to “property under
development.”
Property Under
Development
Property
under development consists of land, new buildings and improvements under
development, and their associated capitalized interest and other development
costs. These building and improvement costs are directly associated
with the development of potential cinemas (whether for sale or lease), the
development of ETRC locations, or other improvements to real
property. Start-up costs (such as pre-opening cinema advertising and
training expense) and other costs not directly related to the acquisition and
development of long-term assets are expensed as incurred. We cease
capitalization on a development property when the property is complete and ready
for its intended use, or if activities necessary to get the property ready for
its intended use have been suspended.
Incident
to the development of our Burwood property, in late 2006, we began various fill
and earth moving operations. In late February 2007, it became
apparent that our cost estimates with respect to site preparation were low, as
the extent of the contaminated soil present at the site, former brickworks, was
greater than we had originally believed. As we were not the source of
this contamination, we are not currently under any legal obligation to remove
this contaminated soil from the site. However, as a practical matter,
we intend to address these issues in connection with our planned redevelopment
of the site as a mixed-use retail, entertainment, commercial and residential
complex. As of December 31, 2008, we estimate that the total site
preparation costs associated with the removal of this contaminated soil will be
$8.1 million (AUS$9.6 million) and as of that date we had incurred a total of
$6.2 million (AUS$7.4 million) of these costs. In accordance with
Emerging Issues Task Force (EITF) 90-8, Capitalization of Costs to Treat
Environmental Contamination, contamination clean up costs that improve
the property from its original acquisition state are capitalized as part of the
property’s overall development costs.
Property and
Equipment
Property
and equipment consists of land, buildings and improvements, leasehold
improvements, fixtures and equipment. With the exception of land,
property and equipment is carried at cost and depreciated over the useful lives
of the related assets. In accordance with US GAAP, land is not
depreciated.
Construction-in-Progress
Costs
Construction-in-progress
includes costs associated with already existing buildings, property, furniture
and fixtures for which we are in the process of improving the site or its
associated business assets.
Accounting for the
Impairment of Long Lived Assets
We assess
whether there has been impairment in the value of our long-lived assets whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
then measured by a comparison of the carrying amount to the future net cash
flows, undiscounted and without interest, expected to be generated by the
asset. If such assets are considered impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less costs to
sell. We recorded impairment losses of approximately $6.1 million
relating to certain of our property under development, property held for
development, and cinema locations for the year ended December 31,
2008. Our impairment calculations contain uncertainties and use
significant estimates and judgments, and are based on the information available
at the balance sheet date. Future economic and other events could
negatively impact the evaluation and future material impairment charges may
become necessary. We evaluate impairment for our joint venture
investments using a discounted cash flow analysis in accordance with APB
18.
Goodwill and Intangible
Assets
We use
the purchase method of accounting for all business
combinations. Goodwill and intangible assets with indefinite useful
lives are not amortized, but instead, tested for impairment at least
annually. Prior to conducting our
goodwill
impairment analysis, we assess long-lived assets for impairment in accordance
with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets (“SFAS No.
144”). We then perform the impairment analysis at the reporting unit
level (one level below the operating segment level) (see Note 10 – Goodwill and Intangibles) as
defined by SFAS No. 142. This analysis requires management to make a
series of critical assumptions to: (1) evaluate whether any impairment exists;
and (2) measure the amount of impairment. We estimate the fair value
of our reporting units as compared with their estimated book
value. If the estimated fair value of a reporting unit is less than
the book value, then impairment is deemed to have occurred. In
estimating the fair value of our reporting units, we primarily use the income
approach (which uses forecasted, discounted cash flows to estimate the fair
value of the reporting unit).
Discontinued Operations and
Properties Held for Sale
In
accordance with SFAS No. 144, the revenues, expenses and net gain on
dispositions of operating properties and the revenues and expenses on properties
classified as held for sale are reported in the consolidated statements of
operations as discontinued operations for all periods presented through the date
of the respective disposition. The net gain (loss) on disposition is
included in the period the property is sold. In determining whether
the income and loss and net gain on dispositions of operating properties is
reported as discontinued operations, we evaluate whether we have any significant
continuing involvement in the operations, leasing or management of the sold
property in accordance with Emerging Issues Task Force Issue No. 03-13, Applying the Conditions in Paragraph
42 of Statement No. 144 in Determining Whether to Report Discontinued
Operations. If we were to determine that there was any
significant continuing involvement, the income and loss and net gain on
dispositions of the operating property would not be recorded in discontinued
operations.
A
property is classified as held for sale when certain criteria, as set forth
under SFAS No. 144, are met. At such time, we present the respective
assets and liabilities related to the property held for sale separately on the
balance sheet and ceases to record depreciation and amortization expense.
Properties held for sale are reported at the lower of their carrying value or
their estimated fair value less the estimated costs to sell. We had
one property in Australia classified as held for sale as of December 31,
2008.
Revenue
Recognition
Revenue
from cinema ticket sales and concession sales are recognized when
sold. Revenue from gift certificate sales is deferred and recognized
when the certificates are redeemed. Rental revenue is recognized on a
straight-line basis in accordance with SFAS No. 13 – Accounting for
Leases.
Deferred Leasing/Financing
Costs
Direct
costs incurred in connection with obtaining tenants and/or financing are
amortized over the respective term of the lease or loan on a straight-line
basis. Direct costs incurred in connection with financing are
amortized over the respective term of the loan utilizing the effective interest
method, or straight-line method if the result is not materially
different. In addition, interest on loans with increasing interest
rates and scheduled principal pre-payments are also recognized on the effective
interest method.
General and Administrative
Expenses
For the years ended December 31, 2008,
2007, and 2006, we booked gains on the settlement of litigation of $2.5 million,
$523,000, and $900,000, respectively, included in other income as a recovery of
legal expenses included in general and administrative expenses.
Depreciation and
Amortization
Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are generally
as follows:
|
Building
and improvements
|
15-40
years
|
|
Leasehold
improvement
|
Shorter
of the life of the lease or useful life of the
improvement
|
|
Theater
equipment
|
7
years
|
|
Furniture
and fixtures
|
5 –
10 years
|
Translation
of Non-U.S. Currency Amounts
The
financial statements and transactions of our Australian and New Zealand cinema
and real estate operations are reported in their functional currencies, namely
Australian and New Zealand dollars, respectively, and are then translated into
U.S. dollars. Assets and liabilities of these operations are
denominated in their functional currencies and are then translated at exchange
rates in effect at the balance sheet date. Revenues and expenses are
translated at the average exchange rate for the reporting
period. Translation adjustments are reported in “Accumulated Other
Comprehensive Income,” a component of Stockholders’ Equity.
The carrying value of our Australian
and New Zealand assets fluctuates due to changes in the exchange rate between
the U.S. dollar and the Australian and New Zealand dollars. The
exchange rates of the U.S. dollar to the Australian dollar were $0.6983 and
$0.8776 as of December 31, 2008 and 2007, respectively. The exchange
rates of the U.S. dollar to the New Zealand dollar were $0.5815 and $0.7678 as
of December 31, 2008 and 2007, respectively.
Earnings per
Share
Basic
earnings per share is calculated using the weighted average number of shares of
Class A and Class B Stock outstanding during the years ended December 31, 2008,
2007, and 2006, respectively. Diluted earnings per share is
calculated by dividing net earnings available to common stockholders by the
weighted average common shares outstanding plus the dilutive effect of stock
options and unvested restricted stock. We had unissued restricted
stock of 119,869 shares as of the year ended December 31, 2008 and stock options
to purchase 577,850, 577,850, and 514,100 shares of Class A Common Stock were
outstanding at December 31, 2008, 2007, and 2006, respectively, at a weighted
average exercise price of $5.60, $5.60, and $5.21 per share,
respectively. Stock options to purchase 185,100 shares of Class B
Common Stock were outstanding at each of the years ended December 31, 2008,
2007, and 2006 at a weighted average exercise price of $9.90 per
share. In accordance with SFAS No. 128 – Earnings Per Share, as we had
recorded a loss from continuing operations before discontinued operations for
the years ended December 31, 2008 and 2007, the effect of the stock options and
restricted stock was anti-dilutive and accordingly excluded from the earnings
per share computation.
Real Estate Purchase Price
Allocation
We
allocate the purchase price to tangible assets of an acquired property (which
includes land, building and tenant improvements) based on the estimated fair
values of those tangible assets assuming the building was
vacant. Estimates of fair value for land are based on factors such as
comparisons to other properties sold in the same geographic area adjusted for
unique characteristics. Estimates of fair values of buildings and
tenant improvements are based on present values determined based upon the
application of hypothetical leases with market rates and terms.
We record
above-market and below-market in-place lease values for acquired properties
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii)
management’s estimate of fair market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease. We amortize any capitalized above-market lease values as a
reduction of rental income over the remaining non-cancelable terms of the
respective leases. We amortize any capitalized below-market lease
values as an increase to rental income over the initial term and any fixed-rate
renewal periods in the respective leases.
We
measure the aggregate value of other intangible assets acquired based on the
difference between (i) the property valued with existing in-place leases
adjusted to market rental rates and (ii) the property valued as if
vacant. Management’s estimates of value are made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis include
an estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions, and costs to execute similar
leases. We also consider information obtained about each property as
a result of our pre-acquisition due diligence, marketing, and leasing activities
in estimating the fair value of the tangible and intangible assets
acquired. In estimating carrying costs, management includes real
estate taxes, insurance and other operating expenses and estimates of lost
rentals at market rates during the expected lease-up
periods. Management also estimates costs to execute similar leases
including leasing commissions, legal, and other related expenses to the extent
that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
The total
amount of other intangible assets acquired is further allocated to in-place
lease values and customer relationship intangible values based on management’s
evaluation of the specific characteristics of each tenant’s
lease
and our
overall relationship with that respective tenant. Characteristics
considered by management in allocating these values include the nature and
extent of our existing business relationships with the tenant, growth prospects
for developing new business with the tenant, the tenant’s credit quality and
expectations of lease renewals (including those existing under the terms of the
lease agreement), among other factors.
We
amortize the value of in-place leases to expense over the initial term of the
respective leases. The value of customer relationship intangibles is
amortized to expense over the initial term and any renewal periods in the
respective leases, but in no event may the amortization period for intangible
assets exceed the remaining depreciable life of the building. Should
a tenant terminate its lease, the unamortized portion of the in-place lease
value and customer relationship intangibles would be charged to
expense.
These
assessments have a direct impact on net income and revenues. If we
assign more fair value to the in-place leases versus buildings and tenant
improvements, assigned costs would generally be depreciated over a shorter
period, resulting in more depreciation expense and a lower net income on an
annual basis. Likewise, if we estimate that more of our leases
in-place at acquisition are on terms believed to be above the current market
rates for similar properties, the calculated present value of the amount above
market would be amortized monthly as a direct reduction to rental revenues and
ultimately reduce the amount of net income.
Business Acquisition
Valuations under SFAS No. 141
The
assets and liabilities of businesses acquired are recorded at their respective
preliminary fair values as of the acquisition date in accordance with SFAS No.
141 - Business
Combinations. We obtain third-party valuations of material
property, plant and equipment, intangible assets, debt and certain other assets
and liabilities acquired. We also perform valuations and physical
counts of property, plant and equipment, valuations of investments and the
involuntary termination of employees, as necessary. Costs in excess
of the net fair values of assets and liabilities acquired is recorded as
goodwill.
We record
and amortize above-market and below-market operating leases assumed in the
acquisition of a business in the same way as those under real estate
acquisitions.
The fair
values of any other intangible assets acquired are based on the expected
discounted cash flows of the identified intangible
assets. Finite-lived intangible assets are amortized using the
straight-line method of amortization over the expected period in which those
assets are expected to contribute to our future cash flows. We do not
amortize indefinite lived intangibles and goodwill.
Fair Value of Financial
Instruments
Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”), on a prospective basis, as amended by FASB Staff Position
(FSP) SFAS No. 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13 (“FSP SFAS 157-1”) and FSP SFAS No. 157-2, Effective Date of FASB Statement No.
157 (“FSP SFAS 157-2”). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP and provides for expanded disclosure
about fair value measurements. SFAS No. 157 applies prospectively to
all other accounting pronouncements that require or permit fair value
measurements. FSP SFAS 157-1 amends SFAS No. 157 to exclude from the
scope of SFAS No. 157 certain leasing transactions accounted for under SFAS No.
13, Accounting for
Leases. FSP SFAS 157-2 amends SFAS No. 157 to defer the
effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis to fiscal years beginning after
November 15, 2008. In addition, effective for the third quarter of
2008, we adopted FSP 157-3 Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP SFAS
157-3”). FSP SFAS 157-3 clarifies the application of SFAS No. 157 to
financial instruments in an inactive market. The adoption of SFAS No.
157 and FSP SFAS 157-3 did not have a material impact on our consolidated
financial statements since we generally do not record our financial assets and
liabilities in our consolidated financial statements at fair value.
Effective
January 1, 2008, we also adopted, on a prospective basis, SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No.
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. The adoption of SFAS No. 159 did not have
a material impact on our consolidated financial statements since we elected not
to apply the fair value option for any of our eligible financial instruments or
other items.
The fair
value of our financial assets and liabilities are disclosed in Note 16 – Fair Value of Financial
Instruments to our consolidated financial statements. We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments while estimating for
non-performance and liquidity risk. These techniques are
significantly affected by the assumptions used, including the discount rate,
credit spreads, and estimates of future cash flow.
The
financial assets and liabilities recorded at fair value in our consolidated
financial statements are marketable securities and interest rate
swaps. The carrying amounts of our cash and cash equivalents,
restricted cash and accounts payable approximate fair value due to their
short-term maturities. The remaining financial assets and liabilities
which are only disclosed at fair value are comprised of notes payable, trust
preferred securities, and other debt instruments. We estimated the
fair value of our secured mortgage notes payable, our unsecured notes payable,
trust preferred securities, and other debt instruments by performing discounted
cash flow analyses using an appropriate market discount rate. We
calculated the market discount rate by obtaining period-end treasury rates for
fixed-rate debt, or LIBOR rates for variable-rate debt, for maturities that
correspond to the maturities of our debt adding an appropriate credit spreads
derived from information obtained from third-party financial institutions. These
credit spreads take into account factors such as our credit standing, the
maturity of the debt, whether the debt is secured or unsecured, and the
loan-to-value ratios of the debt.
We will
adopt SFAS No. 157 for our non-financial assets and non-financial liabilities on
January 1, 2009 in accordance with FSP SFAS 157-2. We believe the
adoption of SFAS No. 157 relating to our non-financial assets and liabilities
will not have a material impact to our consolidated financial
statements. Assets and liabilities typically recorded at fair value
on a non-recurring basis to which SFAS No. 157 will be applied on January 1,
2009 include:
|
|
·
|
Non-financial
assets and liabilities initially measured at fair value in an acquisition
or business combination;
|
|
|
·
|
Long-lived
assets measured at fair value due to an impairment assessment under SFAS
No. 144; and
|
|
|
·
|
Asset
retirement obligations initially measured under SFAS No. 143, Accounting for Asset
Retirement Obligations
|
Recent Accounting
Pronouncements
SFAS No. 141(R) and No.
160
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
No. 141(R)”) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS No.
160”). SFAS No. 141(R) requires an acquiring entity to recognize
acquired assets and assumed liabilities in a transaction at fair value as of the
acquisition date and changes the accounting treatment for certain items,
including acquisition costs, which will be required to be expensed as
incurred. SFAS No. 160 requires that noncontrolling interests be
presented as a component of consolidated stockholders’ equity and eliminates
“minority interest accounting” such that the amount of net income attributable
to the noncontrolling interests will be presented as part of consolidated net
income on the consolidated statement of operations. SFAS No. 141(R) and SFAS No.
160 require concurrent adoption and are to be applied prospectively for the
first annual reporting period beginning on or after December 15,
2008. Early adoption of either standard is
prohibited. Management believes that these statements may have a
material impact on the Company’s consolidated balance sheet, results of
operations, cash flows, or statements of shareholders’ equity.
FSP EITF No.
03-6-1
In June
2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF No. 03-6-1”). This new standard requires that nonvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents be treated as participating securities in the computation
of earnings per share pursuant to the two-class method. We believe
that FSP EITF No. 03-6-1 will not have a material impact on our consolidated
financial statements and results of operations. FSP EITF No. 03-6-1
will be applied retrospectively to all periods presented for fiscal years
beginning after December 15, 2008.
SFAS No.
161
In March
2008, the Financial Accounting Standards Board issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS No. 161”). This new
standard enhances disclosure requirements for derivative instruments in order to
provide users of financial statements with an enhanced understanding of (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and its related interpretations and
(iii) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No.
161 is to be applied prospectively for the first annual reporting period
beginning on or after November 15, 2008. We believe that the adoption
of SFAS No. 161 will not have a material impact on our consolidated financial
statement disclosures since we solely have interest rate swap agreements not
formally designated as cash flow hedges at the inception of the derivative
contract.
FSP
142-3
In April
2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 is to be applied
prospectively for fiscal years beginning after December 15, 2008. We
are currently evaluating the impact of FSP 142-3 on our consolidated financial
position, results of operations and cash flows but currently do not believe it
will have a material impact on our consolidated financial
statements.
Use of
Estimates
The
preparation of financial statements in conformity with US GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Note 3 – Stock Based
Compensation and Employee Stock Option Plan
Stock Based
Compensation
As part
of his compensation package, Mr. James J. Cotter, our Chairman of the Board and
Chief Executive Officer, was granted $500,000, $350,000, and $250,000 of
restricted Class A Non-Voting Common Stock for each of the years ending December
31, 2008, 2007 and 2006. The 2008 stock grant of 66,050 shares was
granted fully vested with a stock grant price of $7.57. The 2007 and
2006 stock grants each have a vesting period of two years, a stock grant price
of $9.99 and $8.26, respectively; and no total unrealized gain in market value
at December 31, 2008. During the year ended December 31, 2008,
one-half of his 2007 and one-half of his 2006 stock grants vested representing
17,518 and 15,133 shares, respectively, of Class A Non-Voting Common Stock with
stock grant prices of $9.99 and $8.26 per share and fair market values of
$69,000 and $60,000, respectively. As of December 31, 2008, these
shares had not yet been issued to Mr. Cotter. At December 31, 2007,
in recognition of the vesting of one-half of his 2006 and one-half of his 2005
stock grants, we issued to Mr. Cotter 15,133 and 16,047 shares, respectively, of
Class A Non-Voting Common Stock, which had a stock grant price of $8.26 and
$7.79 per share and fair market values of $151,000 and $160,000,
respectively.
On August
21, 2008, as part of their executive compensation, 37,388 shares of fully vested
restricted Class A Non-Voting Common Stock were granted to three of our
executives as stock bonuses having a grant date fair value of
$340,000. As of December 31, 2008, these shares had yet to be issued
to them and the executives had the option to accept the shares or to receive a
reduced cash payment in lieu of shares.
As part
of his compensation package, Mr. John Hunter, our Chief Operating Officer, was
granted $100,000 of restricted Class A Non-Voting Common Stock on February 12,
2008 and 2007 in the amounts of 10,309 and 11,587 shares,
respectively. These stock grants have vesting periods of two years
and stock grant prices of $9.70 and $8.63, respectively. On February
11, 2008, $50,000 of restricted Class A Non-Voting Common Stock vested related
to Mr. Hunter’s 2007 grant. As of December 31, 2008, 5,794 shares
related to this vesting have yet to be issued to him. In July 2008,
Mr. Jay Laifman started with the Company as our Corporate General
Counsel. As part of his compensation package, Mr. Laifman was granted
$100,000 of Class A Non-Voting Common Stock or 10,638 shares with stock grant
price of $9.40 upon acceptance of his employment agreement. This
stock grant has a vesting period of two years.
During
the years ended December 31, 2008, 2007 and 2006, we recorded compensation
expense of $896,000, $238,000, and $188,000, respectively, for the vesting of
all our restricted stock grants. The following table details the
grants and vesting of restricted stock to our employees (dollars in
thousands):
|
Non-Vested
Restricted Stock
|
Weighted
Average Fair Value at Grant Date
|
|||||||
|
Outstanding
– January 1, 2006
|
32,094 | $ | 250 | |||||
|
Granted
|
30,266 | 250 | ||||||
|
Vested
|
(16,047 | ) | (188 | ) | ||||
|
Outstanding
– December 31, 2006
|
46,313 | 312 | ||||||
|
Granted
|
46,623 | 450 | ||||||
|
Vested
|
(31,180 | ) | (238 | ) | ||||
|
Outstanding
– December 31, 2007
|
61,756 | 524 | ||||||
|
Granted
|
124,385 | 1,040 | ||||||
|
Vested
|
(152,520 | ) | (990 | ) | ||||
|
Outstanding
– December 31, 2008
|
33,621 | $ | 574 | |||||
In 2006,
we formed Landplan Property Partners, Ltd (“Reading Landplan”), to identify,
acquire and develop or redevelop properties on an opportunistic
basis. In connection with the formation of Reading Landplan, we
entered into an agreement with Mr. Doug Osborne pursuant to which (i) Mr.
Osborne will serve as the chief executive officer of Reading Landplan and (ii)
Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”), will perform
certain property management services for Reading 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. In general, this equity interest will range
from 27.5% to 15%. Currently, this equity interest stands at
15%.
Using our
LPP investment vehicle, we acquired or entered into agreements to acquire four
parcels in Taringa, Brisbane, Australia during 2008, acquired the two properties
called the Lake Taupo Motel and the Manukau property during 2007 in New Zealand,
and acquired one property in Indooroopilly, Brisbane, Australia during
2006. With the purchase of these properties, based on SFAS No.
123(R), we calculated the fair value of Mr. Osborne’s equity interest in our
various trusts to be $117,000 and $237,000 at December 31, 2008 and 2007,
respectively. During the years ended December 31, 2008, 2007, and
2006, we expensed ($59,000), $214,000, and $14,000, respectively, associated
with Mr. Osborne’s interests. At December 31, 2008, the total
unrecognized compensation expense related to the LPP equity awards was $229,000,
which is expected to be recognized over the remaining weighted average period of
approximately 27.0 months.
Employee Stock Option
Plan
We have a
long-term incentive stock option plan that provides for the grant to eligible
employees and non-employee directors of incentive stock options and
non-qualified stock options to purchase shares of the Company’s Class A
Nonvoting Common Stock. For the stock options exercised during the
year ending December 31, 2007, we issued for cash to an employee of the
corporation under this stock based compensation plan, 6,250 shares of Class A
Nonvoting Common Stock at an exercise price of $4.01, and, for the stock options
exercised during the year ending December 31, 2006, 12,000 shares and 15,000
shares of Class A Nonvoting Common Stock were issued at exercise prices of $3.80
and $2.76 per share, respectively. During the year ending December
31, 2008, we did not issue any shares under this stock based compensation
plan.
Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (SFAS No.
123(R)) which replaces SFAS No. 123 and supersedes APB Opinion No.
25. SFAS No. 123(R) requires that all stock-based compensation be
recognized as an expense in the financial statements and that such costs be
measured at the fair value of the award. This statement was adopted
using the modified prospective method, which requires that we recognize
compensation expense on a prospective basis for all newly granted options and
any modifications or cancellations of previously granted
awards. Therefore, prior period consolidated financial statements
have not been restated. Under this method, in addition to reflecting
compensation expense for new share-based payment awards, modifications to
awards, and cancellations of awards, expense is also recognized to reflect the
remaining vesting period of awards that
had been
included in pro-forma disclosures in prior periods. We estimate the
valuation of stock based compensation using a Black-Scholes option pricing
formula.
When our
tax deduction from an option exercise exceeds the compensation cost resulting
from the option, a tax benefit is created. SFAS No. 123(R) requires
that excess tax benefits related to stock option exercises be reflected as
financing cash inflows instead of operating cash inflows. Had we
previously adopted SFAS No. 123(R), there would have been no impact on our
presentation of the consolidated statement of cash flows because there were no
recognized tax benefits relating to the year ended December 31,
2005. For the years ended December 31, 2008, 2007, and 2006, there
was also no impact to the consolidated statements of cash flows because there
were no recognized tax benefits during these periods.
SFAS No.
123(R) requires companies to estimate forfeitures. Based on our
historical experience, we did not estimate any forfeitures for the granted
options during the years ended December 31, 2008, 2007 and 2006.
In
November 2005, the FASB issued FSP SFAS No. 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards. The
Company has elected to adopt the alternative transition method provided in this
FSP for calculating the tax effects of share-based compensation pursuant to SFAS
No. 123(R). The alternative transition method includes a simplified
method to establish the beginning balance of the additional paid-in capital pool
or APIC pool related to the tax effects of employee share-based compensation,
which is available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS No. 123(R).
In
accordance with SFAS No. 123(R), we estimate the fair value of our options using
the Black-Scholes option-pricing model, which takes into account assumptions
such as the dividend yield, the risk-free interest rate, the expected stock
price volatility, and the expected life of the options. The dividend
yield is excluded from the calculation, as it is our present intention to retain
all earnings. We estimated the expected stock price volatility based
on our historical price volatility measured using daily share prices back to the
inception of the Company in its current form beginning on December 31,
2001. We estimate the expected option life based on our historical
share option exercise experience during this same period. We expense
the estimated grant date fair values of options issued on a straight-line basis
over the vesting period.
No
options were granted during 2008. For the 301,250 and 20,000 options
granted during 2007 and 2006, respectively, we estimated the fair value of these
options at the date of grant using a Black-Scholes option-pricing model with the
following weighted average assumptions:
|
2007
|
2006
|
|
|
Stock
option exercise price
|
$8.35
– $10.30
|
$
8.10
|
|
Risk-free
interest rate
|
4.636
– 4.824%
|
4.22%
|
|
Expected
dividend yield
|
--
|
--
|
|
Expected
option life
|
9.60
– 9.96 yrs
|
5.97
yrs
|
|
Expected
volatility
|
33.64
– 45.47%
|
34.70%
|
|
Weighted
average fair value
|
$
4.42 – $4.82
|
$
4.33
|
Using the
above assumptions and in accordance with the SFAS No. 123(R) modified
prospective method, we recorded $640,000, $756,000 and $98,000 in compensation
expense for the total estimated grant date fair value of stock options that
vested during the years ended December 31, 2008, 2007, and 2006,
respectively. The effect on earnings per share of the compensation
charge was $0.03, $0.03, and less than $0.01 per share for the years ended
December 31, 2008, 2007, and 2006, respectively. At December 31, 2008
and 2007, the total unrecognized estimated compensation cost related to
non-vested stock options granted was $236,000 and $876,000, respectively, which
is expected to be recognized over a weighted average vesting period of 0.52 and
1.27 years, respectively. No options were exercised in
2008. The total realized value of stock options exercised during the
years ended December 31, 2007 and 2006 was $37,000, and $136,000,
respectively. The grant date fair value of options that vested during
the years ending December 31, 2007 and 2006 was $55,000 and $199,000,
respectively. We recorded cash received from stock options exercised
of $25,000 and $88,000 during the years ended December 31, 2007 and 2006,
respectively. The intrinsic, unrealized value of all options
outstanding, vested and expected to vest, at December 31, 2008 and 2007 was
$177,000 and $2.5 million, respectively, of which 100.0% and 98.7%,
respectively, were currently exercisable.
All stock
options granted have a contractual life of 10 years at the grant
date. The aggregate total number of shares of Class A Nonvoting
Common Stock and Class B Voting Common Stock authorized for issuance under our
1999 Stock Option Plan is 1,287,150. At the time that options are
exercised, at the discretion of management, we will either
issue
treasury shares or make a new issuance of shares to the employee or board
member. Dependent on the grant letter to the employee or board
member, the required service period for option vesting is between zero and four
years.
We had
the following stock options outstanding and exercisable:
|
Common Stock Options
Outstanding
|
Weighted Average Exercise
Price of Options
Outstanding
|
Common Stock Exercisable
Options
|
Weighted Average
Price of Exercisable
Options
|
|||||||||||||||||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||||||||||||||
|
Outstanding-
January 1, 2006
|
521,100 | 185,100 | $ | 5.00 | $ | 9.90 | 474,600 | 185,100 | $ | 5.04 | $ | 9.90 | ||||||||||||||||||||
|
Granted
|
20,000 | -- | $ | 8.10 | $ | -- | ||||||||||||||||||||||||||
|
Exercised
|
(27,000 | ) | -- | $ | 3.22 | $ | -- | |||||||||||||||||||||||||
|
Outstanding-December
31, 2006
|
514,100 | 185,100 | $ | 5.21 | $ | 9.90 | 488,475 | 185,100 | $ | 5.06 | $ | 9.90 | ||||||||||||||||||||
|
Granted
|
151,250 | 150,000 | $ | 9.37 | $ | 10.24 | ||||||||||||||||||||||||||
|
Exercised
|
(6,250 | ) | -- | $ | 4.01 | $ | -- | |||||||||||||||||||||||||
|
Expired
|
(81,250 | ) | (150,000 | ) | $ | 10.25 | $ | 10.24 | ||||||||||||||||||||||||
|
Outstanding-December
31, 2007
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 477,850 | 35,100 | $ | 4.72 | $ | 8.47 | ||||||||||||||||||||
|
No activity during the
period
|
-- | -- | $ | -- | $ | -- | ||||||||||||||||||||||||||
|
Outstanding-December
31, 2008
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 525,350 | 110,100 | $ | 5.19 | $ | 9.67 | ||||||||||||||||||||
The
weighted average remaining contractual life of all options outstanding, vested
and expected to vest, at December 31, 2008 and 2007 were approximately 5.22 and
6.22 years, respectively. The weighted average remaining contractual
life of the exercisable options outstanding at December 31, 2008 and 2007 was
approximately 4.61 and 4.74, respectively.
Note 4 – Earnings (Loss) Per
Share
For the three years ended December 31,
2008, we calculated the following earnings (loss) per share (dollars in
thousands, except per share amounts):
|
2008
|
2007
|
2006
|
||||||||||
|
Income
(loss) from continuing operations
|
$ | (19,097 | ) | $ | (3,996 | ) | $ | 4,105 | ||||
|
Income
from discontinued operations
|
562 | 1,893 | (249 | ) | ||||||||
|
Net
income (loss)
|
(18,535 | ) | (2,103 | ) | 3,856 | |||||||
|
Weighted
average shares of common stock – basic
|
22,477,471 | 22,478,145 | 22,425,941 | |||||||||
|
Weighted
average shares of common stock – diluted
|
22,477,471 | 22,478,145 | 22,674,818 | |||||||||
|
Earnings
(loss) per share:
|
||||||||||||
|
Earnings (loss) from continuing
operations – basic and diluted
|
$ | (0.84 | ) | $ | (0.18 | ) | $ | 0.18 | ||||
|
Earnings (loss) from
discontinued operations – basic and diluted
|
$ | 0.02 | $ | 0.09 | $ | (0.01 | ) | |||||
|
Earnings (loss) per share –
basic and diluted
|
$ | (0.82 | ) | $ | (0.09 | ) | $ | 0.17 | ||||
For the
year ended December 31, 2006, the weighted average common stock – dilutive only
included 248,877 of exercisable stock options. For the years ended
December 31, 2008 and 2007, we recorded losses from continuing
operations. As such, the incremental shares of 152,520 shares of
restricted Class A Non-Voting Common Stock and 233,760 of exercisable stock
options in 2008 and the 278,376 of exercisable stock options in 2007 were
excluded from the computation of diluted loss per share because they were
anti-dilutive in those periods.
Note 5 – Prepaid and Other
Assets
Prepaid
and other assets are summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Prepaid
and other current assets
|
||||||||
|
Prepaid
expenses
|
$ | 518 | $ | 569 | ||||
|
Prepaid taxes
|
546 | 602 | ||||||
|
Deposits
|
307 | 2,097 | ||||||
|
Other
|
953 | 532 | ||||||
|
Total prepaid and other current
assets
|
$ | 2,324 | $ | 3,800 | ||||
|
Other
non-current assets
|
||||||||
|
Other non-cinema and non-rental
real estate assets
|
$ | 1,140 | $ | 1,270 | ||||
|
Long-term restricted
cash
|
209 | -- | ||||||
|
Deferred financing costs,
net
|
5,773 | 2,805 | ||||||
|
Interest rate
swap
|
-- | 526 | ||||||
|
Other
receivables
|
1,586 | 1,648 | ||||||
|
Pre-acquisition
costs
|
-- | 948 | ||||||
|
Other
|
593 | 787 | ||||||
|
Total non-current
assets
|
$ | 9,301 | $ | 7,984 | ||||
Note 6 – Property Under
Development
Property
under development is summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
Property
Under Development
|
2008
|
2007
|
||||||
|
Land
|
$ | 26,962 | $ | 36,994 | ||||
|
Construction-in-progress
(including capitalized interest)
|
31,633 | 29,793 | ||||||
|
Property
Under Development
|
$ | 58,595 | $ | 66,787 | ||||
The amount of capitalized interest for
our properties under development was $5.7 million, $4.4 million, and $1.8
million for the three years ending December 31, 2008, 2007, and 2006,
respectively. Subsequent to the year-ended December 31, 2008, we
decided to substantially halt our current development progress on certain
Australian land development projects. As a result, we will no longer
capitalize interest for these projects until the development work
recommences. In addition, during the fourth quarter of 2008, we
recorded an impairment expense relating to these projects and a New Zealand
property totaling $4.0 million as reported in our real estate segment operating
income. The impairments are primarily related to the impact of the
fourth quarter economic downturn in the Australian economy.
Note 7 – Property and
Equipment
Property
and equipment is summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
Property
and Equipment
|
2008
|
2007
|
||||||
|
Land
|
$ | 49,885 | $ | 51,242 | ||||
|
Building
and improvements
|
77,660 | 96,321 | ||||||
|
Leasehold
interests
|
30,994 | 12,171 | ||||||
|
Construction-in-progress
|
487 | 1,318 | ||||||
|
Fixtures
and equipment
|
60,011 | 55,658 | ||||||
|
Total cost
|
219,037 | 216,710 | ||||||
|
Less
accumulated depreciation
|
(65,872 | ) | (62,698 | ) | ||||
|
Property
and equipment, net
|
$ | 153,165 | $ | 154,012 | ||||
Depreciation expense for property and
equipment was $15.6 million, $11.1 million, and $12.3 million, for the
three years ending December 31, 2008, 2007, and 2006,
respectively.
During the fourth quarter of 2008, the
significant downturn in the New Zealand economy resulted in four of our cinemas
requiring impairment charges aggregating $2.1 million as reported in our cinema
segment operating income.
Note 8 – Acquisitions and
Property Development
2008 Acquisitions and
Property Development
Consolidated Entertainment
Cinemas Acquisitions
In keeping with our business plan of
being opportunistic in adding to our existing cinema portfolio, on February 22,
2008, we acquired 15 cinemas with 181 screens in Hawaii and California (the
“Consolidated Entertainment” acquisition) from Pacific Theatres Exhibition Corp.
and its affiliates (collectively, the “Sellers”) for $70.2
million. The purchase price was subsequently adjusted to $63.9
million as described below under post closing adjustments, which were applied to
reduce the principal amount owed under financing provided by an affiliate of the
Sellers (the “Nationwide Note 1”). The financing of the transaction
included $48.4 million of debt from GE Capital, net of deferred financing costs
of $1.6 million, a loan of $21.0 million as evidenced by the Nationwide Note 1,
and $800,000 of cash from Reading (see Note 12 – Notes Payable for a more
complete explanation of the GE debt and the Nationwide Note 1).
The theaters and assets are located in
California and Hawaii. We acquired the theaters and other assets
through certain special purpose entities formed by us for this
purpose. The acquired assets consist primarily of the buildings and
leasehold interests in fourteen of the theaters; a management agreement with the
Sellers under which we will manage one other theater (but pursuant to which we
effectively bear the risk and are entitled to the benefits associated with the
ownership of that theater), and furniture, fixtures, equipment and miscellaneous
inventory at the theaters. The theaters contain a total of 181
screens, which compares to 286 total screens owned or operated by us immediately
prior to the acquisition. The leasehold interests
have current terms ranging from approximately 2 to 12 years, subject in some
cases to favorable renewal options. The management agreement relating
to the managed theater is for a term of approximately 4 years and entitles us to
a management fee equal to the cash flow of the
theater.
The initial aggregate purchase price
has now been adjusted down by $6.3 million to $63.9 million, and is subject to
further additional adjustments based upon post-closing matters relating to the
possible opening of competing theater projects in the vicinity of certain
acquired theaters. These additional acquisition price reductions can
range from $0 to as much as the full amount of the Nationwide Note 1 as adjusted
to date, if all contingencies were met. Pursuant to the $6.3 million
reduction in purchase price, the Nationwide Note 1 was correspondingly reduced
by $6.3 million during the second quarter of 2008. The reduction in
purchase price results in a permanent reduction in the original $21.0 million
debt obligation to $14.7 million at December 31, 2008. This loan was
subsequently increased in July 2008 by $3.0 million in accordance with the Sales
and Purchase Agreement of Consolidated Entertainment (see Note 12 – Notes Payable).
During the fourth quarter of 2008, we
finalized our estimates of the value of the assets and liabilities acquired from
this acquisition in accordance with SFAS No. 141, Business
Combinations. These fair value estimates of the cinema assets
acquired have been allocated to the acquired tangible assets, identified
intangible assets and liabilities, consisting of the value of above and
below-market leases, if any, based in each case on their respective fair values
at the date of acquisition. Goodwill was recorded to the extent the
purchase price including certain acquisition and close costs exceeded the fair
value estimates of the net acquired assets. Our finalized purchase
price allocation is as follows:
|
Initial
Allocation
|
Purchase
Price and Allocation Adjustments
|
Final
Allocation
|
||||||||||
|
Inventory
|
$ | 271 | $ | -- | $ | 271 | ||||||
|
Prepaid
assets
|
543 | -- | 543 | |||||||||
|
Property
& Equipment:
|
||||||||||||
|
Leasehold
improvements
|
32,303 | (12,363 | ) | 19,940 | ||||||||
|
Furniture and
equipment
|
7,030 | 2,137 | 9,167 | |||||||||
|
Intangibles:
|
||||||||||||
|
Trade name
|
7,220 | -- | 7,220 | |||||||||
|
Non-compete
agreement
|
400 | -- | 400 | |||||||||
|
Below market
leases
|
9,999 | 1,832 | 11,831 | |||||||||
|
Goodwill
|
12,556 | 6,308 | 18,864 | |||||||||
|
Trade
payables
|
(123 | ) | -- | (123 | ) | |||||||
|
Above
market leases
|
-- | (4,164 | ) | (4,164 | ) | |||||||
|
Total
Purchase Price
|
$ | 70,199 | $ | (6,250 | ) | $ | 63,949 | |||||
The
unaudited pro forma results, assuming the above noted acquisition had occurred
as of January 1, 2007 for purposes of the 2008 and 2007 pro forma disclosures,
are presented below. These unaudited pro forma results have been
prepared for comparative purposes only and include certain adjustments, such as
increased depreciation and amortization expenses as a result of tangible and
intangible assets acquired in the acquisition, as well as higher interest
expense as a result of the debt incurred to finance the
acquisition. These unaudited pro forma results do not purport to be
indicative of what operating results would have been had the acquisition
occurred on January 1, 2007 and January 1, 2008, respectively, and may not be
indicative of future operating results (dollars in thousands, except share
data):
|
2008
|
2007
|
|||||||
|
Revenue
|
$ | 195,631 | $ | 197,271 | ||||
|
Operating
income
|
(538 | ) | 925 | |||||
|
Net
loss from continuing operations
|
(15,898 | ) | (14,109 | ) | ||||
|
Basic
and diluted loss per share from continuing operations
|
(0.71 | ) | (0.63 | ) | ||||
|
Weighted
average number of shares outstanding – basic
|
22,477,471 | 22,478,145 | ||||||
|
Weighted
average number of shares outstanding – dilutive
|
22,477,471 | 22,478,145 | ||||||
Taringa
Land
During
the first quarter of 2008, we have acquired or entered into agreements to
acquire four contiguous properties of approximately 50,000 square feet, which we
intend to develop. The aggregate purchase price of these properties
is $9.8 million (AUS$13.7 million), of which $2.5 million (AUS$2.8 million)
relates to the three properties that have been acquired and $7.6 million
(AUS$10.9 million) relates to the one property that is under contract to be
acquired. As part of the agreement to purchase the one property under
contact, we paid a refundable deposit of $209,000 (AUS$300,000) associated with
the purchase of one of these properties. Our obligation to close on
the fourth property is subject to certain conditions (which we may waive)
including a rezoning.
2007 Acquisitions and
Property Development
New Zealand Property
Acquisitions
On July
27, 2007, we purchased through a Reading Landplan 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.
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. We have completed our purchase price allocation for
this property and the related acquired operating lease in accordance with SFAS
141 – Business
Combinations. The initial purchase price allocation was based
on the assets acquired from the seller. 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.
On
February 14, 2007, we acquired, through a Reading Landplan property trust, a 1.0
acre parcel of commercial real estate for approximately $4.9 million (NZ$6.9
million). 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 was
previously 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. During 2008, this property
was transferred from held for sale to held for future development and a
write-down of $1.0 million to fair value was recognized at the date of
transfer. The operating activities of the motel are not
material. We have completed our purchase price allocation for this
property in accordance with SFAS No. 141 - Business
Combinations.
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 in New York City.
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. The purchase price for the ground lease is being
amortized to rent expense over the remaining ground lease term.
2006 Acquisitions and
Property Development
Indooroopilly
Land
On September 18, 2006, we purchased a
0.3 acre property for $1.8 million (AUS$2.3 million). 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 anticipate
this project being completed by March 2009.
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 now in the planning stages
of determining best use depending on factors including development of adjacent
properties. This property is zoned for high-density as a “Principal
Activity Area.”
Berkeley
Cinemas
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6
million). This 8-screen, leasehold cinema had previously been
included in our Berkeley Cinemas Joint Venture investment and was not previously
consolidated for accounting purposes. We drew down $4.8 million
(AUS$6.3 million) on our Australian Corporate Credit Facility to purchase the
Palms cinema and to payoff its bank debt of $2.0 million (NZ$3.1
million). We have finalized the purchase price allocation of this
acquisition, which resulted in a 50% step up in basis of assets acquired and
liabilities assumed, in accordance with SFAS No. 141 - Business
Combinations. A summary of the increased assets and
liabilities relating to this acquisition as recorded at estimated fair values is
as follows (dollars in thousands):
|
Palms
Cinema
|
||||
|
Assets
|
||||
|
Accounts
receivable
|
$ | 31 | ||
|
Inventory
|
11 | |||
|
Other
assets
|
8 | |||
|
Property
and equipment
|
1,430 | |||
|
Goodwill
|
2,310 | |||
|
Total assets
|
3,790 | |||
|
Liabilities
|
||||
|
Accounts
payable and accrued liabilities
|
178 | |||
|
Note
payable
|
987 | |||
|
Other
liabilities
|
12 | |||
|
Total
liabilities
|
1,177 | |||
|
Total
net assets
|
$ | 2,613 | ||
As a
result of these transactions, the only cinema held in the Berkeley Joint Venture
at December 31, 2006 and 2007, is the Botany Downs cinema in suburban
Auckland.
Malulani Investments,
Limited
On June
26, 2006, we acquired for $1.8 million, an 18.4% interest in Malulani
Investments, Limited, a private real estate company. As of March 11,
2009, we sold that interest (See Note 27 – Subsequent
Events).
Queenstown
Cinema
Effective
February 23, 2006, we purchased a 3-screen leasehold cinema in Queenstown, New
Zealand for $939,000 (NZ$1.4 million). Of this purchase price,
$647,000 (NZ$977,000) was allocated to the acquired fixed assets and $297,000
(NZ$448,000) was allocated to goodwill. We funded this acquisition
through internal sources.
Newmarket
ETRC
During the first quarter of 2006, we
completed the development and opened the remaining retail portion of an ETRC on
our 177,497 square foot parcel in Newmarket, a suburb of Brisbane, in
Queensland, Australia. The total construction costs for the site were
$26.7 million (AUS$34.2 million) including $1.4 million (AUS$1.9 million) of
capitalized interest. This project was primarily funded through our
$78.8 million (AUS$100.0 million) Australian Corporate Credit Facility with the
Bank of Western Australia, Ltd. As of December 31, 2008, this
property was 100% leased.
Note 9 – Assets Held for
Sale and Disposals
2008
Transactions
In
accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, we report as discontinued operations real
estate assets that meet the definition of a component of an entity and have been
sold or meet the criteria to be classified as held for sale under SFAS No.
144. We included all results of these discontinued operations, less
applicable income taxes, in a separate component of operations on the
consolidated statements of operations under the heading “discontinued
operations.” This treatment resulted in reclassifications of the 2007
financial statement amounts to conform to the 2008 presentation.
Auburn Cinema and Real
Estate
On
September 16, 2008, we entered into a sale option agreement to sell our Auburn
real estate property and cinema for $28.5 million (AUS$36.0
million). The sale option agreement calls for an initial option
payment of $948,000 (AUS$1.2 million), received on the agreement date, and four
option installment payments of $316,000 (AUS$400,000), $316,000 (AUS$400,000),
$316,000 (AUS$400,000), and $948,000 (AUS$1.2 million) payable over the
subsequent 9 months. As of December 31, 2008, we have received, as
timetabled in the agreement, $1.3 million
(AUS$1.6
million) in payments associated with this option agreement. The
option comes to term on November 1, 2009 at which time the balance of $25.6
million (AUS$32.4 million) is due and payable. At any time during the
13-month option, the buyer may decline to move further in the sale process
resulting in a forfeiture of all previous option payments.
The
assets of the Auburn real estate and cinema are as follows (dollars in
thousands):
|
December
31,
2008
|
December
31,
2007
|
|||||||
|
Assets
|
||||||||
|
Land
|
$ | 7,395 | $ | 9,294 | ||||
|
Building
|
13,131 | 16,754 | ||||||
|
Equipment
and fixtures
|
7,364 | 8,991 | ||||||
|
Less:
Accumulated depreciation
|
(7,771 | ) | (9,098 | ) | ||||
|
Total
assets held for sale
|
$ | 20,119 | $ | 25,941 | ||||
The years
ending December 31, 2008, 2007, and 2006 results for the Auburn real estate and
cinema are as follows (dollars in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue
|
$ | 5,769 | $ | 5,831 | $ | 5,274 | ||||||
|
Operating
expense
|
4,517 | 4,666 | 4,223 | |||||||||
|
Depreciation
and amortization expense
|
690 | 1,184 | 1,300 | |||||||||
|
Income
(loss) from discontinued operations
|
$ | 562 | $ | (19 | ) | $ | (249 | ) | ||||
Berkeley Cinemas –
Botany
On June
6, 2008, we sold the Botany Downs Cinema to our joint venture partner for $3.3
million (NZ$4.3 million) resulting in a net gain on sale of an unconsolidated
entity of $2.5 million (NZ$3.2 million). With the sale of the cinema,
our unconsolidated joint venture debt decreased by $3.2 million (NZ$4.2
million). We continue to have certain outstanding, contingent claims
related to interest and working capital, which may or may not increase the total
sales price of the cinema.
2007
Transactions
In June
2007, upon the fulfillment of our commitment, we recorded the release of a
deferred gain on the sale of a discontinued operation of $1.9 million associated
with a previously sold property.
2006
Transactions
Berkeley Cinema
Group
On August
28, 2006, we sold to our joint venture partner our interest in the cinemas at
Whangaparaoa, Takapuna and Mission Bay, New Zealand for $4.6 million (NZ$7.2
million) in cash and the assumption of $1.6 million (NZ$2.5 million) in
debt. The sale resulted in a gain on sale of unconsolidated joint
venture for the year ended December 31, 2006 of $3.4 million (NZ$5.4
million).
Note 10 – Goodwill and
Intangible Assets
Goodwill associated with our asset
acquisitions is tested for impairment at the end of the third quarter with
continued evaluation through the fourth quarter of every year. Based
on the projected profits and cash flows of the related assets, it was determined
that there is no impairment to our goodwill as of December 31, 2008 or
2007. Goodwill increased during the period primarily due to 2008
acquisitions discussed in Note 8 – Acquisitions and Property
Development. At December 31, 2008 and 2007, our goodwill
consisted of the following (dollars in thousands):
|
2008
|
Cinema
|
Real
Estate
|
Total
|
|||||||||
|
Balance
as of January 1, 2008
|
$ | 13,827 | $ | 5,273 | $ | 19,100 | ||||||
|
Goodwill
acquired during 2008
|
18,949 | -- | 18,949 | |||||||||
|
Foreign
currency translation adjustment
|
(2,888 | ) | (197 | ) | (3,085 | ) | ||||||
|
Balance
at December 31, 2008
|
$ | 29,888 | $ | 5,076 | $ | 34,964 | ||||||
|
2007
|
Cinema
|
Real
Estate
|
Total
|
|||||||||
|
Balance
as of January 1, 2007
|
$ | 12,713 | $ | 5,206 | $ | 17,919 | ||||||
|
Foreign
currency translation adjustment
|
1,114 | 67 | 1,181 | |||||||||
|
Balance
at December 31, 2007
|
$ | 13,827 | $ | 5,273 | $ | 19,100 | ||||||
The Goodwill acquired in the first
quarter of 2008, as part of the Pacific Theater cinemas acquisition, will be
tested as of each anniversary date of such acquisition.
We have
intangible assets subject to amortization consisting of the following (dollars
in thousands):
|
As
of December 31, 2008
|
Beneficial
Leases
|
Trade
name
|
Option
Fee
|
Other
Intangible Assets
|
Total
|
|||||||||||||||
|
Gross
carrying amount
|
$ | 23,815 | $ | 7,220 | $ | 2,773 | $ | 440 | $ | 34,248 | ||||||||||
|
Less:
Accumulated amortization
|
5,743 | 678 | 2,616 | 93 | 9,130 | |||||||||||||||
|
Total,
net
|
$ | 18,072 | $ | 6,542 | $ | 157 | $ | 347 | $ | 25,118 | ||||||||||
|
As
of December 31, 2007
|
Beneficial
Leases
|
Trade
name
|
Option
Fee
|
Other
Intangible Assets
|
Total
|
|||||||||||||||
|
Gross
carrying amount
|
$ | 12,295 | $ | -- | $ | 2,773 | $ | 238 | $ | 15,306 | ||||||||||
|
Less:
Accumulated amortization
|
4,311 | -- | 2,521 | 26 | 6,858 | |||||||||||||||
|
Total,
net
|
$ | 7,984 | $ | -- | $ | 252 | $ | 212 | $ | 8,448 | ||||||||||
We have
intangible assets other than goodwill that are subject to amortization and are
being amortized over various periods. We amortize our beneficial
leases over the lease period, the longest of which is approximately 30 years,
our trade name using an accelerated amortization method over its estimated
useful life of 45 years, and our option fee and other intangible assets over 10
years. For the years ended December 31, 2008, 2007 and 2006, our
amortization expense totaled $2.3 million, $836,000, and $868,000, per year,
respectively. The estimated amortization expense in the five
succeeding years and thereafter is as follows (dollars in
thousands):
|
Year
Ending December 31,
|
||||
|
2009
|
$ | 2,732 | ||
|
2010
|
2,701 | |||
|
2011
|
2,637 | |||
|
2012
|
2,630 | |||
|
2013
|
2,515 | |||
|
Thereafter
|
11,903 | |||
|
Total future amortization
expense
|
$ | 25,118 | ||
Note 11 – Investments in and
Advances to Unconsolidated Joint Ventures and Entities
Investments
in and advances to unconsolidated joint ventures and entities are accounted for
under the equity method of accounting except for Malulani Investments, Limited
as described below. As of December 31, 2008 and 2007, these
investments in and advances to unconsolidated joint ventures and entities
include the following (dollars in thousands):
|
December 31,
|
||||||||||||
|
Interest
|
2008
|
2007
|
||||||||||
|
Malulani
Investments
|
29.3%
|
$ | 1,800 | $ | 1,800 | |||||||
|
Rialto
Distribution
|
33.3%
|
896 | 1,029 | |||||||||
|
Rialto
Cinemas
|
50.0%
|
3,763 | 5,717 | |||||||||
|
205-209
East 57th
Street Associates, LLC
|
25.0%
|
1,216 | 1,059 | |||||||||
|
Mt.
Gravatt
|
33.3%
|
3,968 | 5,159 | |||||||||
|
Berkeley
Cinemas – Botany
|
50.0%
|
-- | 716 | |||||||||
|
Total
|
$ | 11,643 | $ | 15,480 | ||||||||
For the
years ending December 31, 2008, 2007, and 2006, we recorded our share of equity
earnings (loss) from our unconsolidated joint ventures and entities as follows
(dollars in thousands):
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Rialto
Distribution
|
$ | 66 | $ | 250 | $ | 25 | ||||||
|
Rialto
Cinemas
|
(301 | ) | (101 | ) | (169 | ) | ||||||
|
205-209
East 57th
Street Associates, LLC
|
157 | 1,329 | 8,277 | |||||||||
|
Mt.
Gravatt
|
834 | 793 | 648 | |||||||||
|
Berkeley
Cinema – Group
|
-- | -- | 322 | |||||||||
|
Berkeley
Cinemas – Palms & Botany
|
44 | 274 | 444 | |||||||||
|
Other
|
(303 | ) | -- | -- | ||||||||
|
Total
|
$ | 497 | $ | 2,545 | $ | 9,547 | ||||||
Malulani Investments,
Limited
On June
26, 2006, we acquired for $1.8 million, an 18.4% interest in a private real
estate company. We have been in contact with Malulani Investments,
Limited (“MIL”) and requested quarterly or annual operating
financials. To date, we have received no response to our request for
relevant financial information as described more fully in Note 19 – Commitments and
Contingencies. Based on this situation, we do not believe that
we can assert significant influence over the dealings of this
entity. As such and in accordance with FASB Interpretation No. 35 –
Criteria for Applying the
Equity Method of Accounting for Investments in Common Stock – an Interpretation
of APB Opinion No. 18, we are treating this investment on a cost basis by
recognizing earnings as they are distributed to us.
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. (See Note 19 – Commitments and
Contingencies) On March 11, 2009, we and Magoon LLC agreed to
terms of settlement (the “Settlement Terms”) with respect to this
lawsuit. Under the Settlement Terms, we and Magoon LLC will receive
$2.5 million in cash, a $6.75 million three-year 6.25% secured promissory note
(issued by TMG), and a ten year “tail interest” in MIL and TMG which allows us,
in effect, to participate in certain distributions made or received by MIL, TMG
and/or, in certain cases, the shareholders of TMG. However, the tail
interest continues only for a period of ten years and no assurances can be given
that we will in fact receive any distributions with respect to this Tail
Interest. (See Note 27 – Subsequent
Events).
Rialto
Distribution
Effective
October 1, 2005, we purchased for $694,000 (NZ$1.0 million) a 1/3 interest in
Rialto Distribution. Rialto Distribution, an unincorporated joint
venture, is engaged in the business of distributing art film in New Zealand and
Australia. We own an undivided 1/3 interest in the assets and
liabilities of the joint venture and treat our interest as an equity method
interest in an unconsolidated joint venture.
Rialto
Cinemas
Effective
October 1, 2005, we purchased, indirectly, beneficial ownership of 100% of the
stock of Rialto Entertainment for $4.8 million (NZ$6.9
million). Rialto Entertainment is a 50% joint venture partner with
Village and
Sky in
Rialto Cinemas, the largest art cinema circuit in New Zealand. We own
an undivided 50% interest in the assets and liabilities of the joint venture and
treat our interest as an equity method interest in an unconsolidated joint
venture. As of December 31, 2008, following the closure of two
cinemas with 6 screens, the joint venture owned three cinemas with 22 screens in
the New Zealand cities of Auckland, Christchurch, and Dunedin.
205-209 East 57th Street Associates,
LLC
We own a
non-managing 25% membership interest in 205-209 East 57th Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th Street
in Manhattan.
In 2006,
the joint venture closed on the sales of 59 condominiums resulting in gross
sales of $117.7 million and equity earnings from unconsolidated joint venture to
us of $8.3 million. During 2007, this joint venture sold the
remaining eight condominiums resulting in gross sales of $25.4 million and net
equity earnings from this unconsolidated joint venture of $1.3
million. The remaining retail space was sold in February 2009 (see
Note 27 - Subsequent
Events). The condensed balance sheet and statement of
operations of 205-209 East 57th Street Associates, LLC are as follows (dollars
in thousands):
205-209
East 57th Street
Associates, LLC Condensed Balance Sheet Information:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
assets
|
$ | 2,198 | $ | 2,306 | ||||
|
Non
current assets
|
3,092 | 3,126 | ||||||
|
Current
liabilities
|
157 | 857 | ||||||
|
Non
current liabilities
|
45 | 320 | ||||||
|
Members’
equity
|
5,088 | 4,255 | ||||||
205-209
East 57th Street
Associates, LLC Condensed Statements of Operations Information:
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
revenue
|
$ | 728 | $ | 25,673 | $ | 117,708 | ||||||
|
Net
income
|
833 | 6,805 | 33,106 | |||||||||
Mt.
Gravatt
We own an
undivided 1/3 interest in Mt. Gravatt, an unincorporated joint venture that owns
and operates a 16-screen multiplex cinema in Australia. The condensed
balance sheet and statement of operations of Mt. Gravatt are as follows (dollars
in thousands):
Mt.
Gravatt Condensed Balance Sheet Information:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
assets
|
$ | 799 | $ | 1,458 | ||||
|
Non
current assets
|
2,406 | 3,421 | ||||||
|
Current
liabilities
|
561 | 825 | ||||||
|
Noncurrent
liabilities
|
46 | 49 | ||||||
|
Members’
equity
|
2,598 | 4,005 | ||||||
Mt.
Gravatt Condensed Statements of Operations Information:
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
revenue
|
$ | 10,989 | $ | 10,603 | $ | 9,078 | ||||||
|
Net
income
|
2,273 | 2,381 | 1,946 | |||||||||
Berkeley Cinemas - Group and
Berkeley Cinemas –Palms & Botany
We
previously had investments in three joint ventures with Everard Entertainment
Ltd in New Zealand (the “NZ JVs”). We entered into the first joint
venture in 1998, the second in 2003, and the third in 2004. These
joint
ventures
were unincorporated and as such, we own an undivided 50% interest in the assets
and liabilities of each of the joint ventures and treat our interest as an
equity method interest in an unconsolidated joint venture.
On August
28, 2006, we sold to our joint venture partner our interest in the cinemas at
Whangaparaoa, Takapuna and Mission Bay, New Zealand, the Berkeley Cinema Group
for $4.6 million (NZ$7.2 million) in cash and the assumption of $1.6 million
(NZ$2.5 million) in debt. The sale resulted in a gain on sale of
unconsolidated joint venture for the year ending December 31, 2006 of $3.4
million (NZ$5.4 million). The condensed statement of operations for
the Berkeley Cinema Group is as follows (dollars in thousands):
Berkeley
Cinemas - Group Condensed Statements of Operations Information:
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
revenue
|
$ | -- | $ | -- | $ | 3,440 | ||||||
|
Net
income
|
-- | -- | 644 | |||||||||
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6
million). This 8-screen, leasehold cinema had previously been
included in our Berkeley Cinemas – Palms & Botany investment and was not
previously consolidated for accounting purposes. Subsequent to April
1, 2006, we have consolidated this entity into our financial
statements. See Note 8 – Acquisitions and Property
Development.
On June
6, 2008, we sold the Botany Downs Cinema to our joint venture partner for $3.3
million (NZ$4.3 million) resulting in a net gain on sale of an unconsolidated
entity of $2.5 million (NZ$3.2 million). With the sale of the cinema,
our unconsolidated joint venture debt decreased by $3.2 million (NZ$4.2
million). We continue to have certain outstanding, contingent claims
related to interest and working capital, which may or may not increase the total
sales price of the cinema. The cinema had revenues of $1.6 million
(NZ$2.0 million), $5.9 million (NZ$8.0 million), and $5.6 million (NZ$8.7
million) and net income of $178,000 (NZ$226,000), $520,000 (NZ$706,000), and
$778,000 (NZ$1.2 million) for the years ended December 31, 2008, 2007, and 2006,
respectively.
Combined Condensed Financial
Information
The
combined condensed financial information for all of the above unconsolidated
joint ventures and entities accounted for under the equity method is as follows;
therefore, this only excludes Malulani Investments (dollars in
thousands):
Condensed
Balance Sheet Information (Unaudited):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
assets
|
$ | 7,795 | $ | 11,005 | ||||
|
Non
current assets
|
8,463 | 15,034 | ||||||
|
Current
liabilities
|
2,788 | 6,289 | ||||||
|
Non
current liabilities
|
898 | 3,550 | ||||||
|
Member’s
equity
|
12,572 | 16,200 | ||||||
Condensed
Statements of Operations Information (Unaudited):
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
revenue
|
$ | 24,370 | $ | 53,440 | $ | 135,675 | ||||||
|
Net
income
|
3,973 | 10,247 | 35,697 | |||||||||
Note 12 - Notes
Payable
Notes
payable are summarized as follows (dollars in thousands):
|
December 31,
|
December 31,
|
||||||||||||||||
|
Name
of Note Payable or Security
|
2008
Interest
Rate
|
2007
Interest
Rate
|
Maturity
Date
|
2008
Balance
|
2007
Balance
|
||||||||||||
|
Australian
Corporate Credit Facility
|
5.54%
|
7.75%
|
June
30, 2011
|
$ | 70,179 | $ | 85,772 | ||||||||||
|
Australian
Shopping Center Loans
|
--
|
--
|
2009-2013
|
733 | 1,066 | ||||||||||||
|
Australian
Construction Loan
|
6.26%
|
--
|
January
1, 2015
|
3,458 | -- | ||||||||||||
|
New
Zealand Corporate Credit Facility
|
6.10%
|
10.10%
|
November
23, 2010
|
8,723 | 2,488 | ||||||||||||
|
Trust
Preferred Securities
|
9.22%
|
9.22%
|
April
30, 2027
|
51,547 | 51,547 | ||||||||||||
|
US
Euro-Hypo Loan
|
6.73%
|
6.73%
|
July
11, 2012
|
15,000 | 15,000 | ||||||||||||
|
US
GE Capital Term Loan
|
6.82%
|
--
|
February
21, 2013
|
41,000 | -- | ||||||||||||
|
US
Liberty Theatres Term Loans
|
6.20%
|
--
|
April
1, 2013
|
6,990 | -- | ||||||||||||
|
US
Nationwide Loan 1
|
6.50
- 7.50%
|
--
|
February
21, 2013
|
18,857 | -- | ||||||||||||
|
US
Nationwide Loan 2
|
8.50%
|
--
|
February
21, 2011
|
1,559 | -- | ||||||||||||
|
US
Sutton Hill Capital Note 1 – Related Party
|
10.34%
|
9.91%
|
December
31, 2010
|
5,000 | 5,000 | ||||||||||||
|
US
Sutton Hill Capital Note 2 – Related Party
|
8.25%
|
8.25%
|
December
31, 2010
|
9,000 | 9,000 | ||||||||||||
|
US
Union Square Theatre Term Loan
|
6.26%
|
6.26%
|
January
1, 2010
|
7,116 | 7,322 | ||||||||||||
|
Total
|
$ | 239,162 | $ | 177,195 | |||||||||||||
Australia
Australian Corporate Credit
Facility
During
June 2008, we extended the term of our $76.8 million (AUS$110.0 million)
Australian facility to June 30, 2011. This facility will continue to roll to a
3-year term, following an annual bank review. Besides the extended term, the
only other changes to the original agreement was that the loan requires interest
only payments and our interest margin increased from 1.00% to 1.25%. At December
31, 2008, we had drawn $70.2 million (AUS$100.5 million) against this facility
and issued lease guarantees of $2.8 million (AUS$4.0 million) leaving an
available undrawn balance of $3.8 million (AUS$5.5 million). In
October 2007, we negotiated an increase of our total borrowing limit of the
Australia Corporate Credit Facility from $87.8 million (AUS$100.0 million) to
$96.5 million (AUS$110.0 million).
This
credit facility is secured by substantially all of our cinema assets in
Australia, and is only guaranteed by several of our wholly owned Australian
subsidiaries. The credit facility includes a number of affirmative
and negative covenants designed to protect the Bank’s security
interests. The most restrictive covenant of the facility is a
limitation on the total amount that we are able to drawdown based on the total
assets that are securing the loan. Our Australian Credit Facility
provides for floating interest rates based on the Bank Bill Swap Bid Rate (BBSY
bid rate), but requires that not less than 70% of the loan be swapped into fixed
rate obligations. For further information regarding our swap
agreements, see Note 13 – Derivative
Instruments. All interest rates above include a 1.25% interest
rate margin.
In
accordance with SFAS No. 133, we marked our Australian interest rate swap
instruments to market resulting in a $1.1 million (AUS$1.2 million) increase, a
$320,000 (AUS$338,000) decrease, and an $845,000 (AUS$1.1 million) decrease to
interest expense during 2008, 2007 and 2006, respectively (See Note 13 – Derivative
Instruments).
Australian Shopping Center
Loans
As part
of the Anderson Circuit, in July 2004, we assumed the three loans on the
properties of Epping, Rhodes, and West Lakes. The total amount
assumed on the transaction date was $1.5 million (AUS$2.1 million) and the loans
carry no interest as long as we make timely principal payments of approximately
$280,000 (AUS$320,000) per year. The balance of these loans at
December 31, 2008 and 2007 was $733,000 (AUS$1.1 million) and $1.1 million
(AUS$1.2 million), respectively. Early repayment is possible without
penalty. The only recourse on default of these loans is the security
on the properties. During 2008 and 2007, we have not paid $140,000
(AUS$200,000) and
$88,000
(AUS$100,000), respectively, of principal payments on the West Lakes loan due to
a dispute that we have with the landlord. We are currently in the
process of resolving this dispute.
Australian Construction
Loan
During
2008, we negotiated with an Australian bank a construction line of credit on our
Indooroopilly property of $6.1 million (AUS$8.7 million) which upon completion
of the development project, converts to a term loan of up to $7.3 million
(AUS$10.5 million). As of December 31, 2008, we have drawn $3.5
million (AUS$5.0 million) on this credit facility.
New
Zealand
New Zealand Corporate Credit
Facility
On
December 23, 2008 we drew down $6.8 million (NZ$11.8 million) and used it to
partially repay Reading International, Inc. Trust Preferred Notes during the
first quarter 2009. As of December 31, 2008, we have drawn $8.7 million (NZ
$15.0 million) leaving an available undrawn balance of $26.2 million (NZ$45.0
million).
On June
29, 2007, we finalized the renegotiation of our New Zealand Corporate Credit
Facility as a $34.9 million (NZ$60.0 million) line of credit. This
renegotiated agreement carries the same terms as the previous agreement except
that it is now a line of credit instead of term debt, the maturity date has been
extended by one year to November 23, 2010, the interest rate for the facility is
based on the 90-day Bank Bill Bid Rate (BBBR) plus a 1.00% margin, and a 0.20%
line charge will be incurred on the total line of credit of $34.9 million
(NZ$60.0 million). The loan comes due on November 23,
2010. The facility is secured by substantially all of our New Zealand
assets, but has not been guaranteed by any entity other than several of our New
Zealand subsidiaries. The facility includes various affirmative and
negative financial covenants designed to protect the bank’s security, limits
capital expenditures and the repatriation of funds out of New Zealand without
the approval of the bank. Also included in the restrictive covenants
of the facility is the restriction of transferring funds from subsidiary to
parent. Interest payments for this loan are required on a monthly
basis.
During the February 2007, we paid off
our term debt of this facility of $34.4 million (NZ$50.0 million) as a use of
the proceeds from our new Subordinated notes from Reading International Trust
I. On June 29, 2007, we drew down on this line of credit by $5.2
million (NZ$6.7 million) to purchase a property in New Zealand and on July 29,
2007 we drew down an additional $9.4 million (NZ$12.2 million) to purchase the
Manukau property in New Zealand (see Note 8 – Acquisitions and Property
Development). On August 2, 2007, we paid down this facility by
$12.0 million (NZ$15.7 million) from the proceeds of the sale of certain
marketable securities.
Domestic
Trust Preferred
Securities
On
February 5, 2007, we issued $51.5 million in 20-year fully subordinated notes to
a trust that we control, and which in turn issued $51.5 million in
securities. Of the $51.5 million, $50.0 million in trust-preferred
securities were issued to unrelated investors in a private placement and $1.5
million of common trust securities were issued by the trust to
Reading. This $1.5 million is shown on our balance sheet as
“Investment in Reading International Trust I.” The interest on the
notes and preferred dividends on the trust securities carry a fixed rate for
five years of 9.22% after which the interest will be based on an adjustable rate
of LIBOR plus 4.00% unless we exercise our right to refix the rate at the
current market rate at that time. There are no principal payments due
until maturity in 2027 when the notes and the trust securities are scheduled to
be paid in full. We may pay off the debt after the first five years
at 100.0% of the principal amount without any penalty. The trust is
essentially a pass through, and the transaction is accounted for on our books as
the issuance of fully subordinated notes. The credit facility
includes a number of affirmative and negative covenants designed to monitor our
ability to service the debt. Currently, the most restrictive covenant
of the facility requires that we must maintain a fixed charge coverage ratio at
a certain level. However, on December 31, 2008, we secured a waiver
of all financial covenants with respect to our Trust Preferred Securities for a
period of nine years in consideration of payments totaling $1.6 million,
consisting of an initial payment of $1.1 million paid on January 2, 2009 and a
contractual obligation to pay $270,000 in December 2011 and $270,000 in December
2014.. The placement generated $49.9 million in net proceeds, which
were used principally to make our investment in the common trust securities of
$1.5 million, to retire all of our bank indebtedness in New Zealand of $34.4
million (NZ$50.0 million) and to retire a portion of our bank indebtedness in
Australia of $5.8 million (AUS$7.4 million). During the years ended
December 31, 2008 and December
31, 2007,
we paid $4.6 million and $3.4 million, respectively, in preferred dividends to
the unrelated investors that is included in interest expense. At
December 31, 2008 and 2007, we had preferred dividends payable of
$768,000. Interest payments for this loan are required every three
months.
Euro-Hypo
Loan
On June
28, 2007, Sutton Hill Properties LLC (“SHP”), one of our consolidated
subsidiaries, entered into a $15.0 million loan that is secured by SHP’s
interest in the Cinemas 1, 2 & 3 land and building. SHP is owned
75% by Reading and 25% by Sutton Hill Capital, LLC (“SHC”), a joint venture
indirectly wholly owned by Mr. James J. Cotter, our Chairman and Chief Executive
Officer, and Mr. Michael Forman. Under the terms of the credit
agreement, this loan bears a fixed interest rate of 6.73% per annum payable
monthly. The loan matures on July1, 2012. No principal
payments are due until maturity. SHP distributed the proceeds of the
loan to Reading and to SHC in the amount of $10.6 million and $3.5 million,
respectively. Because, the cash flows from SHP are currently
insufficient to cover its obligations, Reading and Sutton Hill Capital, LLC,
have agreed to contribute the capital required to service the
debt. Reading will be responsible for 75% and SHC will be responsible
for 25% of such capital payments. Interest payments for this loan are
required on a monthly basis.
GE Capital Term
Loan
In
connection with the Consolidated Entertainment acquisition described in Note 8 -
Acquisitions and Property
Development, on February 21, 2008, our wholly-owned subsidiary,
Consolidated Amusement Theatres, Inc., (now renamed Consolidated Entertainment,
Inc.) as borrower (“Borrower”), and Consolidated Amusement Holdings, Inc.
(“Holdings”) entered into a Credit Agreement with General Electric Capital
Corporation (“GE”) as lender and administrative agent, and GE Capital Markets,
Inc. as lead arranger, which provides Borrower with a senior secured credit
facility of up to $55.0 million in the aggregate, including a revolving credit
facility of up to $5.0 million and a $1.0 million sub-limit for letters of
credit (the “Credit Facility”). The initial borrowings
under the Credit Facility were used to finance, in part, our acquisition of the
theaters and other assets described in Note 8 - Acquisitions and Property
Development. We may borrow additional amounts under the Credit
Facility for other acquisitions as permitted under the Credit Facility (and to
pay any related transaction expenses), and for ordinary working capital and
general corporate needs of Borrower, subject to the terms of the Credit
Facility. We incurred deferred financing costs of $2.6 million
related to our borrowings under this Credit Facility. The Credit
Facility expires on February 21, 2013 and is secured by substantially all the
assets of Borrower and Holdings.
Borrowings
under the Credit Facility bear interest at a rate equal to either (i) the Index
Rate (defined as the higher of the Wall Street Journal prime rate and the
federal funds rate plus 50 basis points), or (ii) LIBOR (as defined in the
Credit Facility), at the election of Borrower, plus, in each case, a margin
determined by reference to Borrower's Leverage Ratio (as defined in the Credit
Facility) that ranges between prime rate plus 2.00% and prime rate plus 2.75%,
and between LIBOR plus 3.25% and LIBOR plus 4.00%, respectively. At present, we
have elected to use the LIBOR plus 4.00% as our interest borrowing
rate. We are required to swap no less than 50% of our variable rate
drawdowns for the first two years of this loan agreement. For further
information regarding our swap agreements, see Note 13 – Derivative
Instruments.
Borrowings
under the Credit Facility may be prepaid at any time without penalty, subject to
certain minimums and payment of any LIBOR funding breakage
costs. Borrower will be required to pay an unused commitment fee
equal to 0.50% per annum on the actual daily-unused portion of the revolving
loan facility, payable quarterly in arrears. Outstanding letters of
credit under the Credit Facility are subject to a fee of the applicable LIBOR
rate in effect per annum on the face amount of such letters of credit, payable
quarterly in arrears. Borrower will be required to pay standard fees
with respect to the issuance, negotiation, and amendment of letters of credit
issued under the letter of credit facility. In accordance with the
prepayment provisions of the credit agreement, during 2008, we paid down on the
facility by $9.0 million. This includes a prepayment of the annual
cash flow draw of $6.0 million and a pay down of the overall facility by an
additional $3.0 million.
The
Credit Facility contains other customary terms and conditions, including
representations and warranties, affirmative and negative covenants, events of
default and indemnity provisions. Such covenants, among other things,
limit Borrower's ability to incur indebtedness, incur liens or other
encumbrances, make capital expenditures, enter into mergers, consolidations and
asset sales, engage in transactions with affiliates, pay dividends or other
distributions and change the nature of the business conducted by
Borrower.
The
Credit Agreement contains financial covenants requiring the Borrower to maintain
minimum fixed charge and interest coverage ratios and not to exceed specified
maximum leverage ratios. The compliance levels for the maximum
leverage and minimum interest coverage covenants become stricter over the term
of the Credit Facility.
The
Credit Facility provides for customary events of default, including payment
defaults, covenant defaults, cross-defaults to certain other indebtedness,
certain bankruptcy events, judgment defaults, invalidity of any loan documents
or liens created under the Credit Agreement, change of control of Borrower,
termination of certain theater leases and material inaccuracies in
representations and warranties.
Liberty Theatres Term
Loan
On March
17, 2008, we entered into a $7.1 million loan agreement with a financial
institution, secured by our Royal George Theatre in Chicago, Illinois and our
Minetta and Orpheum Theatres in New York. The loan has a 5-year term
loan that accrues a 6.20% interest rate payable monthly in
arrears. We incurred deferred financing costs of $527,000 related to
our borrowings of this loan. The loan agreement requires only monthly
principal and interest payments along with self-reported annual financial
statements.
US Nationwide Loan
1
As
described in greater detail in Note 8 - Acquisitions and Property
Development, on February 22, 2008, we acquired 15 motion picture theaters
and theater-related assets from Pacific Theatres Exhibition Corp. and its
affiliates (collectively, the “Sellers”) for $70.2 million. The
Seller’s affiliate, Nationwide Theatres Corp (“Nationwide”), provided $21.0
million of acquisition financing evidenced by a five-year promissory note (the
“Nationwide Note 1”) of Reading Consolidated Holdings, Inc., our wholly owned
subsidiary (“RCHI”), maturing on February 21, 2013.
The
Nationwide Note 1 is subject to certain adjustments. To date, these
adjustments have resulted in a net reduction of $3.3 million in the principal
amount of the $8.0 million portion of the note, comprised of a reduction in the
amount of $6.3 million and an additional advance of $3.0 million (such advance
is being used to pay down the GE Capital Term Loan discussed
above).
The
Nationwide Note 1 bears interest (i) as to $4.7 million of principal at the
annual rates of 7.50% for the first three years and 8.50% thereafter and
(ii) as to $13.0 million of principal at the annual rates of 6.50% through
July 31, 2009 and 8.50% thereafter. Accrued interest is due and
payable on February 21, 2011 and thereafter on the last day of each
calendar quarter, commencing on June 30, 2011. The entire
principal amount is due and payable upon maturity, subject to our right to
prepay at any time without premium or penalty and to the requirement that, under
certain circumstances, we make mandatory prepayments equal to a portion of free
cash flow generated by the acquired theaters. The loan is recourse
only to RCHI and its assets, which include all of the Hawaii theaters and
certain of the California theaters acquired from the Sellers and our Manville
and Dallas Angelika Theaters. The accrued interest payable for this
loan and the US Nationwide Loan 2 was $1.2 million and included in the loan
balances at December 31, 2008.
US Nationwide Loan
2
In
connection with the acquisition, the Sellers also committed to loan to RDI up to
$3.0 million in two draws of $1.5 million each, one of which was drawn on July
21, 2008 and the other of which may be drawn on or before July 31,
2009. This loan bears an interest rate of 8.50%, compounded
annually. The loan and accrued interest are due and payable, in full,
on February 21, 2011, subject to our right to prepay the loan without
premium or penalty.
Sutton Hill Capital Note 1 -
City Cinemas Standby Credit Facility
In
connection with the City Cinemas Transaction, on September 14, 2004, we issued a
$5.0 million promissory note to SHC that carries an interest rate at December
31, 2008, of 10.34% per annum, which is indexed, to the annual consumer price
index with interest only payments payable monthly and a balloon principal
payment due on the loan maturity date. The loan maturity date has
been extended three times and is currently December 31, 2010. We used
the proceeds to in part invest in 205-209 East 57th Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th Street
in Manhattan. Interest payments for this loan are required on a
monthly basis.
Sutton Hill Capital Note
2
On
September 19, 2005, we issued a $9.0 million promissory note, bearing interest
at a fixed rate of 8.25% with interest only payments payable monthly and a
balloon principal payment due on December 31, 2010, the loan maturity date, in
exchange for the tenant’s interest in the ground lease estate that is currently
between (i) our fee ownership of the underlying land and (ii) our current
possessory interest as the tenant in the building and improvements constituting
the Cinemas 1, 2 & 3 in Manhattan. This tenant’s ground lease
interest was purchased from Sutton Hill Capital LLC (“SHC”). As SHC
is a related party to our corporation, our Board’s Audit and Conflicts
Committee, comprised entirely of outside independent directors, and subsequently
our entire Board of Directors unanimously approved issuance of debt in
connection with the purchase of the property. The Cinemas 1, 2 &
3 is located on 3rd Avenue
between 59th and
60th
Streets. Interest payments for this loan are required on a monthly
basis.
Union Square Theatre Term
Loan
On
December 4, 2006, we renegotiated our loan agreement, which is secured by our
Union Square Theatre in Manhattan. The new loan increased our
borrowing amount from $3.2 million to $7.5 million and reduced our annual
interest rate from 7.31% to 6.26%. This three-year term loan requires
monthly scheduled principal and interest payments. We owed $7.1
million and $7.3 million on this term loan for the years ended December 31, 2008
and 2007, respectively. While this loan is structured as a limited
recourse liability (the only collateral being our Union Square building and the
tenant leases with respect to that building), this limited recourse structure is
somewhat offset by our inter-company obligation under the lease of the live
theater portion of the building, which provides for an annual rent of
$546,000. Interest payments for this loan are required on a monthly
basis.
Summary of Notes
Payable
Our aggregate future principal loan
payments are as follows (dollars in thousands):
|
Year
Ending December 31,
|
||||
|
2009
|
$ | 1,347 | ||
|
2010
|
30,598 | |||
|
2011
|
73,628 | |||
|
2012
|
15,921 | |||
|
2013
|
62,592 | |||
|
Thereafter
|
55,076 | |||
|
Total
future principal loan payments
|
$ | 239,162 | ||
Since approximately $83.1 million of
our total debt of $239.2 million at December 31, 2008 consisted of debt
denominated in Australian and New Zealand dollars, the U.S dollar amounts of
these repayments will fluctuate in accordance with the relative values of these
currencies.
Note 13 – Derivative
Instruments
We are
exposed to interest rate changes from our outstanding floating rate
borrowings. We manage our fixed to floating rate debt mix to mitigate
the impact of adverse changes in interest rates on earnings and cash flows and
on the market value of our borrowings. From time to time, we may
enter into interest rate hedging contracts, which effectively convert a portion
of our variable rate debt to a fixed rate over the term of the interest rate
swap. In the case of our Australian borrowings, we are presently
required to swap no less than 70% of our drawdowns under our Australian
Corporate Credit Facility into fixed interest rate obligations. Under
our GE Capital Term Loan, we are required to swap no less than 50% of our
variable rate drawdowns for the first two years of the loan
agreement.
The
following table sets forth the terms of our interest rate swap derivative
instruments at December 31, 2008:
|
Type of Instrument
|
Notional Amount
|
Pay Fixed Rate
|
Receive Variable Rate
|
Maturity Date
|
|||||||||
|
Interest
rate swap
|
$ | 41,000,000 |
6.8540%
|
5.4350%
|
January
1, 2009
|
||||||||
|
Interest
rate swap
|
$ | 33,679,000 |
5.8000%
|
5.4500%
|
December
31, 2011
|
||||||||
|
Interest
rate cap
|
$ | 18,135,000 |
5.8000%
|
5.4500%
|
December
31, 2011
|
||||||||
In
accordance with SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities, we marked our interest swap
instruments to market on the consolidated balance sheet resulting in a $2.1
million increase to interest expense during 2008, a $320,000 decrease to
interest expense during 2007, and a $845,000 decrease to interest expense during
2006. At December 31, 2008, we recorded the fair market value of our
interest rate swaps at $1.4 million as an other long-term
liability. At December 31, 2007, we recorded the fair market value of
our interest rate swaps at $526,000 as an other long-term asset. In
accordance with SFAS No. 133, we have not designated any of our current interest
rate swap positions as financial reporting hedges.
Note 14 - Income
Taxes
Income
(loss) before income tax expense includes the following (dollars in
thousands):
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
$ | (13,022 | ) | $ | 737 | $ | (4,460 | ) | ||||
|
Foreign
|
(6,361 | ) | (3,347 | ) | (2,403 | ) | ||||||
|
Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
|
$ | (19,383 | ) | $ | (2,610 | ) | $ | (6,863 | ) | |||
|
Equity earnings and gain on
sale of unconsolidated subsidiary:
|
||||||||||||
|
United
States
|
(146 | ) | 1,328 | 8,277 | ||||||||
|
Foreign
|
3,093 | 1,217 | 4,712 | |||||||||
|
Income
(loss) before income tax expense
|
$ | (16,436 | ) | $ | (65 | ) | $ | 6,126 | ||||
Significant
components of the provision for income taxes are as follows (dollars in
thousands):
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current
income tax expense
|
||||||||||||
|
Federal
|
$ | 900 | $ | 510 | $ | 688 | ||||||
|
State
|
187 | 511 | 409 | |||||||||
|
Foreign
|
1,012 | 1,017 | 1,173 | |||||||||
|
Total
|
2,099 | 2,038 | 2,270 | |||||||||
|
Deferred
income tax expense
|
||||||||||||
|
Federal
|
-- | -- | -- | |||||||||
|
State
|
-- | -- | -- | |||||||||
|
Foreign
|
-- | -- | -- | |||||||||
|
Total
|
-- | -- | -- | |||||||||
|
Total
income tax expense
|
$ | 2,099 | $ | 2,038 | $ | 2,270 | ||||||
Deferred
income taxes reflect the net tax effect of “temporary differences” between the
financial statement carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
components of the deferred tax liabilities and assets are as follows (dollars in
thousands):
|
December 31,
|
||||||||
|
Components
of Deferred Tax Assets and Liabilities
|
2008
|
2007
|
||||||
|
Deferred
Tax Assets:
|
||||||||
|
Net
operating loss carry forwards
|
$ | 39,298 | $ | 43,215 | ||||
|
Impairment
reserves
|
2,991 | 1,142 | ||||||
|
Alternative
minimum tax carry forwards
|
3,752 | 3,714 | ||||||
|
Installment
sale of cinema property
|
5,070 | 5,070 | ||||||
|
Deferred
revenue and expense
|
6,101 | 3,949 | ||||||
|
Other
|
8,310 | 6,528 | ||||||
|
Total Deferred Tax
Assets
|
65,522 | 63,618 | ||||||
|
Deferred
Tax Liabilities:
|
||||||||
|
Acquired
and option properties
|
4,932 | 6,408 | ||||||
|
Net
deferred tax assets before valuation allowance
|
60,590 | 57,210 | ||||||
|
Valuation
allowance
|
(60,590 | ) | (57,210 | ) | ||||
|
Net
deferred tax asset
|
$ | -- | $ | -- | ||||
In
accordance with SFAS No. 109, we record net deferred tax assets to the extent we
believe these assets will more likely than not be realized. In making
such determination, we consider all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies and recent financial
performance. SFAS No. 109 presumes that a valuation allowance is
required when there is substantial negative evidence about realization of
deferred tax assets, such as a pattern of losses in recent years, coupled with
facts that suggest such losses may continue. Because of such negative
evidence available for the U.S. and other countries, as of December 31, 2008 we
recorded a full valuation allowance of $60.6 million.
As of
December 31, 2008, we had the following U.S. net operating loss carry forwards
(dollars in thousands):
|
Expiration
Date
|
Amount
|
|||
|
2018
|
$ | 4 | ||
|
2019
|
1,320 | |||
|
2021
|
198 | |||
|
2022
|
1,495 | |||
|
2025
|
28,345 | |||
|
2026
|
3,912 | |||
|
Total
net operating loss carryforwards
|
$ | 35,274 | ||
In addition to the above net operating
loss carryforwards having expiration dates, we have the following carryforwards
that have no expiration date at December 31, 2008:
|
·
|
approximately
$3.8 million in alternative minimum tax credit
carryforwards;
|
|
·
|
approximately
$45.3 million in Australian loss carry forwards;
and
|
|
·
|
approximately
$3.3 million in New Zealand loss
carryforwards.
|
We
disposed of our Puerto Rico operations during 2005 and plan no further
investment in Puerto Rico for the foreseeable future. We have
approximately $26.1 million in Puerto Rico loss carry forwards expiring no later
than 2015. No material future tax benefits from Puerto Rico loss
carry forwards can be recognized by the Company unless it re-enters the Puerto
Rico market.
We expect
no other substantial limitations on the future use of U.S. or foreign loss carry
forwards except for reductions in unused U.S. loss carry forwards that may occur
in connection with the 1996 Tax Audit described in Note 18 - Commitments and
Contingencies.
U.S.
income taxes have not been recognized on the temporary differences between book
value and tax basis of investment in foreign subsidiaries. These
differences become taxable upon a sale of the subsidiary or upon distribution of
assets from the subsidiary to U.S. shareholders. We expect neither of
these events will occur in the foreseeable future for any of our foreign
subsidiaries.
The
provision for income taxes is different from amounts computed by applying U.S.
statutory rates to consolidated losses before taxes. The significant
reason for these differences follows (dollars in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
tax provision (benefit)
|
$ | (5,753 | ) | $ | (23 | ) | $ | 2,149 | ||||
|
Reduction
(increase) in taxes resulting from:
|
||||||||||||
|
Change in valuation
allowance
|
4,697 | (768 | ) | (4,327 | ) | |||||||
|
Expired foreign loss
carryforward
|
2,283 | 1,760 | 1,961 | |||||||||
|
Foreign tax
provision
|
1,012 | 1,017 | 1,173 | |||||||||
|
Tax effect of foreign tax rates
on current income
|
(378 | ) | (60 | ) | 425 | |||||||
|
State and local tax
provision
|
187 | 511 | 409 | |||||||||
|
Other items
|
51 | (399 | ) | 480 | ||||||||
|
Actual
tax provision
|
$ | 2,099 | $ | 2,038 | $ | 2,270 | ||||||
Pursuant
to APB No.23, Accounting for Income Taxes - Special Areas, a provision should be
made for the tax effect of earnings of foreign subsidiaries that are not
permanently invested outside the United States. Our intent is that
earnings of our foreign subsidiaries are not permanently invested outside the
United States. No current or cumulative earnings were available for
distribution in the Reading Australia consolidated group of subsidiaries or in
the Puerto Rico subsidiary as of December 31, 2008. The Reading New
Zealand consolidated group of subsidiaries did not generate earnings in 2008,
but has cumulative earnings available for distribution. We have
provided $149,000 in foreign withholding taxes connected with these retained
earnings.
We have
accrued $17.8 million in income tax liabilities as of December 31, 2008, of
which $12.0 million have been classified as income taxes payable and $5.8
million have been classified as other non-current liabilities. As
part of income taxes payable, we have accrued $5.4 million in accordance with
the cumulative probability approach prescribed by FIN 48 in connection with the
“Appeal of IRS Deficiency Notices” and we believe that the possible total
settlement amount will be between $5.4 million and $55.7 million (see Note 19 –
Commitments and
Contingencies). The remaining unrecognized tax benefits
included in the table below are primarily netted against our deferred tax
assets. We believe these amounts represent an adequate provision for
our income tax exposures, including income tax contingencies related to foreign
withholding taxes described in Note 15 – Other
Liabilities.
The
following table is a summary of the activity related to unrecognized tax
benefits for the year ending December 31, 2008 and December 31, 2007 (dollars in
thousands):
|
Year Ended December 31,
2008
|
Year Ended December 31,
2007
|
|||||||
|
Unrecognized
tax benefits – beginning balance
|
$ | 11,417 | $ | 10,857 | ||||
|
Gross
increases – prior period tax provisions
|
-- | 47 | ||||||
|
Gross
decreases – prior period tax positions
|
(146 | ) | -- | |||||
|
Gross
increases – current period tax positions
|
-- | 513 | ||||||
|
Settlements
|
-- | -- | ||||||
|
Statute
of limitations lapse
|
-- | -- | ||||||
|
Unrecognized
tax benefits – ending balance
|
$ | 11,271 | $ | 11,417 | ||||
We
adopted FASB Interpretation (FIN) 48 on January 1, 2007. As a result,
we recognized a $509,000 cumulative increase to reserves for uncertain tax
positions, which was accounted for as an adjustment to the beginning balance of
accumulated deficit in 2007. As of that date, we also reclassified
approximately $4.0 million in reserves from current taxes liabilities to
noncurrent tax liabilities. Interest and/or penalties related to
income tax matters are recorded as part of income tax expense. We had
approximately $10.8 million of gross tax benefits and $1.7 million of tax
interest unrecognized on the financial statements as of the date of adoption,
mostly reflecting operating loss carry forwards and the IRS litigation matter
described below. Of the $12.5 million total gross unrecognized tax
benefits at January 1, 2007, $4.5 million would impact the effective tax rate if
recognized. The remaining balance consists of items that would not
impact the effective tax rate due to the existence of the valuation
allowance. We recorded an increase to our gross unrecognized tax
benefits of approximately $0.6 million and an increase to tax interest of
approximately $0.6 million during the period January 1, 2007 to December 31,
2007, and the total balance at December
31, 2007
was approximately $13.7 million (of which approximately 2.3 million represents
IRS interest). We further recorded a decrease to our gross
unrecognized tax benefits of approximately $0.1 million and an increase to tax
interest of approximately $0.9 million during the period January 1, 2008 to
December 31, 2008, and the total balance at December 31, 2008 was approximately
$14.5 million (of which approximately 3.2 million represents IRS
interest).
The
incremental effects of applying FIN 48 on line items in the accompanying
consolidated balance sheet at January 1, 2007 were as follows (dollars in
thousands):
|
Before
Application of FIN 48 on January 1, 2007
|
FIN
48 Adjustments as of January 1, 2007
|
After
Application of FIN 48 on January 1, 2007
|
||||||||||
|
Current
tax liabilities
|
$ | 9,128 | $ | (4,000 | ) | $ | 5,128 | |||||
|
Noncurrent
tax liabilities
|
$ | -- | $ | 4,509 | $ | 4,509 | ||||||
|
Accumulated
deficit
|
$ | (50,058 | ) | $ | (509 | ) | $ | (50,567 | ) | |||
Our
company and subsidiaries are subject to U.S. federal income tax, income tax in
various U.S. states, and income tax in Australia, New Zealand, and Puerto
Rico.
Generally,
changes to our federal and most state income tax returns for the calendar year
2004 and earlier are barred by statutes of limitations. Certain
domestic subsidiaries filed federal and state tax returns for periods before
these entities became consolidated with us. These subsidiaries were
examined by IRS for the years 1996 to 1999 and significant tax deficiencies were
assessed for those years. We are contesting these deficiencies in Tax
Court. Our income tax returns of Australia filed since inception in
1995 are open for examination. The income tax returns filed in New
Zealand and Puerto Rico for calendar year 2003 and afterward generally remain
open for examination as of December 31, 2008. The income tax returns
of certain New Zealand subsidiaries are under examination for years 2002 through
2004. We anticipate the results of this examination will not have a
material effect on our financial position or results of operations.
We do not
anticipate that within 12 months following December 31, 2008 our total
unrecognized tax benefits will change significantly because of settlement of
audits or expiration of statutes of limitations.
Note 15 – Other
Liabilities
Other
liabilities are summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
liabilities
|
||||||||
|
Security deposit
payable
|
$ | 210 | $ | 168 | ||||
|
Other
|
(9 | ) | 1 | |||||
|
Other current
liabilities
|
$ | 201 | $ | 169 | ||||
|
Other
liabilities
|
||||||||
|
Foreign withholding
taxes
|
$ | 5,748 | $ | 5,480 | ||||
|
Straight-line rent
liability
|
5,022 | 3,783 | ||||||
|
Option
liability
|
1,117 | -- | ||||||
|
Environmental
reserve
|
1,656 | 1,656 | ||||||
|
Accrued pension
|
2,946 | 2,626 | ||||||
|
Interest rate
swap
|
1,439 | -- | ||||||
|
Acquired leases
|
4,612 | 532 | ||||||
|
Other
|
1,064 | 859 | ||||||
|
Other
liabilities
|
$ | 23,604 | $ | 14,936 | ||||
Union Pension
Withdrawal
During
the first quarter of 2006, the Motion Picture Projectionists, Video Technicians
and Allied Crafts Union (“Union”) asserted that due to the Company’s reduced
reliance on union labor in New York City, there was
a
partial
withdrawal from the union pension plan by the Company in 2003 resulting in a
funding liability on the part of the Company of approximately
$310,000. We have recorded a $259,000 liability in our other
liabilities and paid to the Union $51,000 during the year ended December 31,
2008.
Note 16 – Fair Value of
Financial Instruments
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value
Measurements (SFAS No. 157). SFAS No. 157 does not establish
requirements for any new fair value measurements, but it does apply to existing
accounting pronouncements in which fair value measurements are already required.
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. We
adopted the provisions of SFAS No. 157 as of January 1, 2008, for financial
instruments. Although the adoption of SFAS No. 157 has not materially impacted
our financial condition, results of operations, or cash flow, we are now
required to provide additional disclosures as part of our financial
statements.
SFAS No.
157 (see Note 2 – Basis of
Presentation – Summary
of Significant Accounting Policies) establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair
value. The statement requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following three
categories:
Level 1:
Quoted market prices in active markets for identical assets or
liabilities.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3:
Unobservable inputs that are not corroborated by market data.
We use
appropriate valuation techniques based on the available inputs to measure the
fair values of our assets and liabilities. When available, we measure
fair value using Level 1 inputs because they generally provide the most reliable
evidence of fair value.
We used
the following methods and assumptions to estimate the fair values of the assets
and liabilities in the table above.
Level 1 Fair Value
Measurements – are based on market quotes of our marketable
securities.
Level 2 Fair Value
Measurements –
Investment in Marketable Securities
in an Inactive Market – Our investment in Available For Sale Securities
includes common shares in an Australian Company that were subject to a tender
offer from a publicly traded Company in Australia that is actively
traded. Based on the exchange ratio provided for the open tender
offer and the related market quote on December 31, 2008, the fair value of our
Available for Sale Securities was derived.
Interest Rate Swaps – The
fair value of interest rate swaps are estimated using internal discounted cash
flow calculations based upon forward interest rate curves, which are
corroborated by market data, and quotes obtained from counterparties to the
agreements.
Level 3 Fair Value
Measurements – we do not have any assets or liabilities that fall into
this category.
As of
December 31, 2008, we held certain items that are required to be measured at
fair value on a recurring basis. These included cash equivalents,
available for sale securities, and interest rate derivative
contracts. Cash equivalents consist of short-term, highly liquid,
income-producing investments, all of which have maturities of 90 days or
less. Derivative instruments are related to our economic hedge of
interest rates. Our available-for-sale securities primarily consist
of investments associated with the ownership of marketable securities in
Australia.
The fair
values of the interest rate swap agreements are determined using the market
standard methodology of discounting the future expected cash receipts that would
occur if variable interest rate fell above the strike rate of the interest rate
cap agreement. The variable interest rates used in the calculation of
projected receipts on the interest rate swap and cap agreements are based on an
expectation of future interest rates derived from observable market interest
rate curves and volatilities. To comply with the provisions of FASB
Statement No. 157, we incorporate credit valuation adjustments to appropriately
reflect both our own nonperformance risk and the respective
counterparty's
nonperformance
risk in the fair value measurements. Although we have determined that
the majority of the inputs used to value our derivatives fall within Level 2 of
the fair value hierarchy, the credit valuation adjustments associated with our
derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by us and our
counterparties. However, as of December 31, 2008, we have assessed
the significance of the impact of the credit valuation adjustments on the
overall valuation and determined that the credit valuation adjustments are not
significant to the overall valuation of our derivatives. As a result, we have
determined that our derivative valuations in their entirety are classified in
Level 2 of the fair value hierarchy. We have consistently applied
these valuation techniques in all periods presented and believe we have obtained
the most accurate information available for the types of derivative contracts we
hold.
The
following items are measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at December 31, 2008 (dollars in
thousands):
|
Book Value
|
Fair Value
|
|||||||||||
|
Financial
Instrument
|
Level
|
December
31, 2008
|
December
31, 2008
|
|||||||||
|
Investment
in marketable securities
|
1
|
$ | 141 | $ | 141 | |||||||
|
Investment
in marketable securities in an inactive market
|
2
|
$ | 2,959 | $ | 2,959 | |||||||
|
Interest
rate swaps asset
|
2
|
$ | 1,439 | $ | 1,439 | |||||||
Financial Instruments
Disclosed at Fair Value
The
following table sets forth the carrying value and the fair value of our
financial assets and liabilities at December 31, 2008 and 2007 (dollars in
thousands):
|
Book Value
|
Fair Value
|
|||||||||||||||
|
Financial
Instrument
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Cash
|
$ | 30,874 | $ | 20,782 | $ | 30,874 | $ | 20,782 | ||||||||
|
Accounts
receivable
|
$ | 7,868 | $ | 5,671 | $ | 7,868 | $ | 5,671 | ||||||||
|
Restricted
cash
|
$ | 1,656 | $ | 59 | $ | 1,656 | $ | 59 | ||||||||
|
Accounts
and film rent payable
|
$ | 20,485 | $ | 15,606 | $ | 20,485 | $ | 15,606 | ||||||||
|
Notes
payable
|
$ | 173,615 | $ | 111,648 | $ | 169,634 | $ | 112,344 | ||||||||
|
Notes
payable to related party
|
$ | 14,000 | $ | 14,000 | $ | 14,000 | $ | 13,942 | ||||||||
|
Subordinated
debt
|
$ | 51,547 | $ | 51,547 | $ | 39,815 | $ | 45,356 | ||||||||
|
Investment
in Marketable Securities
|
$ | 3,100 | $ | 4,533 | $ | 3,100 | $ | 4,533 | ||||||||
|
Interest
rate swaps asset
|
$ | -- | $ | 526 | $ | -- | $ | 526 | ||||||||
Note 17 – Lease
Agreements
Most of
our cinemas conduct their operations in leased facilities. Nineteen
of our twenty operating multiplexes in Australia, five of our nine cinemas in
New Zealand and all but one of our cinemas in the United States are in leased
facilities. These cinema leases have remaining terms inclusive of
options of 3 to 41 years. Certain of our cinema leases provide for
contingent rentals based upon a specified percentage of theater revenues with a
guaranteed minimum. Substantially all of our leases require the
payment of property taxes, insurance and other costs applicable to the
property. We also lease office space and equipment under
non-cancelable operating leases. All of our leases are accounted for
as operating leases and accordingly, we have no leases of facilities that
require capitalization.
We
determine the annual base rent expense of our cinemas by amortizing total
minimum lease obligations on a straight-line basis over the lease
terms. Base rent expense and contingent rental expense under the
operating leases totaled approximately $26.0 million and $346,000 for 2008,
respectively; $11.9 million and $515,000 for 2007, respectively; and $10.8
million and $332,000 for 2006, respectively. Future minimum lease
payments by year and, in the aggregate, under non-cancelable operating leases
consisted of the following at December 31, 2008 (dollars in
thousands):
|
Minimum
Ground Lease Payments
|
Minimum
Premises Lease Payments
|
Total
Minimum Lease Payments
|
||||||||||
|
2009
|
$ | 3,431 | $ | 23,904 | $ | 27,335 | ||||||
|
2010
|
3,145 | 23,750 | 26,895 | |||||||||
|
2011
|
2,570 | 23,784 | 26,354 | |||||||||
|
2012
|
2,582 | 22,332 | 24,914 | |||||||||
|
2013
|
2,663 | 19,789 | 22,452 | |||||||||
|
Thereafter
|
6,941 | 85,449 | 92,390 | |||||||||
|
Total
minimum lease payments
|
$ | 21,332 | $ | 199,008 | $ | 220,340 | ||||||
Since approximately $96.7 million of
our total minimum lease payments of $220.3 million as of December 31, 2008
consisted of lease obligations denominated in Australian and New Zealand
dollars, the U.S dollar amounts of these obligations will fluctuate in
accordance with the relative values of these currencies.
Note 18 – Pension
Liabilities
In March 2007, the Board of Directors
of Reading International, Inc. (“Reading”) approved a Supplemental Executive
Retirement Plan (“SERP”) pursuant to which Reading has agreed to provide James
J. Cotter, its Chief Executive Officer and Chairman of the Board of Directors,
supplemental retirement benefits effective March 1, 2007. Under the
SERP, Mr. Cotter will receive a monthly payment of the greater of (i) 40% of the
average monthly earnings over the highest consecutive 36-month period of
earnings prior to Mr. Cotter’s separation from service with Reading or (ii)
$25,000 per month for the remainder of his life, with a guarantee of 180 monthly
payments following his separation from service with Reading or following his
death. The beneficiaries under the SERP may be designated by Mr.
Cotter or by his beneficiary following his or his beneficiary’s
death. The benefits under the SERP are fully vested as of March 1,
2007.
The SERP initially will be unfunded,
but Reading may choose to establish one or more grantor trusts from which to pay
the SERP benefits. As such, the SERP benefits are unsecured, general
obligations of Reading. The SERP is administered by the Compensation
Committee of the Board of Directors of Reading. In accordance with
SFAS No. 158 - Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R), the initial
pension benefit obligation of $2.7 million was included in our other liabilities
with a corresponding amount of unrecognized prior service cost included in
accumulated other comprehensive income on March 1, 2007 (see Note 24 – Comprehensive
Income). The initial benefit obligation was based on a
discount rate of 5.75% and a compensation increase rate of 3.5%. The
$2.7 million is being amortized as a prior service cost over the estimated
service period of 10 years combined with an annual interest cost. For
the years ended December 31, 2008 and 2007, we recognized $153,000 and $129,000,
respectively, of interest cost and $304,000 and 253,000, respectively, of
amortized prior service cost. For the year ended December 31, 2008,
we recognized $18,000 of amortized net gain. The balance of the other
liability for this pension plan was $2.6 million and $2.4 million at December
31, 2008 and 2007, respectively, and the accumulated other comprehensive income
balance was $1.7 million and $2.1 million at December 31, 2008 and 2007,
respectively. The December 31, 2008 and 2007 values of the SERP are
based on a discount rate of 6.25% and an annual compensation growth rate of
3.50%.
In addition to the aforementioned SERP,
Mr. S. Craig Tompkins has a vested interest in the pension plan originally
established by Craig Corporation prior to its merger with our company of
$188,000 and $181,000 at December 31, 2008 and 2007,
respectively. The balance accrues interest at 30 day LIBOR and is
maintained as an unfunded Executive Pension Plan obligation included in other
liabilities. Additionally, as part of his employment agreement, Mr.
John Hunter, our Chief Operating Officer, has a vested interest in a pension
plan that currently accrues $100,000 per year and has a balance of
$192,000.
The
change in the SERP pension benefit obligation and the funded status for the year
ending December 31, 2008 and 2007 are as follows (dollars in
thousands):
|
Change
in Benefit Obligation
|
For
the year ending December 31, 2008
|
|||
|
Benefit
obligation at January 1, 2008
|
$ | 2,445 | ||
|
Service
cost
|
-- | |||
|
Interest
cost
|
153 | |||
|
Actuarial
gain
|
(32 | ) | ||
|
Benefit
obligation at December 31, 2008
|
2,566 | |||
|
Plan
assets
|
-- | |||
|
Funded
status at December 31, 2008
|
$ | (2,566 | ) | |
|
Change
in Benefit Obligation
|
For
the year ending December 31, 2007
|
|||
|
Benefit
obligation at March 1, 2007
|
$ | 2,701 | ||
|
Service
cost
|
-- | |||
|
Interest
cost
|
129 | |||
|
Actuarial
gain
|
(385 | ) | ||
|
Benefit
obligation at December 31, 2007
|
2,445 | |||
|
Plan
assets
|
-- | |||
|
Funded
status at December 31, 2007
|
$ | (2,445 | ) | |
Amount recognized in balance sheet
consists of (dollars in thousands):
|
At
December 31, 2008
|
At
December 31, 2007
|
|||||||
|
Noncurrent
assets
|
$ | -- | $ | -- | ||||
|
Current
liabilities
|
6 | 5 | ||||||
|
Noncurrent
liabilities
|
2,560 | 2,440 | ||||||
Items not yet recognized as a component
of net periodic pension cost consist of (dollars in thousands):
|
At
December 31, 2008
|
At
December 31, 2007
|
|||||||
|
Unamortized
actuarial gain
|
$ | (399 | ) | $ | (385 | ) | ||
|
Prior
service costs
|
2,144 | 2,448 | ||||||
|
Accumulated
other comprehensive loss
|
1,745 | 2,063 | ||||||
The
components of the net periodic benefit cost and other amounts recognized in
other comprehensive income are as follows (dollars in thousands):
|
Net
periodic benefit cost
|
From
January 1, 2008
to
December 31, 2008
|
From
March 1, 2007
to
December 31, 2007
|
||||||
|
Service
cost
|
$ | -- | $ | -- | ||||
|
Interest
cost
|
153 | 129 | ||||||
|
Expected
return on plan assets
|
-- | -- | ||||||
|
Amortization
of prior service costs
|
304 | 253 | ||||||
|
Amortization
of net gain
|
(18 | ) | -- | |||||
|
Net
periodic benefit cost
|
$ | 439 | $ | 382 | ||||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income
|
||||||||
|
Net
gain
|
$ | (32 | ) | $ | (385 | ) | ||
|
Prior
service cost
|
-- | -- | ||||||
|
Amortization
of prior service cost
|
(304 | ) | (253 | ) | ||||
|
Amortization
of net gain
|
18 | -- | ||||||
|
Total
recognized in other comprehensive income
|
$ | (318 | ) | $ | (638 | ) | ||
|
Total
recognized in net periodic benefit cost and other comprehensive
income
|
$ | 121 | $ | (256 | ) | |||
The estimated net gain and prior
service cost for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the
next fiscal year are $20,000 and $304,000, respectively.
The following weighted average
assumptions were used to determine the plan benefit obligations at December 31,
2008 and 2007:
|
Discount
rate
|
6.25%
|
|
Rate
of compensation increase
|
3.50%
|
The following weighted-average
assumptions were used to determine net periodic benefit cost for the year ended
December 31, 2008 and 2007:
|
Discount
rate
|
6.25%
|
|
Expected
long-term return on plan assets
|
0.00%
|
|
Rate
of compensation increase
|
3.50%
|
The benefit payments, which reflect
expected future service, as appropriate, are expected to be paid over the
following periods (dollars in thousands):
|
Pension
Payments
|
||||
|
2009
|
$ | 6 | ||
|
2010
|
11 | |||
|
2011
|
17 | |||
|
2012
|
23 | |||
|
2013
|
29 | |||
|
Thereafter
|
2,480 | |||
|
Total
pension payments
|
$ | 2,566 | ||
Note 19 - Commitments and
Contingencies
Unconsolidated Joint Venture
Loans
The following section describes the
loans associated with our investments in unconsolidated joint
ventures. As they are unconsolidated, their associated bank loans are
not reflected in our Consolidated Balance Sheet at December 31,
2008. Each loan is without recourse to any assets other than our
interests in the individual joint venture.
Rialto
Distribution. We are the 33.3% co-owners of the assets of
Rialto Distribution. At December 31, 2008 and 2007, the total line of
credit was $1.2 million (NZ$2.0 million) and $1.5 million (NZ$2.0 million),
respectively, and had an outstanding balance of $785,000 (NZ$1.4 million) and
$801,000 (NZ$1.0 million), respectively. This loan is without
recourse to any assets other than our interest in the joint
venture.
Berkeley
Cinemas. During 2007, we were the 50% co-owners with the
Everard Entertainment Ltd of the assets comprising an unincorporated joint
venture in New Zealand, referred to in these financial statements as the
Berkeley Cinemas Joint Venture. The balance of the bank loan at
December 31, 2007 was $3.4 million (NZ$4.4 million) which was secured by a first
mortgage over the land and building assets of the joint venture. This
loan is without recourse to any assets other than our interest in the joint
venture. In June 2008, we sold our interest in this cinema for cash
and the assumption of the outstanding mortgage on the property.
Construction
Commitments
Associated
with the development of our Indooroopilly, Brisbane, Australia property, we have
entered into a construction agreement related to its
redevelopment. Obligations under this agreement are contingent upon
the completion of the services within the guidelines specified in the
agreement. At December 31, 2008, we had $1.0 million (AU$1.5 million)
in outstanding obligations for this contract, which we believe will be settled
in the next twelve months.
Tax
Audit/Litigation
The
Internal Revenue Service (the “IRS”) has 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. These companies are each now wholly
owned subsidiaries of RDI, but for the time periods under audit, were not
consolidated with RDI for tax purposes. 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”). The Stater Stock was 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 an equipment-leasing transaction
entered into by RDGE (discussed below) has been conceded by RDGE resulting in a
net tax refund.
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
$19.6 million as of December 31, 2008. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $5.8 million as of December 31,
2008. Accordingly, this proposed change represented, as of December
31, 2008, an exposure of approximately $51.7 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 $55.7
million. We have accrued $5.5 million in accordance with the
cumulative probability approach prescribed in FIN 48 in relation to this
exposure and believe that the possible total settlement amount will be between
$5.5 million and $55.7 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 the Stater Stock matter 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 the trial is
scheduled for September 2009.
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 RDI, 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 RDI. At the present
time, the assets of these subsidiaries are comprised principally of RDI
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. However, the
satisfaction of any such adverse judgment would result in a material dilution to
existing stockholder interests.
The N/D
issued to RDGE was conceded by RDGE in August 2008. The net result is
expected to be approximately $70,000 in refunds of federal and state income
taxes.
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 that 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 brickworks 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. As of December 31, 2008, we estimate that the total
site preparation costs associated with the removal of this contaminated soil
will be $8.1 million (AUS$9.6 million) and as of that date we had incurred a
total of $6.2 million (AUS$7.4 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”). 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. On May 10, 2005, a mixed judgment was entered by the trial
court. Appeal rights have been exhausted and the net result of that
judgment has been the payment to us by the defendants during the 2008 first
quarter of $830,000 (AUS$901,000) and $314,000 (AUS$333,000) during the 2008
second quarter. These payments are each included in other
income.
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.
In a hearing conducted on November 22
and 29, 2006, we successfully defended an application for summary judgment
brought by Mackie and were awarded costs for part of the preparation of our
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 April 27, 2007, we received payment for those
costs in the sum of $17,000 (AUS$19,000).
A
mediation was held in this matter on July 12, 2007, at which time the matter
failed to settle. 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.
We believe that we have adequate support for our position and that a reserve for
these claims is not required as the likelihood of an unfavorable outcome is not
probable and reasonably capable of being estimated.
Malulani Investments
Litigation
In December 2006, we and Magoon
Acquisition and Development, LLC, another minority shareholder 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,
brought in the Circuit Court of the First Circuit of the State of Hawaii in
Honolulu, 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).
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”).
On March 11, 2009, we and Magoon LLC
agreed to terms of settlement (the “Settlement Terms”) with respect to this
lawsuit. Under the Settlement Terms, we and Magoon LLC will receive
$2.5 million in cash, a $6.75 million three-year 6.25% secured promissory note
(issued by TMG), and a ten year “tail interest” in MIL and TMG which allows us,
in effect, to participate in certain distributions made or received by MIL, TMG
and/or, in certain cases, the shareholders of TMG. However, the tail
interest continues only for a period of ten years and no assurances can be given
that we will in fact receive any distributions with respect to this Tail
Interest. (See Note 27 – Subsequent
Events).
Note 20 – Minority
Interest
The minority interests are comprised of
the following:
|
|
·
|
50%
of membership interest in Angelika Film Center LLC (“AFC LLC”) owned by a
subsidiary of National Auto Credit, Inc.
(“NAC”)
|
|
|
·
|
25%
minority interest in Australian Country Cinemas by 21st
Century Pty, Ltd
|
|
|
·
|
33%
minority interest in the Elsternwick joint venture by Champion Pictures
Pty Ltd
|
|
|
·
|
15%
to 27.5% minority interest in the Landplan Property Partners, Ltd by
Landplan Property Group, Ltd
|
|
|
·
|
25%
minority interest in the Sutton Hill Properties, LLC owned by Sutton Hill
Capital, LLC
|
|
|
·
|
20%
minority interest in Big 4 Farming LLC by Cecelia Packing
Corporation
|
The
components of minority interest are as follows (dollars in
thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
AFC
LLC
|
$ | 1,529 | $ | 2,256 | ||||
|
Australian
Country Cinemas
|
142 | 232 | ||||||
|
Elsternwick
unincorporated joint venture
|
114 | 145 | ||||||
|
Landplan
Property Partners
|
117 | 237 | ||||||
|
Sutton
Hill Properties
|
(85 | ) | (36 | ) | ||||
|
Other
(Big 4 Farming)
|
-- | 1 | ||||||
|
Total
minority interest
|
$ | 1,817 | $ | 2,835 | ||||
The
components of minority interest expense are as follows (dollars in
thousands):
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
AFC
|
$ | 622 | $ | 742 | $ | 624 | ||||||
|
Australian
Country Cinemas
|
146 | 112 | 50 | |||||||||
|
Elsternwick
unincorporated joint venture
|
31 | 21 | (17 | ) | ||||||||
|
Landplan
Property Partners
|
(59 | ) | 214 | 14 | ||||||||
|
Sutton
Hill Properties
|
(120 | ) | (86 | ) | -- | |||||||
|
Other
(Big 4 Farming)
|
-- | -- | 1 | |||||||||
|
Total
minority interest
|
$ | 620 | $ | 1,003 | $ | 672 | ||||||
Landplan Property Partners,
Ltd
In 2006,
we formed Landplan Property Partners, Ltd, referred to as “Reading Landplan”, to
identify, acquire and develop or redevelop properties on an opportunistic
basis. In connection with the formation of Reading Landplan, we
entered into an agreement with Mr. Doug Osborne pursuant to which (i) Mr.
Osborne will serve as the chief executive officer of Reading Landplan and (ii)
Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”), will perform
certain property management services for Reading 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%. During 2006, Reading Landplan acquired
one property in Indooroopilly, Brisbane, Australia. During 2007,
Reading Landplan acquired two properties in New Zealand; the first called the
Lake Taupo Motel and the other is a parcel of land called the Manukau
property. During 2008, Reading Landplan acquired or entered into
agreements to acquire four contiguous properties of approximately 50,000 square
feet, which we intend to develop.
Note 21 - Common
Stock
Our
common stock trades on the NYSE Alternext US under the symbols RDI and RDI.B
which are our Class A (non-voting) and Class B (voting) stock,
respectively. Our Class A (non-voting) has preference over our Class
B (voting) share upon liquidation. No dividends have ever been issued
for either share class.
On
December 31, 2007, in recognition of the vesting of one-half of his 2006 and
one-half of his 2005 stock grants, we issued to Mr. Cotter 15,133 and 16,047
shares, respectively, of Class A Non-Voting Common Stock, which had a stock
grant price of $8.26 and $7.79 per share and fair market values of $151,000 and
$160,000, respectively. At December 31, 2006, in recognition of the
vesting of one-half of the 2006 stock grant, we issued to Mr. Cotter 16,047
shares of Class A Non-Voting Common Stock, which had a stock grant price of
$7.79 per share and a fair market value of $133,000. No shares were
issued to either Mr. Cotter or to any other employee or executive during
2008. For a discussion of the unissued restricted stock grants during
2008, see Note 3 - Stock Based
Compensation and Employee Stock Option Plan.
For the
stock options exercised during the third quarter of 2007, we issued for cash to
an employee of the corporation under our employee stock option plan 6,250 shares
of Class A Nonvoting Common Stock at an exercise price of $4.01 per
share.
For the
stock options exercised during 2006, we issued for cash to an employee of the
corporation under our stock based compensation plan 12,000 shares and 15,000
shares of Class A Nonvoting Common Stock at exercise prices of $3.80 and $2.76
per share, respectively. Additionally, in December 2006, we issued to
Mr. James J. Cotter, our Chairman of the Board and Chief Executive Officer,
16,047 shares of Class A Non-Voting Common Stock at a market price of $7.79 per
share as under the normal vesting schedule of his 2005 restricted stock
compensation (see Note 3 - Stock Based Compensation and
Employee Stock Option Plan.
On
February 27, 2006, we paid $791,000 (NZ$1.2 million) to the sellers of the
Movieland Circuit in exchange for 98,949 Class A Common Nonvoting Common
Stock. This transaction resulted from the exercise of their option to
put back to us at an exercise price of NZ$11.94 the shares they received as part
of the purchase price of the Movieland Circuit.
Note 22 – Business Segments
and Geographic Area Information
The table below sets forth certain
information concerning our cinema operations and our real estate operations
(which includes information relating to both our real estate development, retail
rental and live theater rental activities) for the three years ended December
31, 2008 (dollars in thousands):
|
Year
Ended December 31, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 177,256 | $ | 20,705 | $ | (6,675 | ) | $ | 191,286 | |||||||
|
Operating
expense
|
148,436 | 8,754 | (6,675 | ) | 150,515 | |||||||||||
|
Depreciation
& amortization
|
13,651 | 3,561 | -- | 17,212 | ||||||||||||
|
Impairment
expense
|
2,078 | 3,967 | -- | 6,045 | ||||||||||||
|
General
& administrative expense
|
3,834 | 1,116 | -- | 4,950 | ||||||||||||
|
Segment
operating income
|
$ | 9,257 | $ | 3,307 | $ | -- | $ | 12,564 | ||||||||
|
Year
Ended December 31, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 99,703 | $ | 18,702 | $ | (5,001 | ) | $ | 113,404 | |||||||
|
Operating
expense
|
79,052 | 7,365 | (5,001 | ) | 81,416 | |||||||||||
|
Depreciation
& amortization
|
6,595 | 3,581 | -- | 10,176 | ||||||||||||
|
General
& administrative expense
|
3,195 | 824 | -- | 4,019 | ||||||||||||
|
Segment
operating income
|
$ | 10,861 | $ | 6,932 | $ | -- | $ | 17,793 | ||||||||
|
Year
Ended December 31, 2006
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 90,504 | $ | 14,578 | $ | (4,232 | ) | $ | 100,850 | |||||||
|
Operating
expense
|
70,968 | 6,558 | (4,232 | ) | 73,294 | |||||||||||
|
Depreciation
& amortization
|
8,125 | 3,304 | -- | 11,429 | ||||||||||||
|
General
& administrative expense
|
3,658 | 782 | -- | 4,440 | ||||||||||||
|
Segment
operating income
|
$ | 7,753 | $ | 3,934 | $ | -- | $ | 11,687 | ||||||||
|
Reconciliation
to net income (loss):
|
2008
|
2007
|
2006
|
|||||||||
|
Total
segment operating income
|
$ | 12,564 | $ | 17,793 | $ | 11,687 | ||||||
|
Non-segment:
|
||||||||||||
|
Depreciation and amortization
expense
|
656 | 561 | 483 | |||||||||
|
General and administrative
expense
|
16,484 | 12,066 | 8,551 | |||||||||
|
Operating
income (loss)
|
(4,576 | ) | 5,166 | 2,653 | ||||||||
|
Interest expense,
net
|
(15,740 | ) | (8,161 | ) | (6,597 | ) | ||||||
|
Other income
(expense)
|
991 | (505 | ) | (1,998 | ) | |||||||
|
Minority
interest
|
(620 | ) | (1,003 | ) | (672 | ) | ||||||
|
Gain on disposal of discontinued
operations
|
-- | 1,912 | -- | |||||||||
|
Income (loss) from discontinued
operations
|
562 | (19 | ) | (249 | ) | |||||||
|
Income tax
expense
|
(2,099 | ) | (2,038 | ) | (2,270 | ) | ||||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
497 | 2,545 | 9,547 | |||||||||
|
Gain on sale of unconsolidated
joint venture
|
2,450 | -- | 3,442 | |||||||||
|
Net
income (loss)
|
$ | (18,535 | ) | $ | (2,103 | ) | $ | 3,856 | ||||
|
Reconciliation
to net income (loss):
|
2008
|
2007
|
||||||
|
Segment
assets
|
$ | 345,234 | $ | 315,582 | ||||
|
Corporate
assets
|
24,842 | 30,489 | ||||||
|
Total
Assets
|
$ | 370,076 | $ | 346,071 | ||||
|
Reconciliation
to net income (loss):
|
2008
|
2007
|
2006
|
|||||||||
|
Segment
capital expenditures
|
$ | 74,951 | $ | 42,244 | $ | 16,168 | ||||||
|
Corporate
capital expenditures
|
216 | 170 | 221 | |||||||||
|
Total
capital expenditures
|
$ | 75,167 | $ | 42,414 | $ | 16,389 | ||||||
The cinema results shown above include
revenue and operating expense directly linked to our cinema
assets. The real estate results include rental income from our
properties and live theaters and operating expense directly linked to our
property assets.
The following table sets forth the book
value of our property and equipment by geographical area (dollars in
thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Australia
|
$ | 54,935 | $ | 66,793 | ||||
|
New
Zealand
|
32,074 | 44,029 | ||||||
|
United
States
|
66,156 | 43,190 | ||||||
|
Total
property and equipment
|
$ | 153,165 | $ | 154,012 | ||||
The
following table sets forth our revenues by geographical area (dollars in
thousands):
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Australia
|
$ | 67,759 | $ | 57,826 | $ | 48,159 | ||||||
|
New
Zealand
|
23,739 | 24,371 | 21,230 | |||||||||
|
United
States
|
99,788 | 31,207 | 31,461 | |||||||||
|
Total
Revenues
|
$ | 191,286 | $ | 113,404 | $ | 100,850 | ||||||
Note 23 – Unaudited
Quarterly Financial Information (dollars in thousands, except per share
amounts)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
2008
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Revenue
|
$ | 38,482 | $ | 52,462 | $ | 56,528 | $ | 43,814 | ||||||||
|
Net
income (loss)
|
$ | (226 | ) | $ | 284 | $ | (2,061 | ) | $ | (16,532 | ) | |||||
|
Basic
earnings (loss) per share
|
$ | (0.01 | ) | $ | 0.01 | $ | (0.09 | ) | $ | (0.73 | ) | |||||
|
Diluted
earnings (loss) per share
|
$ | (0.01 | ) | $ | 0.01 | $ | (0.09 | ) | $ | (0.73 | ) | |||||
|
2007
|
||||||||||||||||
|
Revenue
|
$ | 27,049 | $ | 28,822 | $ | 31,078 | $ | 26,455 | ||||||||
|
Net
income (loss)
|
$ | (646 | ) | $ | 1,634 | $ | 870 | $ | (3,961 | ) | ||||||
|
Basic
earnings (loss) per share
|
$ | (0.03 | ) | $ | 0.07 | $ | 0.04 | $ | (0.17 | ) | ||||||
|
Diluted
earnings (loss) per share
|
$ | (0.03 | ) | $ | 0.07 | $ | 0.04 | $ | (0.17 | ) | ||||||
Note 24 - Comprehensive
Income (Loss)
US GAAP requires us to classify
unrealized gains and losses on equity securities as well as our foreign currency
adjustments as comprehensive income. The following table sets forth
our comprehensive income for the periods indicated (in thousands):
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
unrealized gains/(losses) on investments
|
||||||||||||
|
Reclassification
of realized gain on available for sale investments included in net income
(loss)
|
$ | -- | $ | (773 | ) | $ | -- | |||||
|
Unrealized
gain/(loss) on available for sale investments
|
(21 | ) | 889 | (110 | ) | |||||||
|
Net
unrealized gains/(losses) on investments
|
(21 | ) | 116 | (110 | ) | |||||||
|
Net
income (loss)
|
(18,535 | ) | (2,103 | ) | 3,856 | |||||||
|
Cumulative
foreign currency adjustment
|
(39,264 | ) | 14,731 | 4,928 | ||||||||
|
Accrued
pension service costs
|
318 | (2,063 | ) | -- | ||||||||
|
Comprehensive
income (loss)
|
$ | (57,502 | ) | $ | 10,681 | $ | 8,674 | |||||
Note 25 - Future Minimum
Rental Income
Real estate revenue amounted to $14.0
million, $13.7 million, and $10.3 million for the years ended December 31, 2008,
2007 and 2006, respectively. For the year ended December 31, 2008,
rental revenue includes the revenue from all of our Australia and New Zealand
real estate properties and our U.S. properties of the Union Square Theatre, the
Village East Cinema in New York, Gaslamp in San Diego, and the Royal George
Theatre in Chicago.
Future minimum rental income under all
contractual operating leases is summarized as follows (dollars in
thousands):
|
Year
Ending December 31,
|
||||
|
2009
|
$ | 8,816 | ||
|
2010
|
6,082 | |||
|
2011
|
5,199 | |||
|
2012
|
4,722 | |||
|
2013
|
3,890 | |||
|
Thereafter
|
26,618 | |||
|
Total future minimum rental
income
|
$ | 55,327 | ||
Note 26 – Related Parties
and Transactions
Sutton Hill
Capital
In 2001,
we entered into a transaction with Sutton Hill Capital, LLC (“SHC”) regarding
the leasing with an option to purchase of certain cinemas located in
Manhattan. In connection with that transaction, we also agreed to
lend
certain
amounts to SHC, to provide liquidity in its investment, pending our
determination whether or not to exercise our option to purchase and to manage
the 86th Street Cinema on a fee basis. SHC is a limited liability
company owned in equal shares by James J. Cotter and Michael Forman and of which
Mr. Cotter is the managing member. During 2008 and 2007, we paid rent
to SHC in the amount of $487,000 and $491,000, respectively, and we owed SHC
$5.0 million (due December 31, 2010) with respect to the borrowing used
principally to finance the acquisition of our interest in the limited liability
company currently developing the Sutton Cinema site and $9.0 million on the
Purchase Money Promissory Note (due December 31, 2010), for an aggregate
liability of $14.0 million. These two notes had annual interest rates
at December 31, 2008 and 2007 of 10.34% and 8.25%, respectively.
In 2005,
we acquired from a third party the fee interest and from SHC its interest in the
ground lease estate underlying the Cinemas 1, 2 & 3 in
Manhattan. In connection with that transaction, we agreed to grant to
SHC an option to acquire a 25% interest in the special purpose entity formed to
acquire these interests at cost. On June 28, 2007, SHC exercised this
option, paying the option exercise price through the application of their $3.0
million deposit plus the assumption of its proportionate share of SHP’s
liabilities giving it a 25% non-managing membership interest in
SHP.
OBI Management
Agreement
Pursuant to a Theater Management
Agreement (the “Management Agreement”), our live theater operations are managed
by OBI LLC (“OBI Management”), which is wholly owned by Ms. Margaret Cotter who
is the daughter of James J. Cotter and a member of our Board of
Directors.
The
Management Agreement generally provides that we will pay OBI Management a
combination of fixed and incentive fees, which historically have equated to
approximately 20% of the net cash flow received by us from our live theaters in
New York. Since the fixed fees are applicable only during such
periods as the New York theaters are booked, OBI Management receives no
compensation with respect to a theater at any time when it is not generating
revenues for us. This arrangement provides an incentive to OBI
Management to keep the theaters booked with the best available shows, and
mitigates the negative cash flow that would result from having an empty
theater. In addition, OBI Management manages our Royal George live
theater complex in Chicago on a fee basis based on theater cash
flow. In 2008, OBI Management earned $428,000, which was 23.8% of net
cash flows for the year. In 2007, OBI Management earned $377,000,
which was 19.9% of net cash flows for the year. In 2006, OBI
Management earned $471,000, which was 23.6% of net cash flows for the
year. In each year, we reimbursed travel related expenses for OBI
Management personnel with respect to travel between New York City and Chicago in
connection with the management of the Royal George complex.
OBI
Management conducts its operations from our office facilities on a rent-free
basis, and we share the cost of one administrative employee of OBI
Management. Other than these
expenses and travel-related expenses for OBI Management personnel to travel to
Chicago as referred to above, OBI Management is responsible for all of its costs
and expenses related to the performance of its management
functions. The Management Agreement renews automatically each year
unless either party gives at least six months’ prior notice of its determination
to allow the Management Agreement to expire. In addition, we may
terminate the Management Agreement at any time for cause.
Live Theater Play
Investment
From time to time, our officers and
directors may invest in plays that lease our live theaters. During
2004, an affiliate of Mr. James J. Cotter and Michael Forman have a 25%
investment in the play, I Love
You, You’re Perfect, Now Change, playing in one of our auditoriums at our
Royal George Theatre. We similarly had a 25% investment in the
play. The play has earned for us $2,000, $27,000, $25,000 during the
years ended December 31, 2008, 2007 and 2006, respectively. This
investment received board approval from our Conflicts Committee on August 12,
2002.
During 2008, we had a 37.4% investment
in a show that played at our Minetta Lane Theatre from February to July
2008. The operations from the play resulted in a net loss to us of
$304,000.
The play
STOMP has been playing in our Orpheum Theatre since prior to the time we
acquired the theater in 2001. Messrs. James J. Cotter and Michael
Forman own an approximately 5% interest in that play, an interest that they have
held since prior to our acquisition of the theater.
Note 27 – Subsequent
Events
Trust Preferred
Securities
During
the first quarter of 2009, we took advantage of current market illiquidity for
securities such as our Trust Preferred Securities to repurchase $22.9 million in
face value of those securities for $11.5 million.
Place 57 Retail Condominium
Sale
The
remaining retail condominium of our Place 57 joint venture was sold in February
2009 for approximately $4.0 million. Based on the closing statements
of the sale, we estimate our share of the earnings to be approximately
$800,000.
Malulani Investments
Litigation
On March
11, 2009, we and Magoon Acquisition and Development, LLC (“Magoon LLC”) agreed
to terms of settlement (the “Settlement Terms”) with respect to that certain
lawsuit entitled 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) (See Note 19 –
Commitments and
Contingencies). Under the Settlement Terms, we and
Magoon LLC will receive $2.5 million in cash, a $6.75 million three year 6.25%
secured promissory note (issued by TMG), and a ten year “tail interest” in MIL
and TMG which allows us, in effect, to participate in certain distributions made
or received by MIL, TMG and/or, in certain cases, the shareholders of
TMG. However, the tail interest continues only for a period of ten
years and no assurances can be given that we will in fact receive any
distributions with respect to this Tail Interest.
Pursuant
to the Settlement Terms, we will transfer all of our interests in MIL to TMG and
Magoon LLC will transfer all of its interest in MIL and TMG to TMG, and there
will be a mutual release of claims. Mr. Cotter, our Chairman, Chief
Executive Officer and principal shareholder and a director of MIL, is
simultaneously settling his related claims for mutual general releases and
resigning from the Board of Directors of MIL.
Under the
terms of our agreement with Magoon LLC, we are, generally speaking, entitled to
receive, on a priority basis, 100% of any proceeds from any disposition of the
shares in MIL and TMG held by us or Magoon LLC until we (Reading) have recouped
the cost of our investment in MIL and all of our litigation
costs. Accordingly, we will receive virtually all of the cash
proceeds of the settlement, plus virtually all distribution with respect to the
promissory note, until such time as we have recouped both the cost of our
investment in MIL and all of our litigation costs. Thereafter, Magoon
LLC will receive distributions under the promissory note and the Tail Interest
(if any) until it has recouped its investment in MIL and
TMG. Thereafter, any distributions under the Tail Interest, if any,
will be shared between us and Magoon LLC in accordance with the sharing formula
set forth in the Amended and Restated Shareholder Agreement between ourselves
and Magoon LLC. Given the secured nature of the promissory note, we
are reasonably comfortable that we will recoup the full amount of our investment
in MIL and all of our litigation costs from the proceeds of this
settlement.
Schedule
II – Valuation and Qualifying Accounts
|
Description
|
Balance
at beginning of year
|
Additions
charged to costs and expenses
|
Deductions
|
Balance
at end of year
|
||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
Year-ended December 31, 2008 –
Allowance for doubtful accounts
|
$ | 382 | $ | 115 | $ | 100 | $ | 397 | ||||||||
|
Year-ended December 31, 2007 –
Allowance for doubtful accounts
|
$ | 473 | $ | 62 | $ | 153 | $ | 382 | ||||||||
|
Year-ended December 31, 2006 –
Allowance for doubtful accounts
|
$ | 416 | $ | 247 | $ | 190 | $ | 473 | ||||||||
|
Tax
valuation allowance
|
||||||||||||||||
|
Year-ended December 31, 2008 – Tax
valuation allowance
|
$ | 57,210 | $ | 3,380 | $ | -- | $ | 60,590 | ||||||||
|
Year-ended December 31, 2007 – Tax
valuation allowance
|
$ | 56,218 | $ | 992 | $ | -- | $ | 57,210 | ||||||||
|
Year-ended December 31, 2006 – Tax
valuation allowance
|
$ | 58,584 | $ | -- | $ | 2,366 | $ | 56,218 | ||||||||
|
Non-current
tax liability for the year ended December 31, 2008
|
$ | 5,417 | $ | 930 | $ | -- | $ | 6,347 | ||||||||
Item 9
– Change in and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
Item 9A
— Controls and
Procedures
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Securities Exchange
Act Rules 13a-15(f), including maintenance of (i) records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets, and (ii) policies and procedures that provide
reasonable assurance that (a) transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, (b) our
receipts and expenditures are being made only in accordance with authorizations
of management and our Board of Directors and (c) we will prevent or timely
detect unauthorized acquisition, use, or disposition of our assets that could
have a material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of the inherent limitations of any system
of internal control. Internal control over financial reporting is a
process that involves human diligence and compliance and is subject to lapses of
judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or
improper overriding of controls. As a result of such limitations,
there is risk that material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting. However,
these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
criteria established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission. Based on
our evaluation under the COSO framework, our management concluded that our
internal control over financial reporting was effective as of December 31,
2008. The
effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report, which
is included herein.
Disclosure
Controls and Procedures
We have
formally adopted a policy for disclosure controls and procedures that provides
guidance on the evaluation of disclosure controls and procedures and is designed
to ensure that all corporate disclosure is complete and accurate in all material
respects and that all information required to be disclosed in the periodic
reports submitted by us under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods and in the manner
specified in the Securities and Exchange Commission’s rules and
forms. As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures. A Disclosure Committee consisting
of the principal accounting officer, general counsel, chief communication
officer, senior officers of each significant business line and other select
employees assisted the Chief Executive Officer and the Chief Financial Officer
in this evaluation. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as required by the Securities Exchange Act Rule
13a-15(c) as of the end of the period covered by this report.
Changes
in Internal Controls Over Financial Reporting
No
changes in internal control over financial reporting occurred during the last
fiscal quarter that have materially affected, or are likely to materially
affect, our internal control over financial reporting.
Report of Independent
Registered Public Accounting Firm
To the
Board of Directors and Stockholders of
Reading
International, Inc.
Los
Angeles, California
We have
audited the internal control over financial reporting of Reading International,
Inc. and subsidiaries (the "Company") as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2008 of
the Company and our report dated March 16, 2009 expressed an unqualified opinion
on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Deloitte
& Touche LLP
Los
Angeles, California
March 16,
2009
Items 10, 11, 12, 13 and
14
Information
required by Part II (Items 10, 11, 12, 13 and 14) of this From 10-K is herby
incorporated by reference from the Reading International, Inc.’s definitive
Proxy Statement for its 2009 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year.
Item 15 – Exhibits, Financial
Statement Schedules
(a) The
following documents are filed as a part of this report:
1. Financial
Statements
The following financial statements are
filed as part of this report under Item 8 “Financial Statements and
Supplementary Data.”
|
Description
|
Page
|
2. Financial Statement Schedules for
the years ended December 31, 2008, 2007 and 2006
|
(b)
|
Exhibits Required by Item 601
of Regulation S-K
|
See Item
(a)3. above.
|
(c)
|
Financial Statement
Schedule
|
See Item
(a)2. above.
Following are consolidated financial statements and notes of
205-209 EAST 57th STREET
ASSOCIATES, LLC for the periods indicated. We are required to include
in our Report on Form 10-K unaudited financial statements for the year ended
December 31, 2008 and audited financial statements for the years ended December
31, 2007 and 2006.
205-209
East 57th Street
Associates, LLC
Balance
Sheets
December
31, 2008 and 2007
(U.S.
dollars in thousands)
|
December 31,
|
||||||||
|
2008
(unaudited)
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Real
Estate:
|
||||||||
|
Land
|
$ | -- | $ | 780 | ||||
|
Construction
and development costs
|
-- | 1,641 | ||||||
|
Commercial
unit (net of depreciation and amortization)
|
2,446 | -- | ||||||
|
Residential
manager’s apartment (net of depreciation)
|
646 | 659 | ||||||
|
Negotiable
certificates – real estate tax abatements
|
-- | 46 | ||||||
|
Total
real estate
|
3,092 | 3,126 | ||||||
|
Other
Assets:
|
||||||||
|
Cash
and cash equivalents
|
1,513 | 1,933 | ||||||
|
Deferred
leasing commissions
|
267 | -- | ||||||
|
Insurance
recovery receivable
|
338 | -- | ||||||
|
Security
deposits
|
8 | 8 | ||||||
|
Prepaid
income taxes
|
57 | 347 | ||||||
|
Other
assets
|
15 | 18 | ||||||
|
Total
other assets
|
2,198 | 2,306 | ||||||
|
Total
assets
|
$ | 5,290 | $ | 5,432 | ||||
|
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 155 | $ | 440 | ||||
|
Due
to affiliate
|
2 | 417 | ||||||
|
Deferred
rent
|
45 | 320 | ||||||
|
Total liabilities
|
202 | 1,177 | ||||||
|
Commitments
and Contingencies (Note 13)
|
||||||||
|
Members’
Equity
|
5,088 | 4,255 | ||||||
|
Total
Liabilities And Members’ Equity
|
$ | 5,290 | $ | 5,432 | ||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Statements
of Operations
For
The Three Years Ended December 31, 2008, 2007 and 2006
(U.S.
dollars in thousands)
|
Years Ended December 31,
|
||||||||||||
|
2008
(Unaudited)
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Sales
– condominium units
|
$ | -- | $ | 25,401 | $ | 117,329 | ||||||
|
Contract
termination income
|
340 | -- | -- | |||||||||
|
Dividends
and interest
|
74 | 168 | 140 | |||||||||
|
Rental
income
|
314 | 104 | -- | |||||||||
|
Total revenue
|
728 | 25,673 | 117,708 | |||||||||
|
Expenses:
|
||||||||||||
|
Costs
of sales of condominium units
|
(344 | ) | 16,987 | 75,382 | ||||||||
|
Selling
costs
|
-- | 1,369 | 6,523 | |||||||||
|
Marketing
and advertising
|
1 | 184 | 740 | |||||||||
|
Sponsor
common charges
|
10 | 70 | 421 | |||||||||
|
Utilities
|
-- | 9 | 90 | |||||||||
|
Contributions
|
-- | -- | 6 | |||||||||
|
Depreciation
|
33 | 21 | -- | |||||||||
|
Amortization
|
14 | -- | -- | |||||||||
|
Miscellaneous
|
-- | 46 | 5 | |||||||||
|
Professional
fees
|
133 | -- | -- | |||||||||
|
Real
estate taxes
|
1 | -- | -- | |||||||||
|
New
York City unincorporated business tax
|
47 | 182 | 1,435 | |||||||||
|
Total expenses
|
(105 | ) | 18,868 | 84,602 | ||||||||
|
Net
income (loss)
|
$ | 833 | $ | 6,805 | $ | 33,106 | ||||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Statements
of Changes in Members’ Equity
For
the Three Years Ended December 31, 2008, 2007, and 2006
(U.S.
dollars in thousands)
|
PGA
Clarett 1, LLC
|
PGA
Clarett 2, LLC
|
PGA
Clarett 3, LLC
|
PGA
Clarett 4, LP
|
Clarett
Partners, LLC
|
CC
Sutton Manager, LLC
|
Citadel
Cinemas, Inc.
|
Total
|
|||||||||||||||||||||||||
|
Members
equity – January 1, 2006 (Unaudited)
|
$ | 1,707 | $ | 1,663 | $ | 178 | $ | 1,439 | $ | 83 | $ | 3,242 | $ | 2,771 | $ | 11,083 | ||||||||||||||||
|
Member
distributions
|
(2,813 | ) | (2,739 | ) | (293 | ) | (2,372 | ) | (2,503 | ) | (6,854 | ) | (5,858 | ) | (23,432 | ) | ||||||||||||||||
|
Net
income
|
1,355 | 1,319 | 141 | 1,143 | 11,188 | 9,684 | 8,276 | 33,106 | ||||||||||||||||||||||||
|
Members
equity – December 31, 2006 (Audited)
|
249 | 243 | 26 | 210 | 8,768 | 6,072 | 5,189 | 20,757 | ||||||||||||||||||||||||
|
Member
distributions
|
(280 | ) | (272 | ) | (29 | ) | (236 | ) | (9,846 | ) | (6,817 | ) | (5,827 | ) | (23,307 | ) | ||||||||||||||||
|
Net
income
|
82 | 79 | 8 | 69 | 2,875 | 1,990 | 1,702 | 6,805 | ||||||||||||||||||||||||
|
Members
equity – December 31, 2007 (Audited)
|
51 | 50 | 5 | 43 | 1,797 | 1,245 | 1,064 | 4,255 | ||||||||||||||||||||||||
|
Member
distributions
|
-- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Net
income
|
131 | 127 | 14 | 110 | -- | 243 | 208 | 833 | ||||||||||||||||||||||||
|
Members
equity – December 31, 2008 (Unaudited)
|
$ | 182 | $ | 177 | $ | 19 | $ | 153 | $ | 1,797 | $ | 1,488 | $ | 1,272 | $ | 5,088 | ||||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Statements
of Cash Flows
For
the Three Years Ended December 31, 2008, 2007 and 2006
(U.S.
dollars in thousands)
|
Year Ended December 31,
|
||||||||||||
|
2008
(Unaudited)
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
income
|
$ | 833 | $ | 6,805 | $ | 33,106 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Costs
of sales of condominium units
|
69 | 16,987 | 75,382 | |||||||||
|
Amortization
of deferred rent
|
(275 | ) | (103 | ) | -- | |||||||
|
Depreciation
|
33 | 21 | -- | |||||||||
|
Amortization
|
14 | -- | -- | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Additions to land, construction
and development costs
|
(69 | ) | (1,223 | ) | (19,689 | ) | ||||||
|
Acquisition
of negotiable certificates
|
-- | -- | (643 | ) | ||||||||
|
Decrease (increase) in prepaid
taxes
|
291 | (347 | ) | -- | ||||||||
|
Increase in insurance recovery
receivable
|
(338 | ) | -- | -- | ||||||||
|
Decrease (increase) in other
assets
|
2 | (17 | ) | -- | ||||||||
|
Decrease in security
deposits
|
-- | -- | 58 | |||||||||
|
Increase (decrease) in accounts
payable and accrued expenses
|
(285 | ) | 100 | (2,734 | ) | |||||||
|
Increase (decrease) in income
taxes payable
|
-- | (860 | ) | 860 | ||||||||
|
Increase (decrease) in
retainage payable
|
-- | (751 | ) | (953 | ) | |||||||
|
Increase (decrease) in due to
affiliates
|
(415 | ) | 179 | 263 | ||||||||
|
Net
cash provided by (used in) operating activities
|
(140 | ) | 20,791 | 85,650 | ||||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Proceeds from construction
loan
|
-- | -- | 19,224 | |||||||||
|
Repayment of construction
loan
|
-- | -- | (77,156 | ) | ||||||||
|
Member
distributions
|
-- | (23,307 | ) | (23,432 | ) | |||||||
|
Net
cash used in financing activities
|
-- | (23,307 | ) | (81,364 | ) | |||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Increase in deferred leasing
commissions
|
(280 | ) | -- | -- | ||||||||
|
Net
cash used in investing activities
|
(280 | ) | -- | -- | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(420 | ) | (2,516 | ) | 4,286 | |||||||
|
Cash
and cash equivalents – beginning of year
|
1,933 | 4,449 | 163 | |||||||||
|
Cash
and cash equivalents – end of year
|
$ | 1,513 | $ | 1,933 | $ | 4,449 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid during the year
for:
|
||||||||||||
|
Interest
which was capitalized
|
$ | -- | $ | -- | $ | 4,244 | ||||||
|
Income
taxes
|
$ | -- | $ | 1,390 | $ | 575 | ||||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Notes
to Financial Statements
December
31, 2008
Note 1 - Organization and
Business Purpose
205-209
East 57th Street Associates, LLC (“the Company”) was formed as a limited
liability company under the laws of the State of Delaware. The
Company was formed to acquire, finance, develop, own, operate, lease and sell
property located at 205-209 East 57th Street, New York, New York. The
Company completed construction of the property, known as “Place 57”, a 143,000
square foot, thirty-six story building comprised of 68 residential condominium
units and one commercial condominium unit. The company did not sell
and still owns the commercial unit and the manager’s residential
unit. The commercial unit is currently leased to an unrelated third
party tenant as discussed in Note 8. The manager’s residential unit
is leased to the condominium association (Place 57) as discussed in Note
9.
From
September 3, 2003 (the “inception date”) through September 14, 2004 the Company
was a single member limited liability company with Clarett Capital, LLC
(“Clarett Capital”) as the sole member. Effective September 14, 2004,
the operating agreement (“the Agreement”) was amended and restated to provide
for the admission of the following new members: Citadel Cinemas, Inc.
(“Citadel”) 25%, CC Sutton Manager, LLC (“CC Sutton”) 29.25%, PGA
Clarett 1, LLC (“PGA 1”) 8.352%, PGA Clarett 2, LLC (“PGA 2”) 15%, PGA Clarett
3, LLC (“PGA 3”) 21.648% and Clarett Partners, LLC (“Clarett Partners”)
0.75%.
Effective
December 30, 2004 PGA Clarett 1, LLC assigned 28.820% of its percentage interest
and PGA 3, assigned 80.791% of its percentage interest to a new member, PGA
Clarett 4, LP (“PGA 4”).
Net
income or loss and distributions are allocated to the members in accordance with
the terms of the Company’s operating agreement. The members of a
limited liability company are generally not individually liable for the
obligations of the limited liability company.
Note 2 - Summary of
Significant Accounting Policies
|
(a)
|
Income
Taxes
|
The
Company was formed as a limited liability company and has elected to be taxed as
a partnership. Components of the Company’s net income or loss are
taxable to the members. Accordingly, no provision for federal or
state income taxes is provided for in the accompanying financial
statements.
The
construction project is located in the City of New York where an entity level
income tax is imposed on unincorporated businesses, which, for the years ended
December 31, 2008 (unaudited) and 2007 amounted to approximately $47,132 and
$182,502, respectively.
In
June 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS No. 109.”
(“Interpretation No. 48”), Interpretation No. 48 defines a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. Interpretation No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. On December 30, 2008, the FASB
issued a Staff Position (FSP FIN 48-3 “Effective Date of FASB Interpretation No.
48 for Certain Nonpublic Entities”) formally permitting nonpublic entities to
defer implementing FIN 48 for one year, effective for fiscal years beginning
after December 15, 2008. The Company has elected to defer the
implementation of FIN 48 under FSP FIN 48-3 to the year ended December 31,
2009.
|
(b)
|
Use
of Estimates in Financial Statement
Presentation
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies, if any, at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates include the allocation of costs to
units sold, determination of remaining costs to complete and estimated sales
prices of unsold units.
|
(c)
|
Revenue
Recognition
|
Revenue
has been recognized upon the closing of each condominium unit. Rents
are recognized over the non-cancelable term of the related leases on a
straight-line basis.
|
(d)
|
Marketing
and Advertising
|
Marketing
and advertising costs are charged to operations when incurred. The
Company expensed $596 and $184,122 of marketing and promotion costs for the
years ended December 31, 2008 (unaudited) and 2007, respectively.
|
(e)
|
Capitalized
Costs
|
The
Company capitalized all costs associated with the development
project. Capitalized costs include, but are not limited to,
construction and development costs, construction period interest, real estate
taxes and architect, development and professional fees.
|
(f)
|
Costs
of Sales of Condominium
Units
|
In
connection with the sale of condominium units during 2007, land, capitalized
construction and development costs and negotiable certificates for real estate
tax abatements have been expensed based on the total costs incurred and the
estimated costs to complete, multiplied by the relative sales value of units
sold. In addition, included in costs of sales of condominium units
for the year ended December 31, 2007 is the imputed fair value of the rental of
the residential manager unit of $423,506.
|
(g)
|
Cash
and Cash
Equivalents
|
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist
of an interest-bearing money fund account.
|
(h)
|
Depreciation
|
Depreciation
of the residential manager’s apartment and the commercial unit are provided
using the straight-line method over the estimated useful life of forty
years. Depreciation expense on the residential manager’s apartment
amounted to $12,421 and $20,702 for the years ended December 31, 2008
(unaudited) and 2007, respectively. Depreciation expense on the
commercial unit amounted to $20,518 and $0 for the years ended December 31, 2008
(unaudited) and 2007, respectively.
|
(i)
|
Amortization
|
In 2003,
the Company purchased negotiable certificates to obtain real estate tax
abatements (see Note 5). The costs of these certificates allocated to
the unsold commercial and residential manager units are amortized over the
useful life of the certificates, which is ten years.
During
2008 (unaudited), the Company paid a leasing commission of $280,017 related to
the rental of the commercial unit. This commission is amortized over
ten years, which is the life of the lease. Amortization for both the
negotiable certificates and leasing commissions combined amounted to $13,539 and
$0 for the years ended December 31, 2008 (unaudited) and 2007,
respectively.
Note 3 -
Land
At
December 31, 2008 (unaudited) and 2007, land was comprised of the following
(dollars in thousands):
|
Year Ended December 31,
|
||||||||
|
2008
(Unaudited)
|
2007
|
|||||||
|
Direct
purchase cost
|
$ | 15,339 | $ | 15,339 | ||||
|
Air
rights
|
6,925 | 6,925 | ||||||
|
Mortgage
recording tax
|
1,953 | 1,953 | ||||||
|
Brokerage
fees
|
500 | 500 | ||||||
|
Demolition
costs
|
600 | 600 | ||||||
|
Title
insurance
|
256 | 256 | ||||||
|
Total
land
|
25,573 | 25,573 | ||||||
|
Less: costs
allocated to condominium units sold
|
24,611 | 24,611 | ||||||
|
Less: cost
allocated to residential manager’s apartment
|
182 | 182 | ||||||
|
Less: cost
allocated to commercial unit
|
780 | -- | ||||||
|
Net
land value
|
$ | -- | $ | 780 | ||||
Note 4 - Construction and
Development Costs
Construction
and development costs include direct and indirect construction
costs. Direct construction costs (“Hard costs”) include those costs
directly related to the construction of the development
project. Indirect costs (“Soft costs”) include costs that have been
capitalized, such as construction period interest and financing costs, real
estate and recording taxes, insurance, development fees and architect
fees.
At
December 31, 2008 (unaudited), 2007, construction and development costs are
comprised of the following (dollars in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2008
(Unaudited)
|
2007
|
2006
|
||||||||||
|
Hard
costs
|
$ | 49,426 | $ | 49,426 | $ | 48,355 | ||||||
|
Soft
costs
|
18,588 | 18,588 | 18,451 | |||||||||
|
Total
construction and development costs
|
68,014 | 68,014 | 66,806 | |||||||||
|
Less: costs
allocated to condominium units sold
|
65,887 | 65,887 | 53,856 | |||||||||
|
Less: cost
allocated to residential manager’s apartment
|
486 | 486 | -- | |||||||||
|
Less: cost
allocated to commercial unit
|
1,641 | -- | -- | |||||||||
|
Net
construction and development costs
|
$ | -- | $ | 1,641 | $ | 12,950 | ||||||
Note 5 - Negotiable
Certificates
In
December 2003, the Company entered into an agreement to purchase 61 negotiable
certificates under Section 421a of the New York State Real Property tax law in
order to obtain real estate tax abatements. Section 421a provides
that property constructed north of 14th Street in Manhattan, on vacant or
underutilized land, is eligible for partial real estate tax
abatements. Abatements are for ten years and provide for limited real
estate tax reductions. The agreement contained an option to purchase
an additional seven certificates, which the Company exercised in March
2004. The final purchase price was $863,083, which is equal to the
sum of $793,083 for the original 61 certificates plus $10,000 for each of the
seven additional certificates.
In
February 2006, the Company purchased an additional 17 negotiable 421a
certificates for $340,000.
In May
2006, the Company paid a Preliminary Certificate of Eligibility Fee to The City
of New York for $302,681, which is required to be paid in conjunction with these
negotiable certificates.
At
December 31, 2008 (unaudited) and 2007 negotiable certificates is comprised of
the following (dollars in thousands):
|
Year Ended December 31,
|
||||||||
|
2008
(Unaudited)
|
2007
|
|||||||
|
421a
certificates
|
$ | 1,203 | $ | 1,203 | ||||
|
Preliminary
certificate of eligibility fee
|
303 | 303 | ||||||
|
Total
negotiable certificates
|
1,506 | 1,506 | ||||||
|
Less: costs
allocated to condominium units sold
|
1,449 | 1,449 | ||||||
|
Less: cost
allocated to residential manager’s apartment
|
11 | 11 | ||||||
|
Less: cost
allocated to commercial unit
|
46 | -- | ||||||
|
Net
negotiable certificates
|
$ | -- | $ | 46 | ||||
Note 6 - Air
Rights
In 2003,
the Company purchased 25,550 square feet of inclusionary air rights in order to
generate an inclusionary building bonus (air rights) under The Inclusionary
Housing Program, as defined in the Zoning Resolution of the City of New
York. The purchase price was $2,499,750, which has been capitalized
and is included in land.
On July
21, 2004, the Company entered into an exchange agreement with Joseph E. Marx
Company, Inc. (“Marx”) to exchange like-kind property. The Company
exchanged previously acquired land located at 957 Third Avenue, New York, New
York, plus cash of $1,300,000, for excess floor area rights (“air rights”)
having an agreed value of $4,410,000. The value of the air rights has
been capitalized and is included in land.
127,391
square feet out of a total of 128,560 square feet of inclusionary air rights
were utilized to build the condominium development project. The
Company estimates that the remaining 1,169 square feet of development air rights
will not be able to be sold separately and, accordingly, are included in costs
of sales of condominium units.
Note 7 - Condominium
Sales
In 2004,
the Company initiated a condominium offering plan, which obtained the necessary
approvals in 2005 and 2006. The condominium consists of 68
residential units and one commercial unit. As of December 31, 2007,
67 residential units had been sold.
One
residential unit is retained by the Company and leased to the condominium
association at one dollar per year for its residential manager. This
unit is leased for a five-year period, which commenced with the date of the
first unit closing. The condominium association is responsible for
real estate taxes, common charges and other operating expenses for this
unit.
Note 8 - Residential
Manager’s Apartment
At
December 31, 2008 (unaudited) and 2007, the residential manager’s apartment is
comprised of the following (dollars in thousands):
|
Year Ended December 31,
|
||||||||
|
2008
(Unaudited)
|
2007
|
|||||||
|
Land
|
$ | 183 | $ | 183 | ||||
|
Hard
and soft construction costs
|
486 | 486 | ||||||
|
Negotiable
certificates
|
11 | 11 | ||||||
| 680 | 680 | |||||||
|
Less:
accumulated depreciation
|
(34 | ) | (21 | ) | ||||
|
Total
cost
|
$ | 646 | $ | 659 | ||||
The
company is leasing the residential manager’s unit to the condominium association
at one dollar per year for use by its residential manager. This unit
is leased for a five-year period, which commenced with the date of the first
unit closing. The condominium association is responsible for real
estate taxes, common area charges and other operating expenses for this
unit.
Note 9 – Commercial
Unit
At
December 31, 2008 (unaudited), the commercial is comprised of the following
(dollars in thousands):
|
Land
|
$ | 780 | ||
|
Hard
and soft costs
|
1,641 | |||
|
Negotiable
certificates
|
46 | |||
| 2,467 | ||||
|
Less:
accumulated depreciation
|
(21 | ) | ||
| $ | 2,446 |
On July
15, 2008, the Company entered into a ten-year rental agreement for the
commercial unit. The rental agreement provided for 150 days of free
rent beginning on the lease commencement date of July 15, 2008. The
base rent is $466,875 for years one through three, $508,894 for years four
through six, $554,694 for years seven through nine and $604,617 for year
ten.
Note 10 - Deferred
Rent
The
Company recognized deferred rent on the below market lease of the residential
manager’s unit as discussed in Note 8. The Company estimates the fair
value of the rent to be approximately $7,000 per month, which over the life of
the lease amounts to approximately $420,000.
The
Company recognized rental income from the commercial unit on a straight-line
basis. The tenant received 150 days of free rent that concluded on
December 11, 2008. The Company amortized $275,305 and $103,469 of
deferred rent into rental income for both the residential manager and commercial
unit for the years ended December 31, 2008 (unaudited) and 2007,
respectively.
The
deferred rent liability amounted to $44,733 and $320,037 for the years ended
December 31, 2008 (unaudited) and 2007, respectively.
Note 11 - Selling
Costs
At
December 31, 2008 (unaudited) and 2007, selling costs are comprised of the
following (dollars in thousands):
|
2008
(Unaudited)
|
2007
|
|||||||
|
Broker
fees
|
$ | -- | $ | 755 | ||||
|
Commissions
|
-- | 614 | ||||||
|
Total
selling costs
|
$ | -- | $ | 1,369 | ||||
Note 12 - Related Party
Transactions
(a) Due
to Affiliate
At
December 31, 2008 (unaudited) and 2007 the Company owed $2,000 and $416,630,
respectively, to The Clarett Group (“Clarett Group”) for marketing
commissions and other reimbursable expenses paid on behalf of the
Company. Members of the Company are also members in Clarett
Group.
(b) Commissions
Clarett
Group had been designated as the exclusive sales agent for selling residential
units pursuant to a Sales Agreement. The Sales Agreement provides for
a commission equal to four percent of the gross sales price of each unit sold
and a sales commission of two percent when sales involve a third-party
broker. For the years ended December 31, 2008 (unaudited) and 2007,
the Company incurred $0 and $614,080 respectively, of commissions to Clarett
Group.
Note 13 - Commitments and
Contingencies
(a) Sponsor
Common Charges
The
Company is the sponsor for the condominium and is obligated to pay all common
charges, special assessments and real estate taxes allocated to any unsold
residential units or commercial units in accordance with the provisions of the
By-Laws. During the years ended December 31, 2008 (unaudited) and
2007, the Company incurred $10,248 and $69,779, respectively, of sponsor common
charges, which is reflected in the accompanying statements of
income.
(b) Estimated
Costs to Complete
At
December 31, 2008 (unaudited), the Company estimates that there will be no
additional significant costs to complete.
Note 14 - Construction
Manager Incentive
The
construction management agreement provided for an incentive fee to be paid to
the construction manager in the event that the total cost of construction, as
defined, is less than the guaranteed maximum price of $49,217,811, as
defined. Total project costs exceeded the original projected cost of
construction. Accordingly, no construction manager fee was
paid.
Note 15 - Concentration of
Risk
The
Company’s cash balances are deposited in financial institutions. The
Company maintained bank balances that at times exceeded the federally insured
limit.
The
Company and the property are located in New York City and are subject to local
economic conditions.
Note 16 – Subsequent
Events
During
February 2009, the Company sold the commercial unit for $4,000,000.
Report
of Independent Auditors
To the
Members of
205-209
East 57th Street Associates, LLC:
In our
opinion, the accompanying balance sheets and the related statements of
operations, changes in members' equity, and cash flows present fairly, in all
material respects, the financial position of 205-209 East 57th Street
Associates, LLC (the "Company") at December 31, 2007 and 2006, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
February
11, 2009
Following are consolidated financial statements and notes of
Mt. Gravatt Cinemas Joint Venture for the periods indicated. We are
required to include in our Report on Form 10-K unaudited financial statements
for the years ended December 31, 2008 and 2006 and audited financial statements
for the year ended December 31, 2007.
Mt.
Gravatt Cinemas Joint Venture
Income
Statement
For
the Year Ended December 31, 2008
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
2006
(unaudited)
|
||||||||||||
|
Revenue
from rendering services
|
7
|
$ | 9,229,454 | $ | 9,095,218 | $ | 8,777,374 | |||||||||
|
Revenue
from sale of concession
|
3,664,757 | 3,546,654 | 3,269,303 | |||||||||||||
|
Total
Revenue
|
$ | 12,894,211 | $ | 12,641,872 | $ | 12,046,677 | ||||||||||
|
Film
expenses
|
(3,628,015 | ) | (3,549,246 | ) | (3,390,265 | ) | ||||||||||
|
Cost
of concession
|
(1,022,055 | ) | (893,473 | ) | (814,500 | ) | ||||||||||
|
Depreciation
and amortization expenses
|
10
|
(682,943 | ) | (653,342 | ) | (722,828 | ) | |||||||||
|
Personnel
expenses
|
8
|
(1,858,654 | ) | (1,839,730 | ) | (1,684,754 | ) | |||||||||
|
Occupancy
expenses
|
(1,436,093 | ) | (1,248,608 | ) | (1,280,726 | ) | ||||||||||
|
House
expenses
|
(909,990 | ) | (973,931 | ) | (796,373 | ) | ||||||||||
|
Advertising
and marketing costs
|
(297,594 | ) | (285,455 | ) | (283,183 | ) | ||||||||||
|
Management
fees
|
(237,635 | ) | (223,043 | ) | (216,396 | ) | ||||||||||
|
Repairs
and maintenance expense
|
(187,539 | ) | (167,877 | ) | (246,676 | ) | ||||||||||
|
Results
for operating activities
|
$ | 2,633,693 | $ | 2,807,167 | $ | 2,610,976 | ||||||||||
|
Finance
income
|
33,400 | 44,340 | 50,874 | |||||||||||||
|
Finance
expense
|
-- | -- | (82,494 | ) | ||||||||||||
|
Net
finance income(expense)
|
9
|
$ | 33,400 | $ | 44,340 | $ | (31,620 | ) | ||||||||
|
Profit
for the period
|
$ | 2,667,093 | $ | 2,851,507 | $ | 2,579,356 | ||||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Statement
of Changes in Members’ Equity
For
the Year Ended December 31, 2008
|
In
AUS$
|
Reading
Exhibition Pty Ltd
|
Village
Roadshow Exhibition Pty Ltd
|
Birch
Carroll & Coyle Limited
|
Total
|
||||||||||||
|
Members’
Equity – January 1, 2006 (unaudited)
|
$ | 1,160,774 | $ | 1,160,774 | $ | 1,160,774 | $ | 3,482,322 | ||||||||
|
Member
distributions
|
(400,000 | ) | (400,000 | ) | (400,000 | ) | (1,200,000 | ) | ||||||||
|
Net
profit
|
859,785 | 859,785 | 859,786 | 2,579,356 | ||||||||||||
|
Members’
Equity – December 31, 2006 (Unaudited)
|
$ | 1,620,559 | $ | 1,620,559 | $ | 1,620,560 | $ | 4,861,678 | ||||||||
|
Member
distributions
|
(1,050,000 | ) | (1,050,000 | ) | (1,050,000 | ) | (3,150,000 | ) | ||||||||
|
Net
profit
|
950,502 | 950,502 | 950,503 | 2,851,507 | ||||||||||||
|
Members’
Equity – December 31, 2007
|
$ | 1,521,061 | $ | 1,521,061 | $ | 1,521,063 | $ | 4,563,185 | ||||||||
|
Member
distributions
|
(1,170,000 | ) | (1,170,000 | ) | (1,170,000 | ) | (3,510,000 | ) | ||||||||
|
Net
profit
|
889,031 | 889,031 | 889,031 | 2,667,093 | ||||||||||||
|
Members’
Equity – December 31, 2008 (Unaudited)
|
$ | 1,240,092 | $ | 1,240,092 | $ | 1,240,094 | $ | 3,720,278 | ||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Balance
Sheet
As
of December 31, 2008
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
|||||||||
|
ASSETS
|
||||||||||||
|
Current
Assets
|
||||||||||||
|
Cash
and cash equivalents
|
13
|
$ | 935,623 | $ | 1,474,386 | |||||||
|
Trade
receivables
|
12
|
91,712 | 97,597 | |||||||||
|
Inventories
|
11
|
115,630 | 88,317 | |||||||||
|
Other
assets
|
12
|
914 | 534 | |||||||||
|
Total
current assets
|
$ | 1,143,879 | $ | 1,660,834 | ||||||||
|
Property,
plant and equipment
|
10
|
3,446,083 | 3,897,870 | |||||||||
|
Total
non-current assets
|
$ | 3,446,083 | $ | 3,897,870 | ||||||||
|
Total
assets
|
$ | 4,589,962 | $ | 5,558,704 | ||||||||
|
Current
Liabilities
|
||||||||||||
|
Payables
|
15
|
680,470 | 794,733 | |||||||||
|
Employee
benefits
|
14
|
57,082 | 67,745 | |||||||||
|
Deferred
revenue
|
16
|
63,529 | 77,645 | |||||||||
|
Total
current liabilities
|
$ | 801,081 | $ | 940,123 | ||||||||
|
Employee
benefits
|
14
|
68,603 | 55,396 | |||||||||
|
Total
non-current liabilities
|
$ | 68,603 | $ | 55,396 | ||||||||
|
Total
liabilities
|
$ | 869,684 | $ | 995,519 | ||||||||
|
Net
assets
|
$ | 3,720,278 | $ | 4,563,185 | ||||||||
|
Equity
|
||||||||||||
|
Contributed
equity
|
$ | 202,593 | 202,593 | |||||||||
|
Retained
earnings
|
3,517,685 | 4,360,592 | ||||||||||
|
Total
equity
|
$ | 3,720,278 | $ | 4,563,185 | ||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Statement
of Cash Flows
For
the Year Ended December 31, 2008
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
2006
(unaudited)
|
||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Cash
receipts from customers
|
$ | 12,866,696 | $ | 12,617,843 | $ | 12,184,040 | ||||||||||
|
Cash
paid to suppliers and employees
|
(9,697,703 | ) | (8,881,633 | ) | (9,195,814 | ) | ||||||||||
|
Cash
generated from operations
|
$ | 3,168,993 | $ | 3,736,210 | $ | 2,988,226 | ||||||||||
|
Interest
received
|
9
|
33,400 | 44,340 | 50,874 | ||||||||||||
|
Interest
paid
|
9
|
-- | -- | (82,494 | ) | |||||||||||
|
Net
cash from operating activities
|
20
|
$ | 3,202,393 | $ | 3,780,550 | $ | 2,956,606 | |||||||||
|
|
||||||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Acquisition
of property, plant and equipment
|
10
|
(231,156 | ) | (456,537 | ) | (170,042 | ) | |||||||||
|
Net
cash from investing activities
|
$ | (231,156 | ) | $ | (456,537 | ) | $ | (170,042 | ) | |||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Distributions
to Joint Venturers
|
(3,510,000 | ) | (3,150,000 | ) | (1,200,000 | ) | ||||||||||
|
Payment
of finance lease liability
|
-- | -- | (1,416,281 | ) | ||||||||||||
|
Net
cash from financing activities
|
$ | (3,510,000 | ) | $ | (3,150,000 | ) | $ | (2,616,281 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(538,763 | ) | 174,013 | 170,283 | ||||||||||||
|
Cash
and cash equivalents at January 1
|
1,474,386 | 1,300,373 | 1,130,090 | |||||||||||||
|
Cash
and cash equivalents at December 31
|
13
|
$ | 935,623 | $ | 1,474,386 | $ | 1,300,373 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Notes
to Financial Statements
December
31, 2008
1. Reporting
Entity
Mt.
Gravatt Cinemas Joint Venture (the “Joint Venture”) is a legal joint venture
between Birch Carroll & Coyle Limited, Village Roadshow Exhibition Pty Ltd
and Reading Exhibition Pty Ltd. The Joint Venture is domiciled and
provides services solely in Australia. The address of the Joint
Venture’s registered office is 49 Market Street, Sydney NSW 2000. The
Joint Venture primarily is involved in the exhibition of motion pictures in
cinemas.
The joint
venture is to continue in existence until the Joint Venture is terminated and
associated underlying assets have been sold and the proceeds of sale distributed
upon agreement of the members. All distributions of earnings are
required to be agreed upon and distributed evenly to the three Joint
Venturers. The three Joint Venturers will evenly contribute any
future required contributions.
For local
reporting purposes, the Joint Venture has been deemed a non-reporting entity
within the framework of Australian Accounting Standards (AASBs).
2. Basis
of Presentation
(a) Statement
of Compliance
These
financial statements have been prepared in accordance with the International
Financial Reporting Standards (IFRSs) and interpretations issued by the
International Accounting Standards Board.
The
financial year end of the Joint Venture is June 30. For purposes of
the use of these financial statements by one of the Joint Venturers, these
financial statements have been prepared on a 12-month period basis ending on
December 31.
(b) Basis
of Measurement
The
financial statements have been prepared on the historical cost basis except for
assets and liabilities stated at fair value as disclosed in note
4. The methods used to measure fair values are discussed further in
note 4.
(c) Functional
and Presentation Currency
These
financial statements are presented in Australian dollars, which is also the
Joint Venture’s functional currency.
(d) Use
of Estimates and Judgments
The
preparation of financial statements requires management to make judgements,
estimates and assumptions that affect the application of accounting policies and
the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these
estimates.
Estimates
and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the period
in which the estimate is revised and in any future periods
affected.
In
particular, information about significant areas of estimation uncertainty and
critical judgements in applying accounting policies that have the most
significant effect on the amount recognized in the financial statements are
described in note 17 financial instruments.
3. Significant
Accounting Policies
The
accounting policies set out below have been applied consistently to all periods
presented in these financial statements.
(a) Financial
Instruments
Non-derivative
financial instruments comprise trade receivables, cash and cash equivalents, and
trade payables.
Non-derivative
financial instruments are recognized initially at fair value plus, for
instruments not at fair value through profit or loss, any directly attributable
transaction costs. Subsequent to initial recognition non-derivative
financial instruments are measured as described below.
A
financial instrument is recognized if the Joint Venture becomes a party to the
contractual provisions of the instrument. Financial assets are
derecognized if the Joint Venture’s contractual rights to the cash flows from
the financial assets expire or if the Joint Venture transfers the financial
asset to another party without retaining control or substantially all risks and
rewards of the asset. Regular way purchases and sales of financial
assets are accounted for at trade date, i.e., the date that the Joint Venture
commits itself to purchase or sell the asset. Financial liabilities
are derecognized if the Joint Venture’s obligations specified in the contract
expire, are discharged or cancelled.
Cash and
cash equivalents comprise cash balances and call deposits. Bank
overdrafts that are repayable on demand and form an integral part of the Joint
Venture’s cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
Accounting
for finance income and expense is discussed in note 3(k).
(b) Property,
Plant and Equipment
(i) Recognition
and Measurement
Items of
property, plant and equipment are measured at cost less accumulated
depreciation. The cost of property, plant and equipment at July 1,
2004, the date of transition to IFRS, was determined by reference to its fair
value at that date.
Cost
includes expenditures that are directly attributable to the acquisition of the
asset. The cost of self-constructed assets includes the cost of
materials and direct labor, any other costs directly attributable to bringing
the asset to a working condition for its intended use. Costs also may
include purchases of property, plant and equipment. Purchased
software that is integral to the functionality of the related equipment is
capitalized as part of that equipment. Borrowing costs related to the
acquisition or construction of qualifying assets are recognized in profit or
loss as incurred.
When
parts of an item of property, plant and equipment have different useful lives,
they are accounted for as separate items (major components) of property, plant
and equipment.
(ii) Subsequent
Costs
The cost
of replacing part of an item of property, plant and equipment is recognized in
the carrying amount of the item if it is probable that the future economic
benefits embodied within the part will flow to the Joint Venture and its cost
can be measured reliably. The carrying amount of the replaced part is
derecognized. The costs of the day-to-day servicing of property,
plant and equipment are recognized in profit or loss as incurred.
(iii) Depreciation
Depreciation
is recognized in profit or loss on a straight-line basis over the estimated
useful lives of each part of an item of property, plant and
equipment. Leased assets are depreciated over the shorter of the
lease term and their useful lives. Land is not
depreciated.
The
estimated useful lives for the current and comparative periods are as
follows:
|
Leasehold
improvements
|
Shorter
of estimated useful life and term of lease
|
|
Plant
and equipment
|
5.0%
to 33.3%
|
|
Leased
plant and equipment
|
5.0%
to 20.0%
|
Depreciation
methods, useful lives and residual values are reassessed at the reporting
date.
(c) Leased
Assets
Leases in
which the Joint Venture assumes substantially all the risks and rewards of
ownership are classified as finance leases. Upon initial recognition
the leased asset is measured at an amount equal to the lower of its fair value
and the present value of the minimum lease payments. Subsequent to
initial recognition, the asset is accounted for in accordance with the
accounting policy applicable to that asset. The Joint Venture’s one
finance lease expired in June of 2006.
Other
leases are operating leases and are not recognized on the Joint Venture’s
balance sheet.
(d) Inventories
Inventories
are measured at the lower of cost and net realisable value. The cost
of inventories is based on the first-in first-out principle, and includes
expenditure incurred in acquiring the inventories, and other costs incurred in
bringing them to their existing location and condition.
(e) Impairment
(i) Financial
Assets
A
financial asset is assessed at each reporting date to determine whether there
isany objective evidence that it is impaired. A financial asset is
considered to be impaired if objective evidence indicates that one or more
events have had a negativeeffect on the estimated future cash flows of that
asset.
An
impairment loss in respect of a financial asset measured at amortized cost
iscalculated as the difference between its carrying amount, and the present
value of the estimated future cash flows discounted at the original effective
interest rate. An impairment loss in respect of an available-for-sale
financial asset is calculated by reference to its fair value.
All
impairment losses are recognized in profit or loss.
An
impairment loss is reversed if the reversal can be related objectively to an
event occurring after the impairment loss was recognized. For
financial assets measured at amortized cost, the reversal is recognized in
profit or loss.
(ii) Non-financial
Assets
The
carrying amounts of the Joint Venture’s non-financial assets, other than
inventories, are reviewed at each reporting date to determine whether there is
anyindication of impairment. If any such indication exists then the
asset’s recoverable amount is estimated.
The
recoverable amount of an asset or cash-generating unit is the greater of its
value in use and its fair value less costs to sell. In assessing
value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset.
An
impairment loss is recognized if the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment
losses are recognized in profit or loss.
In
respect of other assets, impairment losses recognized in prior periods are
assessed at each reporting date for any indications that the loss has decreased
or no longer exists. An impairment loss is reversed if there has been
a change in the estimates used to determine the recoverable
amount. An impairment loss is reversedonly to the extent that the
asset’s carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation, if no impairment loss had been
recognized.
(f) Employee
Benefits
(i) Long-Term
Employee Benefits
The Joint
Venture’s net obligation in respect of long-term employee benefits is the amount
of future benefit that employees have earned in return for their service in the
current and prior periods plus related on-costs.
(ii) Termination
Benefits
Termination
benefits are recognized as an expense when the Joint Venture is demonstrably
committed, without realistic possibility of withdrawal, to a formal detailed
plan to either terminate employment before the normal retirement date, or to
provide termination benefits as a result of an offer made to encourage voluntary
redundancy. Termination benefits for voluntary redundancies are
recognized if the Joint Venture has made an offer encouraging voluntary
redundancy, it is probable thatthe offer will be accepted, and the number of
acceptances can be estimated reliably.
(iii) Short-Term
Benefits
Liabilities
for employee benefits for wages, salaries, annual leave and sick leave represent
present obligations resulting from employees’ services provided to reporting
date and are calculated at undiscounted amounts based on remuneration wage and
salary rates that the Joint Venture expects to pay as of reporting date
including related on-costs, such as workers compensation insurance and payroll
tax.
(g) Provisions
A
provision is recognized if, as a result of a past event, the Joint Venture has a
present legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of
the time value of money and the risks specific to the liability.
The Joint
Venture is comprised of three parties who share an equal ownership over the
Joint Venture. The Contributed Equity amount represents the initial
investment in the partnership. Distribution to the partners is made
on behalf of the Joint Venture and is recognized through retained
earnings.
(i) Revenue
(i) Rendering
of Service/Sale of Concessions
Revenues
are generated principally through admissions and concession sales with proceeds
received in cash at the point of sale. Service revenue also includes
product advertising and other ancillary revenues which are recognized as income
in the period earned. The Joint Venture recognizes payments received
attributable to the advertising services provided by the Joint Venture under
certain vendor programs as revenue in the period in which services are
delivered.
(ii) Customer
Loyalty Programme
The
cinema operates a loyalty programme where customers accumulate points for
purchases made which entitles them to discounts on future
purchases. The award points are recognized as a separately
identifiable component of the initial sale transaction, by allocating the fair
value of the consideration received between the award points and the components
of the sale such that the award points are recognized at their fair
value. Revenue from the award points is recognized when the points
are redeemed. The amount of the revenue is based on the number of
points redeemed relative to the total number expected to be
redeemed.
(j) Lease
Payments
Payments
made under operating leases recognized in profit or loss on a straight-line
basis over the term of the lease on a basis that is representative of the
pattern of benefit derived from the leased property.
Minimum
lease payments made under finance leases are apportioned between the finance
expense and the reduction of the outstanding liability. The finance
expense is allocated to each period during the lease term so as to produce a
constant periodic rate of interest on the remaining balance of the
liability. Contingent lease payments are accounted for by revising
the minimum lease payments over the remaining term of the lease when the
contingency no longer exists and the lease adjustment is known. The
Joint Venture’s one finance lease expired in June of 2006.
(k) Finance
Income and Expenses
Finance
income comprises interest income on cash held in financial
institutions. Interest income is recognized as it accrues in profit
and loss using the effective interest method.
Finance
expenses comprise interest expense on the finance lease.
(l) Taxes
(i) Goods
and Service Tax
Revenue,
expenses and assets are recognized net of the amount of goods and services tax
(GST), except where the amount of GST incurred is not recoverable from the
taxation authority. In these circumstances, the GST is recognized as
part of the cost of acquisition of the asset or as part of the
expense.
Receivables
and payables are stated with the amount of GST included. The net
amount of GST recoverable from, or payable to, the ATO is included as a current
asset or liability in the balance sheet.
Cash
flows are included in the statement of cash flows on a gross
basis. The GST components of cash flows arising from investing and
financing activities which are recoverable from, or payable to, the ATO are
classified as operating cash flows.
(ii) Income
Tax
Under
applicable Australian law, the Joint Venture is not subject to tax on earnings
generated. Accordingly the Joint Venture does not recognize any
income tax expense, or deferred tax balances. Earnings of the Joint
Venture are taxed on the Joint Venturer level.
(m) Film
Expense
Film
expense is incurred based on a contracted percentage of box office results for
each film. The managing party negotiates terms with each film
distributor on a film-by-film basis. Percentage terms are based on a
sliding scale, with the Joint Venture subject to a higher percentage of box
office results at the beginning of the term and declining each subsequent
week. Different films have different rates dependent upon the
expected popularity of the film, and forecasted success.
(n) New
Standards and Interpretations Not Yet
Adopted
The Joint
Venture has elected to early adopt the following accounting standards and
amendments:
|
·
|
IFRIC
13 Customer Loyalty
Programmes addresses the accounting by entities that operate, or
otherwise participate in, customer loyalty programmes for their customers.
It relates to customer loyalty programmes under which the customer can
redeem credits for awards such as free or discounted goods or
services. The Joint Venture introduced a new customer loyalty
program during the year, and the interpretation was applied
prospectively. The impact of adoption on the year ended
December 31, 2008 is immaterial, and there is no impact on the years ended
December 31, 2007 or December 31,
2006.
|
The
following standards, amendments to standards and interpretations have been
identified as those which may impact the entity in the period of initial
application. They are available for early adoption at December 31,
2008, but have not been applied in preparing this financial report:
|
·
|
Revised
IAS 1 Presentation of Financial Statements (September 2007) introduces as
a financial statement (formerly “primary” statement) the “statement of
comprehensive income”. The revised standard does not change the
recognition, measurement or disclosure of transactions and events that are
required by other IASs. The revised IAS 1 will become mandatory
for the Joint Venture’s December 31, 2009 financial
statements. The Joint Venture has not yet determined the
potential effect of the revised standard on the Joint Venture’s
disclosures.
|
|
·
|
Revised
IAS 23 Borrowing Costs removes the option to expense borrowing costs and
requires that an entity capitalize borrowing costs directly attributable
to the acquisition, construction or production of a qualifying asset as
part of the cost of that asset. The revised IAS 23 will become
mandatory for the Joint Venture’s December 31, 2009 financial statements
and will constitute a change in accounting policy for the Joint
Venture. In accordance with the transitional provisions the
Joint Venture will apply the revised IAS 23 to qualifying assets for which
capitalization of borrowing costs commences on or after the effective
date.
|
4. Determination
of Fair Values
A number
of the Joint Venture’s accounting policies and disclosures require the
determination of fair value, for both financial and non-financial assets and
liabilities. Fair values have been determined for measurement and
disclosure purposes based on the following methods. Where applicable,
further information about the assumptions made in determining fair values is
disclosed in the notes specific to that asset or liability.
(a) Trade
and Other Receivables
The fair
value of trade and other receivables is estimated as the present value of future
cash flows, discounted at the market rate of interest at the reporting
date.
(b) Non-Derivative
Financial Liabilities
Fair
value, which is determined for disclosure purposes, is calculated based on the
present value of future principal and interest cash flows, discounted at the
market rate of interest at the reporting date.
5. Financial
Risk Management
Overview
The Joint
Venture has exposure to the following risks;
|
|
·
|
credit
risk
|
|
|
·
|
liquidity
risk
|
|
|
·
|
market
risk
|
This note
presents information about the Joint Venture’s exposure to each of the above
risks, its objectives, policies and processes for measuring and managing risk,
and the management of capital. Further quantitative disclosures are
included throughout this financial report.
The Joint
Venturers’ have overall responsibility for the establishment and oversight of
the risk management framework and are also responsible for developing and
monitoring risk management policies.
Risk
management policies are established to identify and analyse the risks faced by
the Joint Venture to set appropriate risk limits and controls, and to monitor
risks and adherence to limits. Risk management policies and systems
are reviewed regularly to reflect changes in market conditions and the Joint
Venture’s activities. The Joint Venture, through its training and
management standards and procedures, aims to develop a disciplined and
constructive control environment in which all employees understand their roles
and obligations.
The Joint
Venturers’ oversee how management monitors compliance with the Joint Venture’s
risk management policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the Joint
Venture.
Credit Risk
Credit
risk is the risk of financial loss to the Joint Venture if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Joint Venture’s receivables from
customers.
The Joint
Venture’s exposure to credit risk is influenced mainly by the individual
characteristics of each customer. The demographics of the Joint
Venture’s customer base, including the default risk of the industry
and
country,
in which customers operate, has less of an influence on credit
risk.
The Joint
Venture operates under the managing Joint Venturer’s credit policy under which
each new customer is analysed individually for creditworthiness before the Joint
Venture’s standard payment and delivery terms and conditions are
offered. The Joint Venture’s review includes external ratings, when
available, and in some cases bank references. Purchase limits are
established for each customer. These limits are reviewed
periodically. Customers that fail to meet the Joint Venture’s
benchmark creditworthiness may transact with the Joint Venture only on a
prepayment basis.
The Joint
Venture’s trade receivables relate mainly to the Joint Venture’s screen
advertiser and credit card companies. Customers that are graded as
“high risk” are placed on a restricted customer list, and monitored by the Joint
Venturers.
Liquidity Risk
Liquidity
risk is the risk that the Joint Venture will not be able to meet its financial
obligations as they fall due. The Joint Venture’s approach to
managing liquidity is to ensure, as far as possible, that it will have
sufficient liquidity to meet its liabilities when due, under both normal and
stressed conditions, without incurring unacceptable losses or risking damage to
the Joint Venture’s reputation.
Market Risk
Market
risk is the risk that changes in market prices, such as interest rates will
affect the Joint Venture’s income. The objective of market risk
management is to manage and control market risk exposures within acceptable
parameters, while optimising the return.
There
were no changes in the Joint Venture’s approach to capital management during the
year.
The Joint
Venture is not subject to market risks relating to foreign exchange rates or
equity prices.
6. Segment
Reporting
Business Segments
The
business segment of the Joint Venture is the motion picture exhibition in
cinemas which includes the sale of concession goods. The Joint
Venture did not operate in any other business segments during the financial
years.
Geographical Segments
The Joint
Venture operates one cinema location in Queensland, Australia. The
Joint Venture did not operate into any other geographical locations during the
financial years.
7. Revenue
|
In
AUS$
|
2008
(unaudited)
|
2007
|
2006
(unaudited)
|
|||||||||
|
Box
office revenue
|
$ | 8,472,215 | $ | 8,473,778 | $ | 8,270,416 | ||||||
|
Screen
advertising
|
263,813 | 223,462 | 163,456 | |||||||||
|
Other
cinema services
|
493,426 | 397,978 | 343,502 | |||||||||
|
Revenue
from rendering of services
|
$ | 9,229,454 | $ | 9,095,218 | $ | 8,777,374 | ||||||
8. Personnel
Expenses
|
In
AUS$
|
2008
(unaudited)
|
2007
|
2006
(unaudited)
|
|||||||||
|
Wages
and salaries
|
$ | 1,819,325 | $ | 1,790,110 | $ | 1,652,334 | ||||||
|
Employee
annual leave
|
21,163 | 42,849 | 29,698 | |||||||||
|
Employee
long-service leave
|
18,166 | 6,771 | 2,722 | |||||||||
|
Total
personnel expenses
|
$ | 1,858,654 | $ | 1,839,730 | $ | 1,684,754 | ||||||
9. Finance
Income and Expense
|
In
AUS$
|
2008
(unaudited)
|
2007
|
2006
(unaudited)
|
|||||||||
|
Interest
income on bank balances:
|
$ | 33,400 | $ | 44,340 | $ | 50,874 | ||||||
|
Finance
income
|
$ | 33,400 | $ | 44,340 | $ | 50,874 | ||||||
|
Interest
expense on finance lease commitment
|
$ | -- | $ | -- | $ | (82,494 | ) | |||||
|
Finance
expense
|
$ | -- | $ | -- | $ | (82,494 | ) | |||||
|
Net
finance income and expense
|
$ | 33,400 | $ | 44,340 | $ | (31,620 | ) | |||||
10. Property,
Plant and Equipment
|
In
AUS$
|
Plant
and Equipment
|
Leasehold
Improvements
|
Capital
WIP
|
Total
|
||||||||||||
|
Cost
|
||||||||||||||||
|
Balance
at January 1, 2007
|
$ | 8,252,818 | $ | 2,453,733 | $ | 74,190 | $ | 10,780,741 | ||||||||
|
Additions/(Transfers)
|
417,756 | 112,971 | (74,190 | ) | 456,537 | |||||||||||
|
Balance
at December 31, 2007
|
$ | 8,670,574 | $ | 2,566,704 | $ | -- | $ | 11,237,278 | ||||||||
|
Balance
at January 1, 2008 (unaudited)
|
8,670,574 | 2,566,704 | -- | 11,237,278 | ||||||||||||
|
Additions/(Transfers)
|
231,156 | -- | -- | 231,156 | ||||||||||||
|
Balance
at December 31, 2008 (unaudited)
|
$ | 8,901,730 | $ | 2,566,704 | $ | -- | $ | 11,468,434 | ||||||||
|
In
AUS$
|
Plant
and Equipment
|
Leasehold
Improvements
|
Capital
WIP
|
Total
|
||||||||||||
|
Depreciation
|
||||||||||||||||
|
Balance
at January 1, 2007
|
$ | (6,067,207 | ) | $ | (618,859 | ) | $ | -- | $ | (6,686,066 | ) | |||||
|
Depreciation
and amortization for the year
|
(570,525 | ) | (82,817 | ) | -- | (653,342 | ) | |||||||||
|
Balance
at December 31, 2007
|
$ | (6,637,732 | ) | $ | (701,676 | ) | $ | -- | $ | (7,339,408 | ) | |||||
|
Balance
at January 1, 2008 (unaudited)
|
(6,637,723 | ) | (701,676 | ) | -- | (7,339,408 | ) | |||||||||
|
Depreciation
and amortization for the year
|
(597,033 | ) | (85,910 | ) | -- | (682,943 | ) | |||||||||
|
Balance
at December 31, 2008 (unaudited)
|
$ | (7,234,765 | ) | $ | (787,586 | ) | $ | -- | $ | (8,022,351 | ) | |||||
|
In
AUS$
|
Plant
and Equipment
|
Leasehold
Improvements
|
Capital
WIP
|
Total
|
||||||||||||
|
Carrying
amounts
|
||||||||||||||||
|
At
January 1, 2007
|
$ | 2,185,611 | $ | 1,834,874 | $ | 74,190 | $ | 4,094,675 | ||||||||
|
At
December 31, 2007
|
2,032,842 | 1,865,028 | -- | 3,897,870 | ||||||||||||
|
At
January 1, 2008 (unaudited)
|
2,032,842 | 1,865,028 | -- | 3,897,870 | ||||||||||||
|
At
December 31, 2008 (unaudited)
|
1,666,965 | 1,779,118 | -- | 3,446,083 | ||||||||||||
11. Inventories
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Concession
stores at cost
|
$ | 115,630 | $ | 88,317 | ||||
|
Carrying
amount of inventories
|
115,630 | 88,317 | ||||||
12. Trade
Receivables and Other Assets
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
|||||||||
|
Trade
receivables
|
17
|
$ | 91,712 | $ | 97,597 | |||||||
|
Prepayments
|
914 | 534 | ||||||||||
The Joint Venture’s exposure to credit
and currency risks and impairment losses related to trade and other receivables
are disclosed in Note 17.
13. Cash
and Cash Equivalents
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Bank
balances
|
$ | 877,438 | $ | 1,410,567 | ||||
|
Cash
in transit
|
22,485 | 28,119 | ||||||
|
Cash
on hand
|
35,700 | 35,700 | ||||||
|
Cash
and cash equivalents in the statement of cash flows
|
$ | 935,623 | $ | 1,474,386 | ||||
The Joint
Venture’s exposure to interest rate risk and a sensitivity analysis for
financial assets and liabilities are disclosed in Note 17.
14. Employee
Benefits
|
Current
|
||||||||
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Liability
for annual leave
|
$ | 39,597 | $ | 49,355 | ||||
|
Liability
for long-service leave
|
17,485 | 18,390 | ||||||
|
Total
employee benefits - current
|
$ | 57,082 | $ | 67,745 | ||||
|
Non-current
|
||||||||
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Liability
for long-service leave
|
$ | 68,603 | $ | 55,396 | ||||
|
Total
employee benefits – non current
|
$ | 68,603 | $ | 55,396 | ||||
15. Payables
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
|||||||||
|
Trade
payables
|
$ | 309,932 | $ | 346,369 | ||||||||
|
Other
creditors and accruals
|
370,538 | 448,364 | ||||||||||
|
Total
payables
|
17
|
$ | 680,470 | $ | 794,733 | |||||||
The Joint
Venture’s exposure to liquidity risk related to trade and other payables is
disclosed in Note 17. Trade payables represent payments to trade
creditors. The Joint Venture makes these payments through the
managing parties shared service centre and is charged a management fee for these
services. Disclosure regarding management fee is made in Note
21.
16. Deferred
Revenue
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Deferred
revenue
|
$ | 63,529 | $ | 77,645 | ||||
Deferred
revenue mainly consists of advance funds received from vendors for the exclusive
rights to supply certain concession items. Revenue is released over
the term of the related contract on a straight-line basis and is classified as
service revenue. In addition deferred revenue includes the fair value
of the award points relating to the customer loyalty programme. This
revenue is recognized when the points are redeemed.
17. Financial
Instruments
Credit Risk
Exposure to Credit Risk
The
carrying amount of the Joint Venture’s financial assets represents the maximum
credit exposure. The Joint Venture’s maximum exposure to credit risk
at the reporting date was:
|
Carrying
Amount
|
||||||||||||
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
|||||||||
|
Trade
receivables
|
12
|
$ | 91,712 | $ | 97,597 | |||||||
|
Cash
and cash equivalents
|
13
|
935,623 | 1,474,386 | |||||||||
The Joint
Venture’s maximum exposure to credit risk for trade receivables at the reporting
date by type of customer was:
|
Carrying
amount
|
||||||||
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Screen
advertisers
|
$ | 71,803 | $ | 50,145 | ||||
|
Credit
card companies
|
3,640 | 23,204 | ||||||
|
Screen
hire
|
-- | 12,137 | ||||||
|
Games,
machine and merchandising companies
|
16,269 | 12,111 | ||||||
|
Total
|
$ | 91,712 | $ | 97,597 | ||||
Impairment
losses
There
were no trade receivables at the reporting date or comparable period that were
past due. The carrying value of such receivables was $91,712 in 2008
(unaudited) (2007: $97,597). There were no allowances for impairment
during the reporting periods.
Liquidity
risk
Financial
liabilities are only trade payables all contractually due within 6
months. The carrying value of such liabilities was $680,470 in 2008
(unaudited) (2007: $794,733).
Interest
rate risk
Profile
At the
reporting date the interest rate profile of the Joint Venture’s interest-bearing
financial instruments was:
|
Variable
rate instruments
|
Carrying
amount
|
|||||||
|
In
AUS$
|
2008
(unaudited)
|
2007
|
||||||
|
Bank
Balances
|
$ | 877,438 | $ | 1,410,567 | ||||
The Joint
Venture held no fixed rate instruments during financial year 2008 (unaudited) or
2007.
Cash
Flow Sensitivity Analysis for Variable Rate Instruments
A change
of one percentage point in interest rates at the reporting date would have
increased (decreased) equity and profit or loss by the amounts shown
below. This analysis assumes that all other variables remain
constant. The analysis is performed on the same basis for
2007.
|
Profit
or loss
|
Equity
|
|||||||||||||||
|
Effect
In AUS$
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
||||||||||||
|
December
31, 2008 (unaudited)
|
||||||||||||||||
|
Variable
rate instruments
|
$ | 4,942 | $ | (4,942 | ) | $ | 4,942 | $ | (4,942 | ) | ||||||
|
Cash
flow sensitivity
|
4,942 | (4,942 | ) | 4,942 | (4,942 | ) | ||||||||||
|
Profit
or loss
|
Equity
|
|||||||||||||||
|
Effect
In AUS$
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
||||||||||||
|
December
31, 2007
|
||||||||||||||||
|
Variable
rate instruments
|
$ | 6,804 | $ | (6,804 | ) | $ | 6,804 | $ | (6,804 | ) | ||||||
|
Cash
flow sensitivity
|
6,804 | (6,804 | ) | 6,804 | (6,804 | ) | ||||||||||
Fair
Values
Fair
Values versus Carrying Amounts
The fair
values of financial assets and liabilities, together with the carrying amounts
shown in the balance sheet, are as follows:
|
December
31, 2008
(unaudited)
|
December
31, 2007
|
|||||||||||||||
|
In
AUS$
|
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
||||||||||||
|
Trade
receivables
|
$ | 91,712 | $ | 91,712 | $ | 97,597 | $ | 97,597 | ||||||||
|
Cash
and cash equivalents
|
935,623 | 935,623 | 1,474,386 | 1,474,386 | ||||||||||||
|
Trade
payables
|
680,470 | 680,470 | 794,733 | 794,733 | ||||||||||||
The basis
for determining fair values is disclosed in Note 4.
18. Operating
Leases
Leases as Lessee
|
|
Non-cancellable
operating lease rentals are payable as
follows:
|
|
In
AUS$
|
December
31, 2008
(unaudited)
|
December
31, 2007
|
||||||
|
Less
than one year
|
$ | 1,123,654 | $ | 993,096 | ||||
|
Between
one and five years
|
4,494,614 | 3,792,384 | ||||||
|
More
than five years
|
5,575,169 | 5,958,576 | ||||||
|
Total
|
$ | 11,193,437 | $ | 10,744,056 | ||||
The Joint
Venture leases the cinema property under operating leases expiring over 10
years.
19. Contingencies
The
nature of the Joint Venture’s operations results in claims for personal injuries
(including public liability and workers compensation) being received from time
to time. As of period end there were no material current or ongoing
outstanding claims.
20. Reconciliation
of Cash Flows from Operating Activities
|
In
AUS$
|
Note
|
2008
(unaudited)
|
2007
|
2006
(unaudited)
|
||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Profit
for the period
|
$ | 2,667,093 | $ | 2,851,507 | $ | 2,579,356 | ||||||||||
|
Adjustments
for:
|
||||||||||||||||
|
Depreciation
and amortization
|
10
|
682,943 | 653,342 | 722,828 | ||||||||||||
|
Operating
profit before changes in working capital
|
$ | 3,350,036 | $ | 3,504,849 | $ | 3,302,184 | ||||||||||
|
Change
in trade receivables
|
12
|
5,885 | (31,679 | ) | 105,744 | |||||||||||
|
Change
in inventories
|
11
|
(27,313 | ) | 20,320 | (25,839 | ) | ||||||||||
|
Change
in other assets
|
12
|
(380 | ) | 40,193 | (40,727 | ) | ||||||||||
|
Change
in trade payables
|
15
|
(114,263 | ) | 262,897 | (372,760 | ) | ||||||||||
|
Change
in employee benefits
|
14
|
2,544 | 3,381 | 2,547 | ||||||||||||
|
Change
in deferred revenue
|
16
|
(14,116 | ) | (19,411 | ) | (14,543 | ) | |||||||||
|
Net
cash from operating activities
|
$ | 3,202,393 | $ | 3,780,550 | $ | 2,956,606 | ||||||||||
21. Related
Parties
|
|
Entities
with joint control or significant influence over the Joint
Venture.
|
The
managing Joint Venturer is paid an annual management fee, which is presented
separately in the income statement. The management fee paid is as per
the Joint Venture agreement and is to cover the costs of the managing Joint
Venturer for managing and operating the cinema complex and providing all
relevant accounting and support services. The management fee is based
on a contracted base amount, increased by the Consumer Price Index for the City
of Brisbane as published by the Australian Bureau of Statistics on an annual
basis. Such management fee agreement is binding over the life of the
agreement which shall continue in existence until the Joint Venture is
terminated under agreement by the Joint Venturers.
As of
December 31, 2008 there were no outstanding payable amounts (unaudited)
(2007: nil).
22. Subsequent
Events
Subsequent to December 31, 2008 there
were no events which would have a material effect on the financial
report.
Independent Auditors’
Report
The
Management Committee and Joint Venturers
Mt.
Gravatt Cinemas Joint Venture:
We have
audited the accompanying balance sheet of Mt. Gravatt Cinemas Joint Venture as
of December 31, 2007, and the related income statement, statement of changes in
members’ equity, and statement of cash flows for the year then
ended. These financial statements are the responsibility of the Joint
Venture’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Joint
Venture’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mt. Gravatt Cinemas Joint Venture
as of December 31, 2007, and the results of its operations and its cash flows
for the year then ended in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards
Board.
KPMG
Sydney,
Australia
March 13,
2008
Exhibits
(listed by numbers corresponding to Item 601 of Regulation
S-K)
|
3.1
|
Certificate
of Amendment of Restatement Articles of Incorporation of Citadel Holding
Corporation (filed as Exhibit 3.1 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein by
reference).
|
|
3.2
|
Restated
By-laws of Citadel Holding Corporation, a Nevada corporation (filed as
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by
reference).
|
|
3.3
|
Certificate
of Amendment of Articles of Incorporation of Citadel Holding Corporation
(filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2001).
|
|
3.4
|
Articles
of Merger of Craig Merger Sub, Inc. with and into Craig Corporation (filed
as Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2001).
|
|
3.5
|
Articles
of Merger of Reading Merger Sub, Inc. with and into Reading Entertainment,
Inc. (filed as Exhibit 3.5 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2001).
|
|
3.6
|
Restated
By-laws of Reading International, Inc., a Nevada corporation (filed as
Exhibit 3.6 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004, and incorporated herein by
reference).
|
|
4.1
|
1999
Stock Option Plan of Reading International, Inc. as amended on December
31, 2001 (filed as Exhibit 4.1 to the Company’s Registration Statement on
Form S-8 filed on January 21, 2004, and incorporated herein by
reference).
|
|
4.2
|
Form
of Preferred Security Certificate evidencing the preferred securities of
Reading International Trust I (filed as Exhibit 4.1 to the Company’s
report on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
4.3
|
Form
of Common Security Certificate evidencing common securities of Reading
International Trust I (filed as Exhibit 4.2 to the Company’s report
on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
4.4
|
Form
of Reading International, Inc. Floating Rate Junior Subordinated Debt
Security due 2027 (filed as Exhibit 4.3 to the Company’s report on Form
8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
10.1
|
Tax
Disaffiliation Agreement, dated as of August 4, 1994, by and between
Citadel Holding Corporation and Fidelity Federal Bank (filed as Exhibit
10.27 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by
reference).
|
|
10.2
|
Standard
Office lease, dated as of July 15, 1994, by and between Citadel Realty,
Inc. and Fidelity Federal Bank (filed as Exhibit 10.42 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and
incorporated herein by reference).
|
|
10.3
|
First
Amendment to Standard Office Lease, dated May 15, 1995, by and between
Citadel Realty, Inc. and Fidelity Federal Bank (filed as Exhibit 10.43 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, and incorporated herein by
reference).
|
|
10.4
|
Guaranty
of Payment dated May 15, 1995 by Citadel Holding Corporation in favor of
Fidelity Federal Bank (filed as Exhibit 10.47 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated
herein by reference).
|
|
10.5
|
Exchange
Agreement dated September 4, 1996 among Citadel Holding Corporation,
Citadel Acquisition Corp., Inc. Craig Corporation, Craig Management, Inc.,
Reading Entertainment, Inc., Reading Company (filed as Exhibit 10.51 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by
reference).
|
|
10.6
|
Asset
Put and Registration Rights Agreement dated October 15, 1996 among Citadel
Holding Corporation, Citadel Acquisition Corp., Inc., Reading
Entertainment, Inc., and Craig Corporation (filed as Exhibit 10.52 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by
reference).
|
|
10.7
|
Articles
of Incorporation of Reading Entertainment, Inc., A Nevada Corporation
(filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 1999, and incorporated herein by
reference).
|
|
10.7a
|
Certificate
of Designation of the Series A Voting Cumulative Convertible preferred
stock of Reading Entertainment, Inc. (filed as Exhibit 10.7a to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1999,
and incorporated herein by
reference).
|
|
10.8
|
Lease
between Citadel Realty, Inc., Lesser and Disney Enterprises, Inc., Lessee
dated October 1, 1996 (filed as Exhibit 10.54 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference).
|
|
10.9
|
Second
Amendment to Standard Office Lease between Citadel Realty, Inc. and
Fidelity Federal Bank dated October 1, 1996 (filed as Exhibit 10.55 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, and incorporated herein by
reference).
|
|
10.10
|
Citadel
1996 Non-employee Director Stock Option Plan (filed as Exhibit 10.57 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by
reference).
|
|
10.11
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended December
31, 1997 (filed as Exhibit 10.58 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.12
|
Stock
Purchase Agreement dated as of April 11, 1997 by and between Citadel
Holding Corporation and Craig Corporation (filed as Exhibit 10.56 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, and incorporated herein by
reference).
|
|
10.13
|
Secured
Promissory Note dated as of April 11, 1997 issued by Craig Corporation to
Citadel Holding Corporation in the principal amount of $1,998,000 (filed
as Exhibit 10.60 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, and incorporated herein by
reference).
|
|
10.14
|
Agreement
for Purchase and Sale of Real Property between Prudential Insurance
Company of America and Big 4 Farming LLC dated August 29, 1997 (filed as
Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, and incorporated herein by
reference).
|
|
10.15
|
Second
Amendment to Agreement of Purchase and Sale between Prudential Insurance
Company of America and Big 4 Farming LLC dated November 5, 1997 (filed as
Exhibit 10.62 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, and incorporated herein by
reference).
|
|
10.16
|
Partnership
Agreement of Citadel Agricultural Partners No. 1 dated December 19, 1997
(filed as Exhibit 10.63 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.17
|
Partnership
Agreement of Citadel Agricultural Partners No. 2 dated December 19, 1997
(filed as Exhibit 10.64 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.18
|
Partnership
Agreement of Citadel Agricultural Partners No. 3 dated December 19, 1997
(filed as Exhibit 10.65 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.19
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 1 and Big 4 Farming LLC (filed as Exhibit 10.67 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.20
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 2 and Big 4 Farming LLC (filed as Exhibit 10.68 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.21
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 3 and Big 4 Farming LLC (filed as Exhibit 10.69 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.22
|
Line
of Credit Agreement dated December 29, 1997 between Citadel Holding
Corporation and Big 4 Ranch, Inc. (filed as Exhibit 10.70 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
|
|
10.23
|
Management
Services Agreement dated December 26, 1997 between Big 4 Farming LLC and
Cecelia Packing (filed as Exhibit 10.71 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.24
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 1 (filed as Exhibit 10.72 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.25
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 2 (filed as Exhibit 10.73 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.26
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 3 (filed as Exhibit 10.74 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.27
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partners No. 1 (filed as Exhibit 10.75 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.28
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partners No. 2 (filed as Exhibit 10.76 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.29
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partners No. 3 (filed as Exhibit 10.77 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.30
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partnership No. 1 (filed as Exhibit 10.78 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.31
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partnership No. 2 (filed as Exhibit 10.79 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.32
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partnership No. 3 (filed as Exhibit 10.80 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.33
|
Administrative
Services Agreement between Citadel Holding Corporation and Big 4 Ranch,
Inc. dated December 29, 1997 (filed as Exhibit 10.81 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
|
|
10.34
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended December
31, 1998 (filed as Exhibit as 10.41 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference).
|
|
10.35
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended December
31, 1999 (filed by Reading Entertainment Inc. as Form 10-K for the year
ended December 31, 1999 on April 14, 2000 and incorporated herein by
reference).
|
|
10.36
|
Promissory
Note dated December 20, 1999 between Citadel Holding Corporation and
Nationwide Life Insurance 3 (filed as Exhibit 10.36 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
|
|
10.37*
|
Employment
Agreement between Citadel Holding Corporation and Andrzej Matyczynski
(filed as Exhibit 10.37 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
|
|
10.38
|
Citadel
1999 Employee Stock Option Plan (filed as Exhibit 10.38 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
|
|
10.39
|
Amendment
and Plan of Merger By and Among Citadel Holding Corporation and
Off-Broadway Theatres, Inc. (filed as Exhibit A to the Company’s Proxy
Statement and incorporated herein by
reference).
|
|
10.40
|
Amended
and Restated Lease Agreement dated as of July 28, 2000 as amended and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C. and
Citadel Cinemas, Inc. (filed as Exhibit 10.40 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
10.41
|
Amended
and Restated Citadel Standby Credit Facility dated as of July 28, 2000 as
amended and restated as of January 29, 2002 between Sutton Hill Capital,
L.L.C. and Reading International, Inc. (filed as Exhibit 10.40 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated herein by
reference).
|
|
10.42
|
Amended
and Restated Security Agreement dated as of July 28, 2000 as amended and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C. and
Reading International, Inc. (filed as Exhibit 10.40 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference).
|
|
10.43
|
Amended
and Restated Pledge Agreement dated as of July 28, 2000 as amended and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C. and
Reading International, Inc. (filed as Exhibit 10.40 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by
reference).
|
|
10.44
|
Amended
and Restated Intercreditor Agreement dated as of July 28, 2000 as amended
and restated as of January 29, 2002 between Sutton Hill Capital, L.L.C.
and Reading International, Inc. and Nationwide Theatres Corp. (filed as
Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by
reference).
|
|
10.45
|
Guaranty
dated July 28, 2000 by Michael R. Forman and James J. Cotter in favor of
Citadel Cinemas, Inc. and Citadel Realty, Inc. (filed as Exhibit 10.40 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2002 and incorporated herein by
reference).
|
|
10.46
|
Amended
and Restated Agreement with Respect to Fee Option dated as of July 28,
2000 as amended and restated as of January 29, 2002 between Sutton Hill
Capital, L.L.C. and Citadel Realty, Inc. (filed as Exhibit 10.40 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated herein by
reference).
|
|
10.47
|
Theater
Management Agreement between Liberty Theaters, Inc. and OBI LLC (filed as
Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by
reference).
|
|
10.48*
|
Non-qualified
Stock Option Agreement between Reading International, Inc. and James J.
Cotter (filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by
reference).
|
|
10.49
|
Omnibus
Agreement between Citadel Cinemas, Inc. and Sutton Hill Capital, LLC,
dated October 22, 2003 (filed on Quarterly Report Form 10-Q for the period
ended September 30, 2003 and incorporated herein by
reference).
|
|
10.50
|
Pledge
Agreement between Citadel Cinemas, Inc. and Sutton Hill Capital, LLC,
dated October 22, 2003 (filed on Quarterly Report Form 10-Q for the period
ended September 30, 2003 and incorporated herein by
reference).
|
|
10.51
|
Guarantee
of Lenders Obligation Under Standby Credit Agreement in favor of Sutton
Hill Capital, LLC, dated October 22, 2003 (filed on Quarterly Report Form
10-Q for the period ended September 30, 2003 and incorporated herein by
reference).
|
|
10.52*
|
Employment
agreement between Reading International, Inc. and Wayne D. Smith (filed as
exhibit 10.52 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2004, and incorporated herein by
reference).
|
|
10.53
|
Contract
of Sale between Sutton Hill Capital L.L.C. and Sutton Hill Properties, LLC
dated as of September 19, 2005 (filed as exhibit 10.53 to the Company’s
report on Form 8-K filed on September 21, 2005, and incorporated herein by
reference).
|
|
10.54
|
Installment
Sale Note dated as of September 19, 2005 (filed as exhibit 10.54 to the
Company’s report on Form 8-K filed on September 21, 2005, and incorporated
herein by reference).
|
|
10.55
|
Guaranty
by Reading International, Inc. dated as of September 1, 2005 (filed as
exhibit 10.55 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.56
|
Assignment
and Assumption of Lease between Sutton Hill Capital L.L.C. and Sutton Hill
Properties, LLC dated as of September 19, 2005 (filed as exhibit 10.56 to
the Company’s report on Form 8-K filed on September 21, 2005, and
incorporated herein by reference).
|
|
10.57
|
License
and Option Agreement between Sutton Hill Properties, LLC and Sutton Hill
Capital L.L.C. dated as of September 19, 2005 (filed as exhibit 10.57 to
the Company’s report on Form 8-K filed on September 21, 2005, and
incorporated herein by
reference).
|
|
10.58
|
Second
Amendment to Amended and Restated Master Operating Lease dated as of
September 1, 2005 (filed as exhibit 10.58 to the Company’s report on Form
8-K filed on September 21, 2005, and incorporated herein by
reference).
|
|
10.59
|
Letter
from James J. Cotter dated August 11, 2005 regarding liens (filed as
exhibit 10.59 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.60
|
Letter
amending effective date of transaction to September 19, 2005 (filed as
exhibit 10.60 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.61
|
Promissory
Note by Citadel Cinemas, Inc. in favor of Sutton Hill Capital L.L.C. dated
September 14, 2004 (filed as exhibit 10.61 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2005, and incorporated herein
by reference).
|
|
10.62
|
Guaranty
by Reading International, Inc. in favor of Sutton Hill Capital L.L.C.
dated September 14, 2004 (filed as exhibit 10.62 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005, and incorporated
herein by reference).
|
|
10.63
|
Purchase
Agreement, dated February 5, 2007, among Reading International, Inc.,
Reading International Trust I, and Kodiak Warehouse JPM LLC (filed as
Exhibit 10.1 to the Company’s report on Form 8-K dated February 5, 2007,
and incorporated herein by
reference).
|
|
10.64
|
Amended
and Restated Declaration of Trust, dated February 5, 2007, among Reading
International Inc., as sponsor, the Administrators named therein, and
Wells Fargo Bank, N.A., as property trustee, and Wells Fargo Delaware
Trust Company as Delaware trustee (filed as Exhibit 10.2 to the Company’s
report on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
10.65
|
Indenture
among Reading International, Inc., Reading New Zealand Limited, and Wells
Fargo Bank, N.A., as indenture trustee (filed as Exhibit 10.4 to the
Company’s report on Form 8-K dated February 5, 2007, and incorporated
herein by reference).
|
|
10.66*
|
Employment
Agreement between Reading International, Inc. and John Hunter (filed as
Exhibit 10.66 to the Company’s report on Form 10-K for the year ended
December 31, 2006, and incorporated herein by
reference).
|
|
10.67
|
Asset
Purchase and Sale Agreement dated October 8, 2007 among Pacific Theatres
Exhibition Corp., Consolidated Amusement Theatres, Inc., a Hawaii
corporation, Michael Forman, Christopher Forman, Consolidated Amusement
Theatres, Inc., a Nevada corporation, and Reading International, Inc.
(filed as Exhibit 10.67 to the Company’s report on Form 10-K for the year
ended December 31, 2007, and incorporated herein by
reference).
|
|
10.68
|
Real
Property Purchase and Sale Agreement dated October 8, 2007 between
Consolidated Amusement Theatres, Inc., a Hawaii corporation, and
Consolidated Amusement Theatres, Inc., a Nevada corporation (filed as
Exhibit 10.68 to the Company’s report on Form 10-K for the year ended
December 31, 2007, and incorporated herein by
reference).
|
|
10.69
|
Leasehold
Purchase and Sale Agreement dated October 8, 2007 between Kenmore Rohnert,
LLC and Consolidated Amusement Theatres, Inc., a Nevada corporation (filed
as Exhibit 10.69 to the Company’s report on Form 10-K for the year ended
December 31, 2007, and incorporated herein by
reference).
|
|
10.70
|
Amendment
No. 1 to Asset Purchase and Sale Agreement dated February 8, 2008 among
Pacific Theatres Exhibition Corp., Consolidated Amusement Theatres, Inc.,
a Hawaii corporation, Michael Forman, Christopher Forman, Consolidated
Amusement Theatres, Inc., a Nevada corporation, and Reading International,
Inc. (filed as Exhibit 10.70 to the Company’s report on Form 10-K for the
year ended December 31, 2007, and incorporated herein by
reference).
|
|
10.71
|
Amendment
No. 2 to Asset Purchase and Sale Agreement dated February 14, 2008 among
Pacific Theatres Exhibition Corp., Consolidated Amusement Theatres, Inc.,
a Hawaii corporation, Michael Forman, Christopher Forman, Consolidated
Amusement Theatres, Inc., a Nevada corporation, and Reading International,
Inc. (filed as Exhibit 10.71 to the Company’s report on Form 10-K for the
year ended December 31, 2007, and incorporated herein by
reference).
|
|
10.72
|
Credit
Agreement dated February 21, 2008 among Consolidated Amusement Theatres,
Inc., a Nevada corporation, General Electric Capital Corporation, and GE
Capital Markets, Inc. (filed as Exhibit 10.72 to the Company’s report on
Form 10-K for the year ended December 31, 2007, and incorporated herein by
reference).
|
|
10.73
|
Reading
Guaranty Agreement dated February 21, 2008 among Consolidated Amusement
Theatres, Inc., a Nevada corporation, General Electric Capital
Corporation, and GE Capital Markets, Inc. (filed as Exhibit 10.73 to the
Company’s report on Form 10-K for the year ended December 31, 2007, and
incorporated herein by reference).
|
|
10.74
|
Pledge
and Security Agreement dated February 22, 2008 by Reading Consolidated
Holdings, Inc. in favor of Nationwide Theatres Corp (filed as Exhibit
10.74 to the Company’s report on Form 10-K for the year ended December 31,
2007, and incorporated herein by
reference).
|
|
10.75
|
Promissory
Note dated February 22, 2008 by Reading Consolidated Holdings, inc. in
favor of Nationwide Theatres Corp. (filed as Exhibit 10.75 to the
Company’s report on Form 10-K for the year ended December 31, 2007, and
incorporated herein by reference).
|
|
21
|
List
of Subsidiaries (filed herewith).
|
|
23.1
|
Consent
of Independent Auditors, Deloitte & Touche LLP (filed
herewith).
|
|
23.2
|
Consent
of Independent Auditors, Pricewaterhousecoopers LLP (filed
herewith).
|
|
23.3
|
Consent
of Independent Auditors, KPMG Australia (filed
herewith).
|
|
31.1
|
Certification
of Principal Executive Officer dated March 16, 2009 pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
31.2
|
Certification
of Principal Financial Officer dated March 16, 2009 pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
32.1
|
Certification
of Principal Executive Officer dated March 16, 2009 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
|
|
32.2
|
Certification
of Principal Financial Officer dated March 16, 2009 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
|
*These
exhibits constitute the executive compensation plans and arrangements of the
Company.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
READING
INTERNATIONAL, INC.
(Registrant)
|
Date: March
16, 2009
|
By:
|
/s/
Andrzej Matyczynski
|
|
Andrzej
Matyczynski
|
||
|
Chief
Financial Officer and Treasurer
|
||
|
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title(s)
|
Date
|
|
/s/
James J. Cotter
|
Chairman
of the Board and Director and Chief Executive Officer
|
March
16, 2009
|
|
James
J. Cotter
|
||
|
/s/
Eric Barr
|
Director
|
March
16, 2009
|
|
Eric
Barr
|
||
|
/s/
James J. Cotter, Jr.
|
Director
|
March
16, 2009
|
|
James
J. Cotter, Jr.
|
||
|
/s/
Margaret Cotter
|
Director
|
March
16, 2009
|
|
Margaret
Cotter
|
||
|
/s/
William D. Gould
|
Director
|
March
16, 2009
|
|
William
D. Gould
|
||
|
/s/
Edward L. Kane
|
Director
|
March
16, 2009
|
|
Edward
L Kane
|
||
|
/s/
Gerard P. Laheney
|
Director
|
March
16, 2009
|
|
Gerard
P. Laheney
|
||
|
/s/
Alfred Villaseñor
|
Director
|
March
16, 2009
|
|
Alfred
Villaseñor
|
-147-
EXHIBIT
21
READING
INTERNATIONAL, INC. – LIST OF SUBSIDIARIES
|
Subsidiary
|
Jurisdiction of
Incorporation
|
|
AHGP,
Inc.
|
Delaware
|
|
AHLP,
Inc.
|
Delaware
|
|
Angelika
Film Centers (Dallas), Inc.
|
Texas
|
|
Angelika
Film Centers (Plano) LP
|
Nevada
|
|
Angelika
Film Centers LLC
|
Delaware
|
|
Australia
Country Cinemas Pty Ltd
|
New
South Wales, Australia
|
|
Australian
Equipment Supply Pty Ltd
|
Victoria,
Australia
|
|
Bayou
Cinemas LP
|
Delaware
|
|
Bogart
Holdings Ltd
|
New
Zealand
|
|
Burwood
Developments Pty Ltd
|
Victoria,
Australia
|
|
Carmel
Theatres, LLC
|
Nevada
|
|
Citadel
57th
Street, LLC
|
Nevada
|
|
Citadel
Agriculture, Inc.
|
California
|
|
Citadel
Cinemas, Inc.
|
Nevada
|
|
Citadel
Realty, Inc.
|
Nevada
|
|
Consolidated
Amusement Holdings, Inc.
|
Nevada
|
|
Consolidated
Entertainment, Inc.
|
Nevada
|
|
Copenhagen
Courtenay Central Ltd
|
New
Zealand
|
|
Courtenay
Car Park Ltd
|
New
Zealand
|
|
Craig
Corporation
|
Nevada
|
|
Darnelle
Enterprises Ltd
|
New
Zealand
|
|
Dimension
Specialty, Inc.
|
Delaware
|
|
Epping
Cinemas Pty Ltd
|
Victoria,
Australia
|
|
Gaslamp
Theatres, LLC
|
Nevada
|
|
Hope
Street Hospitality, LLC
|
Delaware
|
|
Hotel
Newmarket Pty Ltd
|
Victoria,
Australia
|
|
Landplan
Property Partners Lake Taupo Ltd
|
New
Zealand
|
|
Landplan
Property Partners Manukau Ltd
|
New
Zealand
|
|
Landplan
Property Partners New Zealand Ltd
|
New
Zealand
|
|
Landplan
Property Partners Pty Ltd
|
Victoria,
Australia
|
|
Landplan
Property Partners Taupo Ltd
|
New
Zealand
|
|
Liberty
Live, LLC
|
Nevada
|
|
Liberty
Theaters, LLC
|
Nevada
|
|
Liberty
Theatricals, LLC
|
Nevada
|
|
Minetta
Live, LLC
|
Nevada
|
|
Movieland
Cinemas (NZ) Ltd
|
New
Zealand
|
|
Newmarket
Properties No. 2 Pty Ltd
|
Victoria,
Australia
|
|
Newmarket
Properties Pty Ltd
|
Victoria,
Australia
|
|
Orpheum
Live, LLC
|
Nevada
|
|
Queenstown
Land Holdings Ltd
|
New
Zealand
|
|
Reading
Arthouse Distribution Ltd
|
New
Zealand
|
|
Reading
Arthouse Ltd
|
New
Zealand
|
|
Reading
Auburn Pty Ltd
|
Victoria,
Australia
|
|
Reading
Australia Leasing (E&R) Pty Ltd
|
Victoria,
Australia
|
|
Reading
Belmont Pty Ltd
|
Victoria,
Australia
|
|
Reading
Bundaberg Pty Ltd
|
Victoria,
Australia
|
|
Reading
Capital Corporation
|
Delaware
|
|
Reading
Center Development Corporation
|
Pennsylvania
|
|
Reading
Charlestown Pty Ltd
|
Victoria,
Australia
|
|
Reading
Cinemas Courtenay Central Ltd
|
New
Zealand
|
|
Reading
Cinemas Management Pty Ltd
|
Victoria,
Australia
|
|
Reading
Cinemas NJ, Inc.
|
Delaware
|
|
Reading
Cinemas of Puerto Rico, Inc.
|
Puerto
Rico
|
|
Reading
Cinemas Pty Ltd
|
New
South Wales, Australia
|
|
Reading
Cinemas Puerto Rico LLC
|
Nevada
|
|
Reading
Cinemas USA LLC
|
Nevada
|
|
Reading
Colac Pty Ltd
|
Victoria,
Australia
|
|
Reading
Company
|
Pennsylvania
|
|
Reading
Consolidated Holdings, Inc.
|
Nevada
|
|
Reading
Courtenay Central Ltd
|
New
Zealand
|
|
Reading
Dandenong Pty Ltd
|
Victoria,
Australia
|
|
Reading
Elizabeth Pty Ltd
|
Victoria,
Australia
|
|
Reading
Entertainment Australia Pty Ltd
|
New
South Wales, Australia
|
|
Reading
Exhibition Pty Ltd
|
Victoria,
Australia
|
|
Reading
Holdings, Inc.
|
Nevada
|
|
Reading
International Cinemas LLC
|
Delaware
|
|
Reading
International Services Company
|
California
|
|
Reading
Licenses Pty Ltd
|
Victoria,
Australia
|
|
Reading
Maitland Pty Ltd
|
Victoria,
Australia
|
|
Reading
Malulani, LLC
|
Nevada
|
|
Reading
Malulani Properties, LLC
|
Nevada
|
|
Reading
Melton Pty Ltd
|
Victoria,
Australia
|
|
Reading
Moonee Ponds Pty Ltd
|
Victoria,
Australia
|
|
Reading
New Zealand Ltd
|
New
Zealand
|
|
Reading
Pacific LLC
|
Nevada
|
|
Reading
Properties Pty Ltd
|
Victoria,
Australia
|
|
Reading
Property Holdings Pty Ltd
|
Victoria,
Australia
|
|
Reading
Property Partners No. 1 Pty Ltd
|
Victoria,
Australia
|
|
Reading
Queenstown Ltd
|
New
Zealand
|
|
Reading
Real Estate Company
|
Pennsylvania
|
|
Reading
Rouse Hill Pty Ltd
|
Victoria,
Australia
|
|
Reading
Royal George, LLC
|
Delaware
|
|
Reading
Sunbury Pty Ltd
|
Victoria,
Australia
|
|
Reading
Theaters, Inc.
|
Delaware
|
|
Reading
Wellington Properties Ltd
|
New
Zealand
|
|
Rhodes
Peninsula Cinema Pty Ltd
|
Victoria,
Australia
|
|
Rialto
Brands Ltd
|
New
Zealand
|
|
Rialto
Cinemas Ltd
|
New
Zealand
|
|
Rialto
Distribution Ltd
|
New
Zealand
|
|
Rialto
Entertainment Ltd
|
New
Zealand
|
|
Ronwood
Investments Ltd
|
New
Zealand
|
|
Rydal
Equipment Co.
|
Pennsylvania
|
|
Sails
Apartments Management Ltd
|
New
Zealand
|
|
Sutton
Hill Properties, LLC
|
Nevada
|
|
Tobrooke
Holdings Ltd
|
New
Zealand
|
|
Trans-Pacific
Finance Fund I, LLC
|
Delaware
|
|
Trenton-Princeton
Traction Company
|
New
Jersey
|
|
Twin
Cities Cinemas, Inc.
|
Delaware
|
|
US
Development, LLC
|
Nevada
|
|
US
International Property Finance Pty Ltd
|
Victoria,
Australia
|
|
Washington
and Franklin Railway Company
|
Pennsylvania
|
|
Westlakes
Cinema Pty Ltd
|
Victoria,
Australia
|
|
The
Wilmington and Northern Railroad Company
|
Pennsylvania
|
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement No.
333-36277 on Form S-8 of our reports dated March 16, 2009, relating to the
financial statements and financial statement schedule of Reading International,
Inc. and subsidiaries (the “Company”) (which report expresses an unqualified
opinion and includes an explanatory paragraph regarding the Company's adoption
of Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109), and
the effectiveness of the Company’s internal control over financial reporting,
appearing in this Annual Report on Form 10-K of Reading International, Inc. and
subsidiaries for the year ended December 31, 2008.
DELOITTE
& TOUCHE LLP
Los
Angeles, California
March 16,
2009
EXHIBIT 23.2
CONSENT
OF INDEPENDENT ACCOUNTANTS
We hereby
consent to the incorporation by reference in the Registration Statement on Form
S-8 (No. 333-36277) of Reading International, Inc. of our report dated February
11, 2008 relating to the financial statements of 205-209 East 57th Street
Associates, LLC, which appears in this Annal Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 11, 2009
EXHIBIT 23.3
Consent
of Independent Auditors
The Management Committee and Joint Venturers
Mt. Gravatt Cinemas Joint Venture:
We consent to the incorporation by reference in
the registration statement No. 333-36277 on Form S-8 of Reading International,
Inc., of our report dated March 13, 2008, with respect to the balance sheet of
Mt. Gravatt Cinemas Joint Venture as of December 31, 2007, and the related
income statement, statement of changes in members' equity, and statement of cash
flows for the year ended December 31, 2007, which report appears in the December
31, 2008, annual report on Form 10-K of Reading International, Inc.
KPMG
Sydney, Australia
March 13, 2009
EXHIBIT
31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James
J. Cotter, certify that:
|
1)
|
I
have reviewed this Form 10-K of Reading International,
Inc.;
|
|
2)
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3)
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4)
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5)
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s Board of
Directors (or persons performing the equivalent
functions):
|
|
a)
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
/s/ James J.
Cotter
James J.
Cotter
Chief
Executive Officer
March 16,
2009
EXHIBIT
31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Andrzej Matyczynski, certify that:
|
1)
|
I
have reviewed this Form 10-K of Reading International,
Inc.;
|
|
2)
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3)
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4)
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5)
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s Board of
Directors (or persons performing the equivalent
functions):
|
|
a)
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
/s/ Andrzej
Matyczynski
Andrzej
Matyczynski
Chief
Financial Officer
March 16,
2009
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18
U.S.C. SECTION 1350)
In
connection with the accompanying Annual Report of Reading International, Inc.
(the “Company”) on Form 10-K for the fiscal year ended December 31, 2007 (the
“Report”), I, James J. Cotter, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that:
|
1.
|
The
Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934;
and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/ James J.
Cotter
James J.
Cotter
Chief
Executive Officer
March 16,
2009
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18
U.S.C. SECTION 1350)
In
connection with the accompanying Annual Report of Reading International, Inc.
(the “Company”) on Form 10-K for the fiscal year ended December 31, 2007 (the
“Report”), I, Andrzej Matyczynski, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
|
1.
|
The
Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934;
and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/ Andrzej
Matyczynski
Andrzej
Matyczynski
Chief
Financial Officer
March 16,
2009