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 | ||||||||||||||