UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________________
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period
ended: June 30, 2009
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 number 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)
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95-3885184
(IRS
Employer Identification No.)
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500
Citadel Drive, Suite 300
Commerce, CA
(Address
of principal executive offices)
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90040
(Zip
Code)
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Registrant’s
telephone number, including area code: (213) 235-2240
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes þ No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer ¨ Accelerated
filer þ Non-accelerated
filer ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No þ
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date. As of August 7, 2009, there were 21,089,901 shares
of Class A Nonvoting Common Stock, $0.01 par value per share and 1,495,490
shares of Class B Voting Common Stock, $0.01 par value per share
outstanding.
READING INTERNATIONAL, INC. AND
SUBSIDIARIES
TABLE OF
CONTENTS
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Page
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PART I –
Financial Information
Item 1 – Financial
Statements
Reading
International, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets (Unaudited)
(U.S.
dollars in thousands)
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June
30, 2009
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December
31, 2008
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|||||||
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ASSETS
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||||||||
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Current
Assets:
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||||||||
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Cash
and cash equivalents
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$ | 21,199 | $ | 30,874 | ||||
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Receivables
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6,891 | 7,868 | ||||||
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Inventory
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700 | 797 | ||||||
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Investment
in marketable securities
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1,324 | 3,100 | ||||||
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Restricted
cash
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855 | 1,656 | ||||||
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Prepaid
and other current assets
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2,821 | 2,324 | ||||||
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Total
current assets
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33,790 | 46,619 | ||||||
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Property
held for and under development
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82,708 | 69,016 | ||||||
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Property
& equipment, net
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181,090 | 173,662 | ||||||
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Investments
in unconsolidated joint ventures and entities
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11,701 | 11,643 | ||||||
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Investment
in Reading International Trust I
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838 | 1,547 | ||||||
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Goodwill
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36,004 | 34,964 | ||||||
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Intangible
assets, net
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23,901 | 25,118 | ||||||
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Other
assets
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8,984 | 9,301 | ||||||
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Total
assets
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$ | 379,016 | $ | 371,870 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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||||||||
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Current
Liabilities:
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||||||||
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Accounts
payable and accrued liabilities
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$ | 12,483 | $ | 13,170 | ||||
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Film
rent payable
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6,437 | 7,315 | ||||||
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Notes
payable – current portion
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13,809 | 1,347 | ||||||
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Taxes
payable
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6,348 | 6,425 | ||||||
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Deferred
current revenue
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4,730 | 5,645 | ||||||
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Other
current liabilities
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149 | 201 | ||||||
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Total
current liabilities
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43,956 | 34,103 | ||||||
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Notes
payable – long-term portion
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169,089 | 172,268 | ||||||
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Notes
payable to related party – long-term portion
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14,000 | 14,000 | ||||||
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Subordinated
debt – trust preferred securities
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27,913 | 51,547 | ||||||
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Noncurrent
tax liabilities
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6,603 | 6,347 | ||||||
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Deferred
non-current revenue
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588 | 554 | ||||||
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Other
liabilities
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23,037 | 23,604 | ||||||
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Total
liabilities
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285,186 | 302,423 | ||||||
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Commitments
and contingencies (Note 13)
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||||||||
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Stockholders’
equity:
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||||||||
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Class
A Nonvoting Common Stock, par value $0.01, 100,000,000 shares authorized,
35,661,806 issued and 21,084,582 outstanding at June 30, 2009 and
35,564,339 issued and 20,987,115 outstanding at December 31,
2008
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216 | 216 | ||||||
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Class
B Voting Common Stock, par value $0.01, 20,000,000 shares authorized and
1,495,490 issued and outstanding at June 30, 2009 and at December 31,
2008
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15 | 15 | ||||||
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Nonvoting
Preferred Stock, par value $0.01, 12,000 shares authorized and no
outstanding shares
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-- | -- | ||||||
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Additional
paid-in capital
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134,237 | 133,906 | ||||||
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Accumulated
deficit
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(62,981 | ) | (69,477 | ) | ||||
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Treasury
shares
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(4,306 | ) | (4,306 | ) | ||||
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Accumulated
other comprehensive income
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24,865 | 7,276 | ||||||
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Total
Reading International, Inc. stockholders’ equity
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92,046 | 67,630 | ||||||
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Noncontrolling
interest
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1,784 | 1,817 | ||||||
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Total
stockholders’ equity
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93,830 | 69,447 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 379,016 | $ | 371,870 | ||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
Reading International, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations (Unaudited)
(U.S.
dollars in thousands, except per share amounts)
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Three
Months Ended
June
30,
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Six
Months Ended
June
30,
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|||||||||||||||
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2009
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2008
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2009
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2008
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|||||||||||||
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Revenue
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||||||||||||||||
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Cinema
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$ | 51,215 | $ | 49,488 | $ | 94,651 | $ | 84,831 | ||||||||
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Real
estate
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3,207 | 4,263 | 6,849 | 8,647 | ||||||||||||
| 54,422 | 53,751 | 101,500 | 93,478 | |||||||||||||
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Operating
expense
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||||||||||||||||
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Cinema
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39,095 | 41,780 | 73,055 | 69,185 | ||||||||||||
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Real
estate
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2,680 | 2,296 | 5,633 | 4,410 | ||||||||||||
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Depreciation
and amortization
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3,324 | 5,528 | 7,168 | 9,411 | ||||||||||||
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Loss
on transfer of real estate held for sale to continuing
operations
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549 | -- | 549 | -- | ||||||||||||
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General
and administrative
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4,233 | 4,909 | 8,668 | 9,597 | ||||||||||||
| 49,881 | 54,513 | 95,073 | 92,603 | |||||||||||||
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Operating
income (loss)
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4,541 | (762 | ) | 6,427 | 875 | |||||||||||
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Interest
income
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219 | 365 | 737 | 603 | ||||||||||||
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Interest
expense
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(3,090 | ) | (3,404 | ) | (7,998 | ) | (6,479 | ) | ||||||||
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Gain
on retirement of subordinated debt (trust preferred
securities)
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10,714 | -- | 10,714 | -- | ||||||||||||
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Other
income (loss)
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(1,921 | ) | 1,671 | (2,716 | ) | 3,045 | ||||||||||
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Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
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10,463 | (2,130 | ) | 7,164 | (1,956 | ) | ||||||||||
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Income
tax expense
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(647 | ) | (407 | ) | (999 | ) | (824 | ) | ||||||||
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Income
(loss) before equity earnings of unconsolidated joint ventures and
entities
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9,816 | (2,537 | ) | 6,165 | (2,780 | ) | ||||||||||
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Equity
earnings of unconsolidated joint ventures and entities
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164 | 189 | 659 | 547 | ||||||||||||
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Gain
on sale of investment in an unconsolidated entity
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-- | 2,450 | -- | 2,450 | ||||||||||||
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Net
income
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$ | 9,980 | $ | 102 | $ | 6,824 | $ | 217 | ||||||||
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Net
(income) loss attributable to noncontrolling interest
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(90 | ) | 182 | (328 | ) | (161 | ) | |||||||||
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Net
income attributable to Reading International, Inc. common
shareholders
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$ | 9,890 | $ | 284 | $ | 6,496 | $ | 56 | ||||||||
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Basic
and diluted earnings per share attributable to Reading International, Inc.
common shareholders
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$ | 0.44 | $ | 0.01 | $ | 0.29 | $ | 0.00 | ||||||||
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Weighted
average number of shares outstanding – basic
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22,653,050 | 22,476,355 | 22,616,193 | 22,476,355 | ||||||||||||
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Weighted
average number of shares outstanding – dilutive
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22,687,273 | 22,763,826 | 22,650,415 | 22,763,826 | ||||||||||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
Reading International, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(U.S.
dollars in thousands)
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Six
Months Ended
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||||||||
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June
30,
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||||||||
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2009
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2008
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|||||||
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Operating
Activities
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Net
income
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$ | 6,824 | $ | 217 | ||||
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Adjustments
to reconcile net income to net cash provided
by operating activities:
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||||||||
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(Gain)
loss recognized on foreign currency transactions
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2,248 | (447 | ) | |||||
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Equity
earnings of unconsolidated joint ventures and entities
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(659 | ) | (547 | ) | ||||
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Distributions
of earnings from unconsolidated joint ventures and
entities
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412 | 507 | ||||||
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Other-than-temporary
loss on marketable securities
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2,093 | 1 | ||||||
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Gain
on retirement of subordinated debt
(trust preferred securities)
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(10,714 | ) | -- | |||||
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Gain
on option termination
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(1,530 | ) | -- | |||||
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Loss
on transfer of real estate held for sale to continuing
operations
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549 | |||||||
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Gain
on sale of investment in an unconsolidated joint venture
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-- | (2,450 | ) | |||||
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Gain
on insurance settlement
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-- | (910 | ) | |||||
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Depreciation
and amortization
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7,168 | 9,411 | ||||||
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Amortization
of prior service costs
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142 | 143 | ||||||
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Amortization
of above and below market leases
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431 | 378 | ||||||
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Amortization
of deferred financing costs
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417 | 227 | ||||||
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Amortization
of straight-line rent
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721 | 691 | ||||||
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Stock
based compensation expense
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331 | 516 | ||||||
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Changes
in operating assets and liabilities:
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||||||||
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(Increase)
decrease in receivables
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1,416 | (1,177 | ) | |||||
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(Increase)
decrease in prepaid and other assets
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(670 | ) | 252 | |||||
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Increase
(decrease) in accounts payable and accrued expenses
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(1,105 | ) | 1,614 | |||||
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Increase
(decrease) in film rent payable
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(1,234 | ) | 3,032 | |||||
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Increase
(decrease) in deferred revenues and other liabilities
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(654 | ) | 823 | |||||
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Net
cash provided by operating activities
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6,186 | 12,281 | ||||||
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Investing
activities
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||||||||
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Acquisitions
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-- | (51,746 | ) | |||||
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Acquisition
deposit (paid) returned
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(147 | ) | 2,000 | |||||
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Purchases
of and additions to property and equipment
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(3,043 | ) | (12,067 | ) | ||||
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Change
in restricted cash
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801 | -- | ||||||
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Purchase
of marketable securities
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(11,463 | ) | -- | |||||
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Investments
in unconsolidated joint ventures and entities
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-- | (460 | ) | |||||
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Distributions
of investment in unconsolidated joint ventures and
entities
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1,277 | 198 | ||||||
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Option
proceeds
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284 | -- | ||||||
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Proceeds
from the sale of an unconsolidated joint venture
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-- | 3,340 | ||||||
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Proceeds
from insurance settlement
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-- | 910 | ||||||
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Net
cash used in investing activities
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(12,291 | ) | (57,825 | ) | ||||
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Financing
activities
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||||||||
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Repayment
of long-term borrowings
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(5,468 | ) | (5,416 | ) | ||||
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Proceeds
from borrowings
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1,453 | 59,659 | ||||||
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Capitalized
borrowing costs
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-- | (2,498 | ) | |||||
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Noncontrolling
interest contributions
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50 | 75 | ||||||
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Noncontrolling
interest distributions
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(489 | ) | (761 | ) | ||||
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Net
cash provided by (used in) financing activities
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(4,454 | ) | 51,059 | |||||
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Effect
of exchange rate changes on cash and cash equivalents
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884 | 455 | ||||||
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Increase
(decrease) in cash and cash equivalents
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(9,675 | ) | 5,970 | |||||
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Cash
and cash equivalents at beginning of period
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30,874 | 20,782 | ||||||
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Cash
and cash equivalents at end of period
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$ | 21,199 | $ | 26,752 | ||||
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Supplemental
Disclosures
|
||||||||
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Interest paid
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$ | 7,753 | $ | 8,008 | ||||
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Income taxes paid
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$ | 254 | $ | 161 | ||||
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Non-cash
transactions
|
||||||||
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Exchange of marketable securities
for Reading International Trust I securities
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$ | (11,463 | ) | $ | -- | |||
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Retirement of subordinated debt
(trust preferred securities)
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$ | (23,634 | ) | $ | -- | |||
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Retirement of Reading
International Trust I securities
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$ | 11,463 | $ | -- | ||||
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Retirement of investment in
Reading International Trust I securities
|
$ | 709 | $ | -- | ||||
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Note payable due to Seller issued
for acquisition
|
$ | -- | $ | 14,750 | ||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
Reading International, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (Unaudited)
For
the Six Months Ended June 30, 2009
Note
1 – Basis of Presentation
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
founded in 1983 as a Delaware corporation and reincorporated in 1999 in
Nevada. Our businesses consist primarily of:
|
|
·
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the
development, ownership and operation of multiplex cinemas in the United
States, Australia, and New Zealand
and
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|
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·
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the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United
States.
|
The accompanying unaudited condensed
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) for
interim reporting and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission for interim
reporting. As such, certain information and disclosures
typically required by US GAAP for complete financial statements have been
condensed or omitted. There have been no material changes in the
information disclosed in the notes to the condensed consolidated financial
statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2008 (“2008 Annual Report”). The financial information
presented in this quarterly report on Form 10-Q for the period ended June 30,
2009 (the “June Report”) should be read in conjunction with our 2008 Annual
Report which contains the latest audited financial statements and related
notes. The periods presented in this document are the three (“2009
Quarter”) and six (“2009 Six Months”) months ended June 30, 2009 and the three
(“2008 Quarter”) and six (“2008 Six Months”) months ended June 30,
2008.
In the opinion of management, all
adjustments of a normal recurring nature considered necessary to present fairly
in all material respects our financial position, results of our operations and
cash flows as of and for the three months and six months ended June 30, 2009 and
2008 have been made. The results of operations for the three months
and six months ended June 30, 2009 and 2008 are not necessarily indicative of
the results of operations to be expected for the entire year. We have
evaluated subsequent events for recognition or disclosure through August 7,
2009, which was the date we filed this Form 10-Q with the SEC.
Marketable
Securities
We had investments in marketable
securities of $1.3 million and $3.1 million at June 30, 2009 and December 31,
2008, respectively. These investments are accounted for as available
for sale investments in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities, as amended by FSP FAS 115-2/124-2
Recognition and Presentation of Other-Than-Temporary Impairments. In accordance
with the Financial Accounting Standards Board’s Emerging Issues Task Force
(“EITF”) 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, assessments of potential impairment for these investments
are performed for each applicable reporting period. During the three
and six months ended June 30, 2009, we recorded other-than-temporary losses of
$1.3 million and $2.1 million, respectively, and during the three and six months
ended June 30, 2008, we recorded losses of $1,000 on certain marketable
securities. Additionally, these investments have a cumulative
unrealized loss of $2,000 included in accumulated other comprehensive income at
June 30, 2009. For the three months and six months ended June 30,
2009 our net unrealized gain on marketable securities was
$3,000
and $1,000, respectively. For the three and six months ended June 30,
2008, our net unrealized gain on marketable securities was $3,000 and $4,000,
respectively.
Included
in the second quarter of 2009 other-than-temporary impairment loss of $1.3
million is an out-of-period adjustment in connection with the recording of
additional other-than-temporary loss on marketable securities. The
adjustment decreased investment in marketable securities and increased other
loss by approximately $900,000 in the second quarter of 2009, which decreased
net income by the same amount in the second quarter of 2009. Had the
amount been reflected during the first quarter of 2009, in the period in which
it arose, other loss would have increased by $900,000 and net loss would have
increased by the same amount during that period. Based upon an
evaluation of all relevant quantitative and qualitative factors, and after
considering the provisions of APB 28, paragraph 29, and SAB Nos. 99 and 108, we
believe this correcting adjustment was not material to our estimated full year
results for 2009. In addition, we do not believe the correcting
adjustment is material to the amounts reported in the previous
quarter.
Other
Income/Loss
For the
three and six months ended June 30, 2009, we recorded other losses of $1.9
million and $2.7 million, respectively, compared to an other income of $1.7
million and $3.0 million for the same periods in 2008. For the three
months ended June 30, 2009, the $1.9 million other loss included a $2.2 million
loss on foreign currency translation, a $1.3 million other-than-temporary loss
on marketable securities, and a $1.5 million gain on a property option
termination. The six months ended June 30, 2009 included the
aforementioned items noted for the second quarter of 2009 plus an additional
$746,000 other-than-temporary loss on marketable securities. For the
three months ended June 30, 2008, other income of $1.7 million was primarily
related to a gain on foreign currency translation of $447,000, a $314,000
receipt related to our Burstone litigation and $910,000 of insurance proceeds
related to damage caused by Hurricane George in 1998 to one of our previously
owned cinemas in Puerto Rico. The six months ended June 30, 2009
included the aforementioned items noted for the second quarter of 2008 plus
settlements on our Burstone litigation of $836,000 and credit card dispute of
$385,000.
Deferred Leasing
Costs
Direct
costs incurred in connection with obtaining tenants are amortized over the
respective term of the lease on a straight-line basis.
Deferred Financing
Costs
Direct
costs incurred in connection with financing are amortized over the respective
term of the loan using the effective interest method or straight-line method if
the result is not materially different. In addition, interest on
loans with increasing interest rates and scheduled principal pre-payments is
also recognized using the effective interest method.
Correction of
Error
Subsequent
to the issuance of the 2008 consolidated financial statements, we discovered
that there was an error in the 2008 fixed asset impairment analysis related to
certain cinema assets held in New Zealand. As a result of the error,
impairment expense and accumulated other comprehensive income for the year ended
December 31, 2008 were overstated by $1.7 million and $66,000, respectively, and
property and equipment was understated by $1.8 million. We concluded that
the error is not material to the 2008 consolidated financial statements and that
the errors will be corrected with the next filing of our annual financial
statements. As a result of this correction, the net loss for the year
ended December 31, 2008 was reduced from $18.5 million to $16.8 million and the
property and equipment balance as of December 31, 2008 was increased from
$171.9
million
to $173.7 million. The unaudited condensed consolidated balance sheet
as of December 31, 2008, included in this Form 10-Q reflects this correction as
an increase in property and equipment as noted above and a corresponding
decrease in accumulated deficit from $71.2 million to $69.5
million.
Accounting Pronouncements
Adopted During 2009
SFAS No. 141(R) and No.
160
Pronouncement
Affecting the Presentation of Noncontrolling (Minority) Interests in the
Company
Effective
January 1, 2009, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 160 “Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that amounts formerly reported as minority
interests in the Company’s unaudited condensed consolidated financial statements
be reported as noncontrolling interests. In connection with the
issuance of SFAS 160, certain revisions were also made to EITF No. Topic D-98
“Classification and
Measurement of Redeemable Securities” (“EITF D-98”). These
revisions clarify that noncontrolling interests with redemption provisions
outside of the control of the issuer and noncontrolling interests with
redemption provisions that permit the issuer to settle in either cash or common
shares at the option of the issuer are subject to evaluation under EITF D-98 to
determine the appropriate balance sheet classification and measurement of
such instruments. This adoption resulted in modifications to the
reporting of noncontrolling interests in the Unaudited Condensed Consolidated
Financial Statements.
The
adoption of SFAS 160 had an impact on the presentation and disclosure of
noncontrolling (minority) interests in our condensed consolidated financial
statements. As a result of the retrospective presentation and
disclosure requirements of SFAS 160, the Company will be required to reflect the
change in presentation and disclosure for all periods presented in future
filings.
The
principal effect on the prior year balance sheet related to the adoption of SFAS
160 is an increase in total stockholders’ equity of $1.8 million due to the
reclassification of the non-controlling interest to a component of stockholders’
equity at December 31, 2008.
The
effect of the reclassification of the non-controlling interest on our prior
year’s income statement related to the adoption of SFAS 160 is a decrease in the
net income and an increase in loss before equity earnings of unconsolidated
joint ventures and entities of $182,000 for the three months ended June 30, 2008
and an increase in net income and a decrease in the loss before equity earnings
of unconsolidated joint ventures and entities of $161,000 for the six months
ended June 30, 2008.
Non-controlling
interest represents ownership interests not held by Reading International, Inc.
in its underlying consolidated subsidiaries.
SFAS
141(R)
Pronouncement
Affecting Future Operating Property Acquisitions
Effective
January 1, 2009, the Company adopted the provisions Statement of Financial
Accounting Standards No. 141(R) “Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) requires an acquiring entity to
recognize acquired assets and assumed liabilities in a transaction at fair value
as of the acquisition date and changes the accounting treatment for certain
items, including acquisition costs, which will be required to be expensed as
incurred. SFAS 141(R) is required to be applied on a prospective
basis.
The
adoption of SFAS 141(R) had a minimal effect on the Company’s unaudited
condensed consolidated financial statements, results of operations, or cash
flows for the three and six months ended June 30, 2009. The Company
anticipates that the adoption of SFAS 141(R) could have an impact on the cost
allocation of future acquisitions and will require the Company to expense
acquisition costs for future property acquisitions. While the Company
believes the impact of the adoption of SFAS 141(R) will not be material to the
Company in the future based on recent historical acquisition activity, the
impact will ultimately depend on future property acquisitions.
FSP FAS
157-4
Effective
April 1, 2009, the Company adopted the provisions of FASB Staff Position SFAS
157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP SFAS 157-4”). FSP SFAS 157-4 relates to determining
fair values when there is no active market or where the price inputs being used
represent distressed sales. It reaffirms what SFAS 157 states, which
is that the objective of fair value measurement is to reflect how much an asset
would be sold for in an orderly transaction (as opposed to a distressed or
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive. The adoption of FSP SFAS 157-4 did not
have a material effect on the Company’s financial statements.
FSP FAS 107-1 and APB
28-1
Effective
April 1, 2009, the Company adopted the provisions of FASB Staff Position SFAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (“FSP SFAS 107-1” and “APB 28-1”). FSP SFAS 107-1 and APB 28-1
relate to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet at fair value. Prior to the
issuance of FSP SFAS 107-1, fair values for these assets and liabilities were
only disclosed once a year. FSP SFAS 107-1 now requires these disclosures on a
quarterly basis, providing qualitative and quantitative information about fair
value estimates for all those financial instruments not measured on the balance
sheet at fair value. FSP SFAS 107-1 and APB 28-1 do not require disclosures for
earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, FSP SFAS 107-1 and APB 28-1 require comparative
disclosures only for periods ending subsequent to initial adoption. The adoption
of FSP SFAS 107-1 and APB 28-1 did not have a material effect on the Company’s
financial statements (see Note 18 – Fair Value of Financial
Instruments).
SFAS 165
Effective
for the second quarter of 2009, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 165 “Subsequent Events” (“SFAS
165”). SFAS 165 establishes principles and requirements for
evaluating and reporting subsequent events and distinguishes which subsequent
events should be recognized in the financial statements versus which subsequent
events should be disclosed in the financial statements. SFAS 165 also
requires disclosure of the date through which subsequent events are evaluated by
management (see Note 1 – Basis
of Presentation). The adoption of SFAS 165 did not have a
material impact on the Company’s financial statements.
New Accounting
Pronouncements
During
the first six months of 2009, the Financial Accounting Standards Board (“FASB”)
issued the following Final Staff Positions (“FSPs”) and Statements of Financial
Accounting Standards (“SFASs”) that were relevant to our company:
SFAS 167
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”) which amends the
guidance for identifying the primary beneficiary in variable interest entities,
requires ongoing assessments for purposes of identifying the primary
beneficiary, and eliminates the scope exception for qualifying special-purpose
entities. SFAS 167 will be
effective
for our first quarter 2010. We are currently assessing the impact, if
any, of SFAS 167 on our consolidated financial statements.
FSP SFAS
141(R)-1
In April
2009, the FASB issued FASB Staff Position SFAS 141(R)-1 "Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies" (“FSP SFAS 141(R)-1”). FSP SFAS 141(R)-1 amends and
clarifies SFAS 141(R) to address application issues on the accounting for
contingencies in a business combination. FSP SFAS 141(R)-1 is
effective for assets or liabilities arising from contingencies in business
combinations acquired on or after January 1, 2009. The adoption of
FSP SFAS 141(R)-1 did not have any impact on the Company’s financial
statements.
FSP SFAS
115-2 and SFAS 124-2
In April
2009, the FASB issued FSP SFAS 115-2 and FSP SFAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (“FSP SFAS 115-2 and SFAS
124-2”). FSP SFAS 115-2 and SFAS 124-2 changes the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings, as well
as expands and increases the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities. FSP
SFAS 115-2 and SFAS 124-2 is effective for fiscal years, and interim periods
within those fiscal years, ending after June 15, 2009. The adoption
of FSP SFAS 115-2 and SFAS 124-2 did not have any impact on the Company’s
financial statements.
Note
2 –Equity and Stock Based Compensation
Equity
Compensation
Landplan Property Partners,
Pty Ltd
As more
fully described in our 2008 Annual Report, we have granted the President of
Landplan Property Partners, Pty Ltd (“LPP”), Mr. Doug Osborne, as incentive
compensation, a subordinated carried interest in certain property trusts, owned
by LPP or its affiliates and formed to acquire and hold LPP’s real property
investments. The estimated value of Mr. Osborne’s incentive interest
of $203,000 at June 30, 2009 is included in the noncontrolling interest in these
property trusts at June 30, 2009 (see Note 14 – Noncontrolling
Interest). During the three and six months ended June 30,
2009, we expensed $5,000 and $55,000, respectively, and during the three and six
months ended June 30, 2008, we expensed $30,000 and $91,000, respectively,
associated with Mr. Osborne’s interests. At June 30, 2009, the total
unrecognized compensation expense related to the LPP equity awards was $175,000,
which is expected to be recognized over the remaining weighted average period of
approximately 21 months. No amounts, however, will be payable unless
the properties held by the property trusts, on a consolidated basis, provide
returns on capital in excess of 11%, compounded annually.
Stock Based
Compensation
As part
of his compensation package, Mr. John Hunter, our Chief Operating Officer, was
granted $100,000 of restricted Class A Non-Voting Common Stock on February 12,
2008. This stock grant has a vesting period of two years and stock
grant price of $9.70.
On
February 11, 2009 and 2008, $100,000 and $50,000, respectively, of restricted
Class A Non-Voting Common Stock vested related to prior year
grants. At June 30, 2009, 16,742 shares related to vested
restricted
shares
had yet to be issued. For the three and six months ended June 30,
2009, we recorded compensation expense of $56,000 and $113,000, respectively,
and, for the three and six months ended June 30, 2008, we recorded compensation
expense of $100,000 and $196,000, respectively, related to the vesting of all
our restricted stock grants.
The
following table details the grants and vesting of restricted stock to our
employees (dollars in thousands):
|
Non-Vested
Restricted Stock
|
Fair
Value at Grant Date
|
|||||||
|
Outstanding
– December 31, 2008
|
33,621 | $ | 574 | |||||
|
Vested
|
(10,948 | ) | $ | (150 | ) | |||
|
Outstanding
– June 30, 2009
|
22,673 | $ | 424 | |||||
Employee/Director Stock
Option Plan
We have a
long-term incentive stock option plan that provides for the grant to eligible
employees and non-employee directors of incentive stock options and
non-qualified stock options to purchase shares of the Company’s Class A
Nonvoting Common Stock.
When the
Company’s tax deduction from an option exercise exceeds the compensation cost
resulting from the option, a tax benefit is created. SFAS No. 123(R),
Accounting for Stock-Based
Compensation (“SFAS 123(R)”), requires that excess tax benefits related
to stock option exercises be reflected as financing cash inflows instead of
operating cash inflows. For the three months ended June 30, 2009 and
2008, there was no impact to the unaudited condensed consolidated statement of
cash flows because there were no recognized tax benefits from stock option
exercises during these periods.
SFAS
123(R) requires companies to estimate forfeitures. Based on our
historical experience and the relative market price to strike price of the
options, we do not currently estimate any forfeitures of vested or unvested
options.
In
accordance with SFAS 123(R), we estimate the fair value of our options using the
Black-Scholes option-pricing model, which takes into account assumptions such as
the dividend yield, the risk-free interest rate, the expected stock price
volatility, and the expected life of the options. The dividend yield
is excluded from the calculation, as it is our present intention to retain all
earnings. We expense the estimated grant date fair values of options
issued on a straight-line basis over the vesting period.
Based on
prior years’ assumptions for options which have been granted and in accordance
with the SFAS 123(R) modified prospective method, we recorded $58,000 and
$218,000, respectively, in compensation expense for the total estimated grant
date fair value of stock options that vested during the three and six months
ended June 30, 2009, respectively. We also recorded $160,000 and
$320,000 in compensation expense for the total estimated grant date fair value
of stock options that vested during the three and six months ended June 30,
2008, respectively. At June 30, 2009, the total unrecognized
estimated compensation cost related to non-vested stock options granted was
$17,000, which is expected to be recognized over a weighted average vesting
period of 1.8 years. No options were exercised during the three or
six months ended June 30, 2009 and 2008; therefore, no cash was received and no
value was realized from the exercise of options during those
periods. During the three and six months ended June 30, 2009, 120,625
options vested having a current intrinsic value of $0 for the period as all the
options were “out-of-the-money” at June 30, 2009. During the three
and six months ended June 30, 2008, 120,625 options vested having a current
intrinsic value of $0 for the period as all the options were “out-of-the-money”
at June 30,
2008. The
intrinsic, unrealized value of all options outstanding, vested and expected to
vest, at June 30, 2009 was $366,000 of which 100% are currently
exercisable.
All stock
options granted have a contractual life of 10 years at the grant
date. The aggregate total number of shares of Class A Nonvoting
Common Stock and Class B Voting Common Stock authorized for issuance under our
1999 Stock Option Plan is 1,287,150. At the time that options are
exercised, at the discretion of management, we will either issue treasury shares
or make a new issuance of shares to the employee or board
member. Dependent on the grant letter to the employee or board
member, the required service period for option vesting is between zero and four
years.
We had
the following stock options outstanding and exercisable as of June 30, 2009 and
December 31, 2008:
|
Common Stock Options
Outstanding
|
Weighted Average Exercise Price of Options
Outstanding
|
Common Stock Exercisable Options
|
Weighted Average Price of Exercisable
Options
|
|||||||||||||||||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||||||||||||||
|
Outstanding-
January 1, 2008
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 477,850 | 35,100 | $ | 4.72 | $ | 8.47 | ||||||||||||||||||||
|
No activity during the
period
|
-- | -- | $ | -- | $ | -- | ||||||||||||||||||||||||||
|
Outstanding-
December 31, 2008
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 525,350 | 110,100 | $ | 5.19 | $ | 9.67 | ||||||||||||||||||||
|
Expired options
|
-- | (35,100 | ) | $ | -- | $ | 8.47 | |||||||||||||||||||||||||
|
Outstanding-June
30, 2009
|
577,850 | 150,000 | $ | 5.60 | $ | 10.24 | 570,975 | 150,000 | $ | 5.57 | $ | 10.24 | ||||||||||||||||||||
The
weighted average remaining contractual life of all options outstanding, vested,
and expected to vest at June 30, 2009 and December 31, 2008 was approximately
4.98 and 5.22 years, respectively. The weighted average remaining
contractual life of the exercisable options outstanding at June 30, 2009 and
December 31, 2008 was approximately 4.96 and 4.61 years,
respectively.
Note
3 – Business Segments
Our operations are organized into two
reportable business segments within the meaning of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Our reportable segments
are (1) cinema
exhibition and (2) real
estate. The cinema segment is engaged in the development, ownership,
and operation of multiplex cinemas. The real estate segment is
engaged in the development, ownership, and operation of commercial
properties. Incident to our real estate operations we have acquired,
and continue to hold, raw land in urban and suburban centers in Australia and
New Zealand.
The
tables below summarize the results of operations for each of our principal
business segments for the three and six months ended June 30, 2009 and the three
and six months ended June 30, 2008, respectively. Operating expense
includes costs associated with the day-to-day operations of the cinemas and live
theatres and the management of rental properties (dollars in
thousands):
|
Three
months ended June 30, 2009
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 51,215 | $ | 5,432 | $ | (2,225 | ) | $ | 54,422 | |||||||
|
Operating
expense
|
41,320 | 2,680 | (2,225 | ) | 41,775 | |||||||||||
|
Depreciation
& amortization
|
2,576 | 754 | -- | 3,330 | ||||||||||||
|
Loss
on transfer of real estate held for sale to Continuing
Operations
|
-- | 549 | -- | 549 | ||||||||||||
|
General
& administrative expense
|
765 | 189 | -- | 954 | ||||||||||||
|
Segment
operating income
|
$ | 6,554 | $ | 1,260 | $ | -- | $ | 7,814 | ||||||||
|
Three
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 49,488 | $ | 5,813 | $ | (1,550 | ) | $ | 53,751 | |||||||
|
Operating
expense
|
43,330 | 2,296 | (1,550 | ) | 44,076 | |||||||||||
|
Depreciation
& amortization
|
4,060 | 1,287 | -- | 5,347 | ||||||||||||
|
General
& administrative expense
|
1,129 | 432 | -- | 1,561 | ||||||||||||
|
Segment
operating income
|
$ | 969 | $ | 1,798 | $ | -- | $ | 2,767 | ||||||||
|
Reconciliation
to net income attributable to Reading International, Inc.
shareholders:
|
2009
Quarter
|
2008
Quarter
|
||||||
|
Total
segment operating income
|
$ | 7,814 | $ | 2,767 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
(6 | ) | 181 | |||||
|
General and administrative
expense
|
3,279 | 3,348 | ||||||
|
Operating
income (loss)
|
4,541 | (762 | ) | |||||
|
Interest expense,
net
|
(2,871 | ) | (3,039 | ) | ||||
|
Gain on retirement of
subordinated debt (trust preferred securities)
|
10,714 | -- | ||||||
|
Other income
(loss)
|
(1,921 | ) | 1,671 | |||||
|
Income tax
expense
|
(647 | ) | (407 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
164 | 189 | ||||||
|
Gain on sale of investment in an
unconsolidated entity
|
-- | 2,450 | ||||||
|
Net
income
|
9,980 | 102 | ||||||
|
Net
(income) loss attributable to the noncontrolling interest
|
(90 | ) | 182 | |||||
|
Net
income attributable to Reading International, Inc. common
shareholders
|
$ | 9,890 | $ | 284 | ||||
|
Six
months ended June 30, 2009
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 94,651 | $ | 11,390 | $ | (4,541 | ) | $ | 101,500 | |||||||
|
Operating
expense
|
77,596 | 5,633 | (4,541 | ) | 78,688 | |||||||||||
|
Depreciation
& amortization
|
5,485 | 1,435 | -- | 6,920 | ||||||||||||
|
Loss
on transfer of real estate held for sale to Continuing
Operations
|
-- | 549 | -- | 549 | ||||||||||||
|
General
& administrative expense
|
1,567 | 370 | -- | 1,937 | ||||||||||||
|
Segment
operating income
|
$ | 10,003 | $ | 3,403 | $ | -- | $ | 13,406 | ||||||||
|
Six
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 84,831 | $ | 11,763 | $ | (3,116 | ) | $ | 93,478 | |||||||
|
Operating
expense
|
72,301 | 4,410 | (3,116 | ) | 73,595 | |||||||||||
|
Depreciation
& amortization
|
6,669 | 2,382 | -- | 9,051 | ||||||||||||
|
General
& administrative expense
|
1,898 | 598 | -- | 2,496 | ||||||||||||
|
Segment
operating income
|
$ | 3,963 | $ | 4,373 | $ | -- | $ | 8,336 | ||||||||
|
Reconciliation
to net income attributable to Reading International, Inc.
shareholders:
|
2009
Six Months
|
2008
Six Months
|
||||||
|
Total
segment operating income
|
$ | 13,406 | $ | 8,336 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
248 | 360 | ||||||
|
General and administrative
expense
|
6,731 | 7,101 | ||||||
|
Operating
income
|
6,427 | 875 | ||||||
|
Interest expense,
net
|
(7,261 | ) | (5,876 | ) | ||||
|
Gain on retirement of
subordinated debt (trust preferred securities)
|
10,714 | -- | ||||||
|
Other income
(loss)
|
(2,716 | ) | 3,045 | |||||
|
Income tax
expense
|
(999 | ) | (824 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
659 | 547 | ||||||
|
Gain on sale of investment in an
unconsolidated entity
|
-- | 2,450 | ||||||
|
Net
income
|
6,824 | 217 | ||||||
|
Net
income attributable to the noncontrolling interest
|
(328 | ) | (161 | ) | ||||
|
Net
income attributable to Reading International, Inc. common
shareholders
|
$ | 6,496 | $ | 56 | ||||
Note
4 – Operations in Foreign Currency
We have significant assets in Australia
and New Zealand. To the extent possible, we conduct our Australian
and New Zealand operations on a self-funding basis. The carrying
value of our Australian and New Zealand assets and liabilities fluctuate due to
changes in the exchange rates between the US dollar and the functional currency
of Australia (Australian dollar) and New Zealand (New Zealand
dollar). We have no derivative financial instruments to hedge against
the risk of foreign currency exposure.
Presented
in the table below are the currency exchange rates for Australia and New Zealand
as of June 30, 2009 and December 31, 2008:
|
US
Dollar
|
||||||||
|
June
30, 2009
|
December
31, 2008
|
|||||||
|
Australian
Dollar
|
$ | 0.8055 | $ | 0.6983 | ||||
|
New
Zealand Dollar
|
$ | 0.6447 | $ | 0.5815 | ||||
Note
5 – Earnings (Loss) Per Share
Basic earnings (loss) per share is
computed by dividing the net income (loss) to common stockholders by the
weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed by dividing the
net income (loss) to common stockholders by the weighted average number of
common shares outstanding during the period after giving effect to all
potentially dilutive common shares that would have been outstanding if the
dilutive common shares had been issued. Stock options and non-vested
stock awards give rise to potentially dilutive common shares. In
accordance with SFAS No. 128, Earnings Per Share, these shares are
included in the dilutive earnings per share calculation under the treasury stock
method. As noted in the table below, due to the small difference
between the basic and dilutive weighted average common shares, the basic and
dilutive earnings per share are the same for the 2009 Quarter, the 2008 Quarter,
the 2009 Six Months, and the 2008 Six Months. The following is a
calculation of earnings (loss) per share (dollars in thousands, except share
data):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
income attributable to Reading International, Inc. common
shareholders
|
$ | 9,890 | $ | 284 | $ | 6,496 | $ | 56 | ||||||||
|
Basic
and diluted earnings per share attributable to Reading International, Inc.
common share holders
|
$ | 0.44 | $ | 0.01 | $ | 0.29 | $ | 0.00 | ||||||||
|
Weighted
average common stock – basic
|
22,653,050 | 22,476,355 | 22,616,193 | 22,476,355 | ||||||||||||
|
Weighted
average common stock – dilutive
|
22,687,273 | 22,763,826 | 22,650,415 | 22,763,826 | ||||||||||||
For the three and six months ended June
30, 2009 and for the three and six months ended June 30, 2008, the exercisable,
out-of-the-money options excluded from the computation of diluted earnings per
share were 686,753 and 358,898, respectively, because they were
anti-dilutive.
Note
6 – Property Held For and Under Development and Property and
Equipment
As of June 30, 2009 and December 31,
2008, we owned property held for and under development summarized as follows
(dollars in thousands):
|
Property
Held For and Under Development
|
June
30, 2009
|
December
31,
2008
|
||||||
|
Land
|
$ | 44,626 | $ | 37,383 | ||||
|
Construction-in-progress
(including capitalized interest)
|
38,082 | 31,633 | ||||||
|
Property
held for and under development
|
$ | 82,708 | $ | 69,016 | ||||
We recorded capitalized interest
related to our properties under development for the three months ended June 30,
2008 of $1.7 million and for the six months ended June 30, 2009 and 2008 of
$136,000 and $3.1 million, respectively. We have curtailed the
development activities of our properties under development and not currently
capitalizing interest expense. Therefore, we did not capitalize any
interest during the three months ended June 30, 2009.
During
the second quarter of 2009, we completed the construction of the building on our
Indooroopilly property. We are currently in the process of
negotiating the lease of this property. Until the property is leased
and considered substantially complete, it will remain Property Held For and
Under Development.
As of
June 30, 2009 and December 31, 2008, we owned investments in property and
equipment as follows (dollars in thousands):
|
Property
and equipment
|
June
30, 2009
|
December
31, 2008
|
||||||
|
Land
|
$ | 57,185 | $ | 55,865 | ||||
|
Building
|
101,799 | 90,791 | ||||||
|
Leasehold
interests
|
32,553 | 32,198 | ||||||
|
Construction-in-progress
|
1,401 | 487 | ||||||
|
Fixtures
and equipment
|
76,935 | 67,965 | ||||||
| 269,873 | 247,306 | |||||||
|
Less:
accumulated depreciation
|
(88,783 | ) | (73,644 | ) | ||||
|
Property
and equipment, net
|
$ | 181,090 | $ | 173,662 | ||||
Depreciation expense for property and
equipment was $2.6 million and $4.7 million for the three months ended June 30,
2009 and 2008, respectively, and $5.8 million and $8.2 million for the six
months ended June 30, 2009 and 2008, respectively.
Note
7 – Investments in Unconsolidated Joint Ventures and Entities
Except as
noted below regarding our investment in Malulani Investments, Limited ("MIL"),
investments in unconsolidated joint ventures and entities are accounted for
under the equity method of accounting, and, as of June 30, 2009 and December 31,
2008, include the following (dollars in thousands):
|
Interest
|
June
30,
2009
|
December
31,
2008
|
||||||||||
|
Malulani
Investments, Limited
|
18.4%
|
$ | 1,800 | $ | 1,800 | |||||||
|
Rialto
Distribution
|
33.3%
|
789 | 896 | |||||||||
|
Rialto
Cinemas
|
50.0%
|
4,171 | 3,763 | |||||||||
|
205-209
East 57th
Street Associates, LLC
|
25.0%
|
358 | 1,216 | |||||||||
|
Mt.
Gravatt Cinema
|
33.3%
|
4,583 | 3,968 | |||||||||
|
Total
investments
|
$ | 11,701 | $ | 11,643 | ||||||||
For the
three and six months ended June 30, 2009 and 2008, we recorded our share of
equity earnings (loss) from our investments in unconsolidated joint ventures and
entities as follows (dollars in thousands):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Malulani
Investments, Limited
|
$ | -- | $ | -- | $ | -- | $ | -- | ||||||||
|
Rialto
Distribution
|
(60 | ) | 115 | (150 | ) | 172 | ||||||||||
|
Rialto
Cinemas
|
19 | (47 | ) | 106 | (14 | ) | ||||||||||
|
205-209
East 57th
Street Associates, LLC
|
-- | -- | 304 | -- | ||||||||||||
|
Mt.
Gravatt Cinema
|
205 | 192 | 399 | 457 | ||||||||||||
|
Berkeley
Cinema – Botany
|
-- | 1 | -- | 88 | ||||||||||||
|
Other
investments
|
-- | (72 | ) | -- | (156 | ) | ||||||||||
|
Total
equity earnings
|
$ | 164 | $ | 189 | $ | 659 | $ | 547 | ||||||||
Malulani Investments,
Limited
We continue to treat this investment on
a cost basis by recognizing earnings as they are distributed to
us. In December 2006, we commenced a lawsuit against certain officers
and directors of 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. On July 2, 2009, we and Magoon Acquisition and
Development, LLC (“Magoon LLC”) entered into a settlement agreement (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 The Malulani Group
(“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. On July 2, 2009, the lawsuit was settled in accordance with
the Settlement Terms. See Note 21 – Subsequent
Events.
Place 57 Retail Condominium
Sale
The remaining retail condominium of our
Place 57 joint venture was sold in February 2009 for approximately $4.0
million. Based on the closing statements of the sale, our share of
the sales proceeds was approximately $900,000 and earnings of $304,000.On April
11, 2009, we received $1.2 million relating to our investment in the Place 57
joint venture representing a return of substantially all of our initial
investment.
Berkeley
Cinemas
On June 6, 2008, we sold the Botany
Downs Cinema to our joint venture partner for $3.3 million (NZ$4.3 million)
resulting in a recognized gain on sale of investment in an unconsolidated entity
of $2.4 million (NZ$3.1 million).
Note
8 – Goodwill and Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, we perform an annual impairment review of our goodwill and other
intangible assets on a reporting unit basis, or earlier if changes in
circumstances indicate that an asset may be impaired. As of June 30,
2009 and December 31, 2008, we had goodwill consisting of the following (dollars
in thousands):
|
Cinema
|
Real
Estate
|
Total
|
||||||||||
|
Balance
as of December 31, 2008
|
$ | 29,888 | $ | 5,076 | $ | 34,964 | ||||||
|
Change
in goodwill due to a purchase price adjustment
|
(226 | ) | -- | (226 | ) | |||||||
|
Foreign
currency translation adjustment
|
1,199 | 67 | 1,266 | |||||||||
|
Balance
at June 30, 2009
|
$ | 30,861 | $ | 5,143 | $ | 36,004 | ||||||
We have
intangible assets other than goodwill that are subject to amortization and are
being amortized over various periods. We amortize our beneficial
leases over the lease period, the longest of which is 20 years; our trade name
using an accelerated amortization method over its estimated useful life of 50
years; and our option fee and other intangible assets over 10
years. For the three months ended June 30, 2009 and 2008,
amortization expense totaled $697,000 and $804,000, respectively; and for the
six months ended June 30, 2009 and 2008, amortization expense totaled $1.3
million and $1.2 million, respectively.
Intangible
assets subject to amortization consist of the following (dollars in
thousands):
|
As
of June 30, 2009
|
Beneficial
Leases
|
Trade
name
|
Option
Fee
|
Other
Intangible Assets
|
Total
|
|||||||||||||||
|
Gross
carrying amount
|
$ | 23,938 | $ | 7,220 | $ | 2,773 | $ | 445 | $ | 34,376 | ||||||||||
|
Less:
Accumulated amortization
|
6,320 | 1,364 | 2,663 | 128 | 10,475 | |||||||||||||||
|
Total,
net
|
$ | 17,618 | $ | 5,856 | $ | 110 | $ | 317 | $ | 23,901 | ||||||||||
|
As
of December 31, 2008
|
Beneficial
Leases
|
Trade
name
|
Option
Fee
|
Other
Intangible Assets
|
Total
|
|||||||||||||||
|
Gross
carrying amount
|
$ | 23,815 | $ | 7,220 | $ | 2,773 | $ | 440 | $ | 34,248 | ||||||||||
|
Less:
Accumulated amortization
|
5,743 | 678 | 2,616 | 93 | 9,130 | |||||||||||||||
|
Total,
net
|
$ | 18,072 | $ | 6,542 | $ | 157 | $ | 347 | $ | 25,118 | ||||||||||
Note
9 – Prepaid and Other Assets
Prepaid
and other assets are summarized as follows (dollars in thousands):
|
June
30, 2009
|
December
31, 2008
|
|||||||
|
Prepaid
and other current assets
|
||||||||
|
Prepaid
expenses
|
$ | 1,214 | $ | 518 | ||||
|
Prepaid taxes
|
1,035 | 546 | ||||||
|
Deposits
|
253 | 307 | ||||||
|
Other
|
319 | 953 | ||||||
|
Total prepaid and other current
assets
|
$ | 2,821 | $ | 2,324 | ||||
|
Other
non-current assets
|
||||||||
|
Other non-cinema and non-rental
real estate assets
|
$ | 1,134 | $ | 1,140 | ||||
|
Long-term restricted
cash
|
242 | 209 | ||||||
|
Deferred financing costs,
net
|
4,361 | 5,773 | ||||||
|
Interest rate cap – at fair
value
|
314 | -- | ||||||
|
Other
receivables
|
2,001 | 1,586 | ||||||
|
Other
|
932 | 593 | ||||||
|
Total non-current
assets
|
$ | 8,984 | $ | 9,301 | ||||
Note
10 – Income Tax
The provision for income taxes is
different from amounts computed by applying U.S. statutory rates to consolidated
losses before taxes. The significant reason for these differences is
as follows (dollars in thousands):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Expected
tax provision (benefit)
|
$ | 3,719 | $ | 178 | $ | 2,738 | $ | 364 | ||||||||
|
Reduction
(increase) in taxes resulting from:
|
||||||||||||||||
|
Change in valuation allowance,
retirement of trust preferred debt
|
(4,012 | ) | -- | (4,012 | ) | -- | ||||||||||
|
Change in valuation allowance,
other
|
388 | (91 | ) | 1,355 | (170 | ) | ||||||||||
|
Foreign income tax
provision
|
98 | 46 | 156 | 115 | ||||||||||||
|
Foreign withholding tax
provision
|
165 | 191 | 321 | 379 | ||||||||||||
|
Tax effect of foreign tax rates
on current income
|
(95 | ) | (87 | ) | (81 | ) | (194 | ) | ||||||||
|
State and local tax
provision
|
257 | 43 | 268 | 76 | ||||||||||||
|
Reserve for federal tax
litigation
|
127 | 127 | 254 | 254 | ||||||||||||
|
Actual
tax provision
|
$ | 647 | $ | 407 | $ | 999 | $ | 824 | ||||||||
During
the three and six months ended June 30, 2009 the Company’s FIN 48 liability
increased by $127,000 and $254,000, respectively, reflecting the accrual of
interest for IRS matters under litigation.
Future taxable temporary differences
connected with retiring of our trust preferred subordinated debt (see Note 11 -
Notes Payable and Subordinated
Debt) are fully offset by future deductible temporary differences, except
for state taxes of approximately $190,000 reflected above in other income
tax.
Note
11 – Notes Payable and Subordinated Debt (Trust Preferred Securities)
Notes
payable and subordinated debt (trust preferred securities)
are summarized as follows (dollars in thousands):
|
Name
of Note Payable or Security
|
June
30, 2009
|
December
31, 2008
|
Maturity
Date
|
June
30, 2009 Balance
|
December
31, 2008
Balance
|
|||||||||||||||
|
Australian
Corporate Credit Facility
|
5.12%
|
5.54%
|
June
30, 2011
|
$ | 80,953 | $ | 70,179 | |||||||||||||
|
Australian
Shopping Center Loans
|
--
|
--
|
2009-2013 | 805 | 733 | |||||||||||||||
|
Australian
Construction Loan
|
6.31%
|
6.26%
|
January
1, 2015
|
5,851 | 3,458 | |||||||||||||||
|
New
Zealand Corporate Credit Facility
|
4.35%
|
6.10%
|
March
31, 2012
|
9,671 | 8,723 | |||||||||||||||
|
Trust
Preferred Securities
|
9.22%
|
9.22%
|
April
30, 2027
|
27,913 | 51,547 | |||||||||||||||
|
US
Euro-Hypo Loan
|
6.73%
|
6.73%
|
July
11, 2012
|
15,000 | 15,000 | |||||||||||||||
|
US
GE Capital Term Loan
|
6.60%
|
6.82%
|
February
21, 2013
|
35,750 | 41,000 | |||||||||||||||
|
US
Liberty Theatres Term Loans
|
6.20%
|
6.20%
|
April
1, 2013
|
6,926 | 6,990 | |||||||||||||||
|
US
Nationwide Loan 1
|
6.50
- 7.50%
|
6.50
- 7.50%
|
February
21, 2013
|
19,311 | 18,857 | |||||||||||||||
|
US
Nationwide Loan 2
|
8.50%
|
8.50%
|
February
21, 2011
|
1,622 | 1,559 | |||||||||||||||
|
US
Sutton Hill Capital Note 1 – Related Party
|
10.34%
|
10.34%
|
December
31, 2010
|
5,000 | 5,000 | |||||||||||||||
|
US
Sutton Hill Capital Note 2 – Related Party
|
8.25%
|
8.25%
|
December
31, 2010
|
9,000 | 9,000 | |||||||||||||||
|
US
Union Square Theatre Term Loan
|
6.26%
|
6.26%
|
January
1, 2010
|
7,009 | 7,116 | |||||||||||||||
|
Total
|
$ | 224,811 | $ | 239,162 | ||||||||||||||||
New Zealand Corporate Credit
Facility
During May 2009, we extended the term
of our New Zealand facility to March 31, 2012 and reduced the available
borrowing amount to $29.0 million (NZ$45.0 million). The drawn
balance of this loan was $9.7 million (NZ$15.0 million) at June 30,
2009. We recorded $29,000 (NZ$45,000) in deferred financing costs
associated with this term extension which we will amortize over the remaining
life of the loan.
Trust Preferred
Securities
During
the first quarter of 2009, we took advantage of current market illiquidity
for securities such as our trust preferred securities to repurchase $22.9
million in face value of those securities through an exchange of $11.5 million
worth of marketable securities purchased during the period for the express
purpose of executing this exchange transaction with the third party holder of
these trust preferred securities. During the six months ended June
30, 2009, $106,000 of discount was amortized to interest income. On
April 30, 2009, we extinguished $22.9 million of these trust-preferred
securities, which resulted in a second quarter gain on retirement of
subordinated debt (trust preferred securities) of $10.7 million net of loss on
the associated deferred loan costs of $749,000.
Australia Construction
Loan
Our
Australian Construction Loan effectively matures on September 30,
2009. As such, we used our available cash reserves to pay off the
loan on July 31, 2009. See Note 21 – Subsequent
Events.
Note
12 – Other Liabilities
Other
liabilities are summarized as follows (dollars in thousands):
|
June
30, 2009
|
December
31, 2008
|
|||||||
|
Current
liabilities
|
||||||||
|
Security deposit
payable
|
$ | 158 | $ | 210 | ||||
|
Other
|
(9 | ) | (9 | ) | ||||
|
Other current
liabilities
|
$ | 149 | $ | 201 | ||||
|
Other
liabilities
|
||||||||
|
Foreign withholding
taxes
|
$ | 5,882 | $ | 5,748 | ||||
|
Straight-line rent
liability
|
5,853 | 5,022 | ||||||
|
Option
liability
|
- | 1,117 | ||||||
|
Environmental
reserve
|
1,656 | 1,656 | ||||||
|
Accrued pension
|
3,080 | 2,946 | ||||||
|
Interest rate swaps – at fair
value
|
1,033 | 1,439 | ||||||
|
Acquired leases
|
4,335 | 4,612 | ||||||
|
Other
|
1,198 | 1,064 | ||||||
|
Other
liabilities
|
$ | 23,037 | $ | 23,604 | ||||
Included
in our other liabilities are accrued pension costs of $3.1
million. The benefits of our pension plans are fully vested, and, as
such, no service costs were recognized for the three and six months ended June
30, 2009 and 2008. Our pension plans are unfunded; therefore, the
actuarial assumptions do not include an estimate for expected return on plan
assets. For the three and six months ended June 30, 2009, we
recognized $65,000 and $134,000, respectively, of interest cost and $71,000 and
$142,000, respectively, of amortized prior service cost. For the
three and six months ended June 30, 2008, we recognized $63,000 and $226,000,
respectively, of interest cost and $71,000 and $143,000, respectively, of
amortized prior service cost.
Note
13 – Commitments and Contingencies
Unconsolidated
Debt
Total
debt of unconsolidated joint ventures and entities was $870,000 and $785,000 as
of June 30, 2009 and December 31, 2008, respectively. Our share of
unconsolidated debt, based on our ownership percentage, was $290,000 and
$261,000 as of June 30, 2009 and December 31, 2008,
respectively. This debt is without recourse to us as of June 30, 2009
and December 31, 2008.
Litigation
Malulani Investments
Litigation
In
December 2006, we and Magoon LLC commenced a lawsuit entitled
Magoon Acquisition & Development, LLC; a California limited liability
company, Reading International, Inc.; a Nevada corporation, and James J. Cotter
vs. Malulani Investments, Limited, a Hawaii Corporation, Easton T. Mason; John
R. Dwyer, Jr.; Philip Gray; Kenwei Chong (Civil No. 06-1-2156-12 (GWBC)) 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.
On March
11, 2009, we and Magoon LLC agreed to terms of settlement (the “Settlement
Terms”) with respect to that lawsuit, pursuant to which we and Magoon LLC agreed
to settle that litigation and to convey our respective interests in MIL and its
parent company TMG in consideration of $2.5 million in cash, a $6.75
million three year 6.25% secured promissory note (issued by TMG), certain
releases, 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. 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. The settlement closed on July 2, 2009, in accordance with
the Settlement Terms. See Note 21 – Subsequent
Events.
Pursuant
to the Settlement Terms, on July 2, 2009, we transferred all of our interests in
MIL to TMG and Magoon LLC transferred all of its interest in MIL and TMG to TMG,
and there has been a mutual release of claims. Mr. Cotter, our
Chairman, our Chief Executive Officer and our principal shareholder and a
director of MIL, simultaneously settled his related claims for mutual general
releases and resigned from the Board of Directors of MIL.
Under the
terms of our Amended and Restated Shareholder Agreement with Magoon LLC, we are
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 substantially all of our litigation costs and the cost
of our investment in MIL. Accordingly, we will receive virtually all
of the cash proceeds of the settlement, plus virtually all distribution with
respect to the promissory note, until we have recouped both our litigation costs
and the cost of our investment. Thereafter, Magoon LLC will receive
some 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 believe that
we will recoup the full amount of our litigation costs and our investment in MIL
from the proceeds of this settlement.
Note
14 – Noncontrolling Interest
Noncontrolling interest is composed of
the following enterprises:
|
|
·
|
50%
membership interest in Angelika Film Centers LLC (“AFC LLC”) owned by a
subsidiary of DNA, Inc.;
|
|
|
·
|
25%
noncontrolling interest in Australia Country Cinemas Pty Ltd (“ACC”) owned
by Panorama Cinemas for the 21st
Century Pty Ltd.;
|
|
|
·
|
33%
noncontrolling interest in the Elsternwick Joint Venture owned by Champion
Pictures Pty Ltd.;
|
|
|
·
|
15%
incentive interest in certain property holding trusts established by LPP
or its affiliates (see Note 2); and
|
|
|
·
|
25%
noncontrolling interest in the Sutton Hill Properties, LLC owned by Sutton
Hill Capital, L.L.C.
|
The
components of noncontrolling interest are as follows (dollars in
thousands):
|
June
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
AFC
LLC
|
$ | 1,381 | $ | 1,529 | ||||
|
Australian
Country Cinemas
|
220 | 142 | ||||||
|
Elsternwick
Unincorporated Joint Venture
|
130 | 114 | ||||||
|
LPP
Property Trusts
|
203 | 117 | ||||||
|
Sutton
Hill Properties
|
(150 | ) | (85 | ) | ||||
|
Noncontrolling
interest in consolidated subsidiaries
|
$ | 1,784 | $ | 1,817 | ||||
|
Expense
for the
|
Expense
for the
|
|||||||||||||||
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
AFC
LLC
|
$ | 98 | $ | (118 | ) | $ | 302 | $ | 103 | |||||||
|
Australian
Country Cinemas
|
43 | 21 | 70 | 58 | ||||||||||||
|
Elsternwick
Unincorporated Joint Venture
|
6 | 15 | 16 | 19 | ||||||||||||
|
LLP
Property Trusts
|
5 | 30 | 55 | 91 | ||||||||||||
|
Sutton
Hill Properties
|
(62 | ) | (130 | ) | (115 | ) | (110 | ) | ||||||||
|
Net
(income) loss attributable to noncontrolling interest
|
$ | 90 | $ | (182 | ) | $ | 328 | $ | 161 | |||||||
A summary
of the changes in controlling and noncontrolling stockholders’ equity are as
follows (dollars in thousands):
|
Reading
International, Inc. Stockholders’ Equity
|
Noncontrolling
Stockholders’ Equity
|
Total
Stockholders’ Equity
|
||||||||||
|
Equity
at – January 1, 2009
|
$ | 67,630 | $ | 1,817 | $ | 69,447 | ||||||
|
Net
income
|
6,496 | 328 | 6,824 | |||||||||
|
Increase
in additional paid in capital
|
331 | 50 | 381 | |||||||||
|
Distributions
to noncontrolling stockholders
|
-- | (489 | ) | (489 | ) | |||||||
|
Accumulated
other comprehensive income
|
17,589 | 78 | 17,667 | |||||||||
|
Equity
at – June 30, 2009
|
$ | 92,046 | $ | 1,784 | $ | 93,830 | ||||||
|
Reading
International, Inc. Stockholders’ Equity
|
Noncontrolling
Stockholders’ Equity
|
Total
Stockholders’ Equity
|
||||||||||
|
Equity
at – January 1, 2008
|
$ | 121,362 | $ | 2,835 | $ | 124,197 | ||||||
|
Net
income
|
56 | 161 | 217 | |||||||||
|
Increase
in additional paid in capital
|
516 | 75 | 591 | |||||||||
|
Distributions
to noncontrolling stockholders
|
-- | (761 | ) | (761 | ) | |||||||
|
Accumulated
other comprehensive income
|
6,915 | 34 | 6,949 | |||||||||
|
Equity
at – June 30, 2008
|
$ | 128,849 | $ | 2,344 | $ | 131,193 | ||||||
Note
15 – Common Stock
During
the six months ended June 30, 2009, we issued 83,568 and 14,461 of Class A
Nonvoting shares to Mr. James J. Cotter and to Mr. S. Craig Tompkins,
respectively, associated with their prior years’ vested stock
bonuses.
Note
16 – Comprehensive Income (Loss)
U.S. GAAP requires that the effect of
foreign currency translation adjustments and unrealized gains and/or losses on
securities that are available-for-sale (“AFS”) be classified as comprehensive
income (loss). The following table sets forth our comprehensive
income (loss) for the periods indicated (dollars in thousands):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
unrealized gains (losses) on investments
|
||||||||||||||||
|
Reclassification of recognized
loss on available for sale investments included in net
income
|
$ | 1,346 | $ | -- | $ | 2,093 | $ | 1 | ||||||||
|
Unrealized gain (loss) on
available for sale investments
|
(1,343 | ) | 3 | (2,092 | ) | 3 | ||||||||||
|
Net unrealized gains on
investments
|
3 | 3 | 1 | 4 | ||||||||||||
|
Net
income
|
9,980 | 102 | 6,824 | 217 | ||||||||||||
|
Foreign currency translation
gains
|
19,796 | 1,258 | 17,446 | 6,768 | ||||||||||||
|
Accrued pension
|
71 | 71 | 142 | 143 | ||||||||||||
|
Comprehensive
income
|
29,850 | 1,434 | 24,413 | 7,132 | ||||||||||||
|
Comprehensive income (loss)
attributable to noncontrolling interest
|
(90 | ) | 182 | (328 | ) | (161 | ) | |||||||||
|
Comprehensive
income attributable to Reading International, Inc.
|
$ | 29,760 | $ | 1,616 | $ | 24,085 | $ | 6,971 | ||||||||
Note
17 – Derivative Instruments
The
following table sets forth the terms of our interest rate swap derivative
instruments at June 30, 2009:
|
Type of Instrument
|
Notional Amount
|
Pay Fixed Rate
|
Receive Variable Rate
|
Cap Rate
|
Maturity Date
|
||||||||||||
|
Interest
rate swap
|
$ | 38,500,000 | 6.6040 | % | 4.9575 | % | N/A |
April
1, 2011
|
|||||||||
|
Interest
rate swap
|
$ | 38,849,000 | 4.5500 | % | 4.4383 | % | N/A |
December
31, 2011
|
|||||||||
|
Interest
rate cap
|
$ | 20,919,000 | N/A | N/A | 4.5500 | % |
December
31, 2011
|
||||||||||
In
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), we marked our interest
rate swap instruments to market on the consolidated balance sheet resulting in a
decrease in interest expense of $1.1 million and $710,000 during the three and
six months ended June 30, 2009, respectively, and a $754,000 and $815,000
decrease to interest expense during the three and six months ended June 30,
2008, respectively. At June 30, 2009, we have recorded the fair
market value of our interest rate cap of $314,000 as an other long-term asset
and our interest rate swaps of $1.0 million as an other long-term
liability. At December 31, 2008, we have recorded the fair market
value of our interest rate swaps of $1.4 million as an other long-term
liability. In accordance with SFAS 133, we have not designated any of
our current interest rate swap positions as financial reporting
hedges.
Note
18 – Fair Value of Financial Instruments
The
following items are measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 (dollars in thousands):
|
Book Value
|
Fair Value
|
|||||||||||||||||||
|
Financial
Instrument
|
Level
|
June
30, 2009
|
December
31, 2008
|
June
30, 2009
|
December
31, 2008
|
|||||||||||||||
|
Investment
in marketable securities
|
1
|
$ | 29 | $ | 141 | $ | 29 | $ | 141 | |||||||||||
|
Investment
in marketable securities in an inactive market
|
2
|
$ | 1,295 | $ | 2,959 | $ | 1,295 | $ | 2,959 | |||||||||||
|
Interest
rate cap asset
|
2
|
$ | 314 | $ | -- | $ | 314 | $ | -- | |||||||||||
|
Interest
rate swaps liability
|
2
|
$ | 1,033 | $ | 1,439 | $ | 1,033 | $ | 1,439 | |||||||||||
We used
the following methods and assumptions to estimate the fair values of the assets
and liabilities in the table above:
|
|
·
|
Level
1: Quoted market prices in active markets for identical assets or
liabilities.
|
|
|
·
|
Level
2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
|
|
|
·
|
Level
3: Unobservable inputs that are not corroborated by market data (were not
used to value any of our assets).
|
Financial Instruments
Disclosed at Fair Value
The
following table sets forth the carrying value and the fair value of our
financial assets and liabilities at June 30, 2009 and December 31, 2008 (dollars
in thousands):
|
Book Value
|
Fair Value
|
|||||||||||||||
|
Financial
Instrument
|
June
30, 2009
|
December
31, 2008
|
June
30, 2009
|
December
31, 2008
|
||||||||||||
|
Notes
payable
|
$ | 182,898 | $ | 173,615 | $ | 180,025 | $ | 169,634 | ||||||||
|
Notes
payable to related party
|
$ | 14,000 | $ | 14,000 | $ | -- | $ | -- | ||||||||
|
Subordinated
debt (trust preferred securities)
|
$ | 27,913 | $ | 51,547 | $ | 21,608 | $ | 39,815 | ||||||||
The fair value of notes payable to
related party cannot be determined due to the related party nature of the terms
of the notes payable.
Note
19 - Transfer of Held for Sale Real Estate to Continuing Operations
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). During the period ended June 30, 2009, we did not receive
the fourth of five options payments from the buyer, but we did receive notice
from the buyer that they intended to withdraw from the option
agreement. As a result of termination of the option agreement, we
recorded a gain on option termination of $1.5 million (AUS$2.0
million). As of December 31, 2008, the Auburn property was classified
as held for sale; and, as a result of the buyer’s withdrawal from the option
agreement, we transferred this property to continuing operations during June
2009. As a result of the transfer of the previously held for sale
real estate to continuing operations, a loss was recorded in the current period
in the amount of $549,000 (AUS$685,000) to measure the property at the lower of
its carrying amount adjusted for depreciation and
amortization
expense that would have been recognized had the asset been continuously
classified as continuing operational asset, or its fair value at the date of the
decision not to sell.
The real
estate held for sale assets were reclassified from assets held for sale to in
real estate assets and then adjusted for the loss on transfer at June 30, 2009
as follows (in thousands):
|
December
31,
2008
|
Loss
Adjustment
|
June
30,
2009
|
||||||||||
|
Assets
|
||||||||||||
|
Land
|
$ | 7,395 | $ | -- | $ | 7,395 | ||||||
|
Building
|
13,131 | (286 | ) | 12,845 | ||||||||
|
Equipment
and fixtures
|
7,364 | (263 | ) | 7,101 | ||||||||
|
Less:
Accumulated depreciation
|
(7,771 | ) | -- | (7,771 | ) | |||||||
|
Total
assets held for sale
|
$ | 20,119 | $ | (549 | ) | $ | 19,570 | |||||
Note
20 - Acquisitions
Manukau Land
Purchase
On April
30, 2009, we entered into an agreement to purchase for $2.9 million (NZ$5.2
million) a property adjacent to our Manukau property. The agreement
is conditioned upon us getting regulatory approval and calls for a deposit of
$147,000 (NZ$258,000) to be paid immediately which is returnable to us if we are
unable to get regulatory approval, a second deposit to be made of $440,000
(NZ$773,000) upon regulatory approval, and the remaining balance to be paid on
the settlement date of March 31, 2010.
Note
21 – Subsequent Events
Malulani Investments
Litigation
On July
2, 2009, we settled our lawsuit with MIL and certain of its officers, directors
and affiliates. The terms of that settlement are as described in Note
13 – Commitments and
Contingencies.
Change in Stock
Exchange
On August
4, 2009, we moved our stock listings for both our classes of voting and
nonvoting stock from the AMEX to the NASDAQ exchange. The ticker
symbols for each of the stocks remained the same, namely RDI for the nonvoting
stock and RDIB for the voting stock.
Australia Construction
Loan
Our
Australian Construction Loan effectively matures on September 30,
2009. As such, we used our available cash reserves to pay off the
loan on July 31, 2009.
Indooroopilly
Lease
On July 24, 2009, we signed a lease
with the City of Brisbane, Australia to lease our Indooroopilly building to them
for an initial three-year period with two three-year options.
Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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:
|
|
·
|
cinema
exhibition, through our 58 multiplex theatres,
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:
|
|
·
|
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.
|
We believe cinema exhibition to be a
business that will likely continue to generate fairly consistent cash flows in
the years ahead. This is based on our belief that people will
continue to spend some reasonable portion of their entertainment dollar on
entertainment outside of the home and that, when compared to other forms of
outside the home entertainment, movies continue to be a popular and
competitively priced option. In keeping with our business plan of
being opportunistic in adding to our existing cinema portfolio, on February 22,
2008, we acquired 15 cinemas with 181 screens in Hawaii and California (the
“Consolidated Entertainment” acquisition) and we continue to consider the
acquisition of cinema assets currently being offered for sale in Australia, New
Zealand, and the United States. Also, in April 2008 and in August
2008, we opened two leased cinemas in Rouse Hill and Dandenong, Australia with 9
and 6 screens, respectively. We anticipate that our cinema operations
will continue as our main source of cash flow and will support our real estate
oriented activities.
In short, while we do have operating
company attributes, we see ourselves principally as a hard asset company and
intend to add to shareholder value by building the value of our portfolio of
tangible assets.
In
addition, we may from time to time identify opportunities to expand our existing
businesses and asset base, or to otherwise profit, through the acquisition of
interests in other publicly traded companies, both in the United States and in
the overseas jurisdictions in which we do business. We may also, in
addition to our investments in various private cinema joint ventures, take
positions in private companies.
At June
30, 2009, we owned and operated 52 cinemas with 427 screens, had interests in
certain unconsolidated joint ventures and entities that own an additional 4
cinemas with 32 screens and managed 2 cinemas with 9 screens.
Although we have curtailed our
development activities, we remain opportunistic in our acquisitions of cinema
assets, our business plan going forward is to continue the build-out of our
existing development properties and to seek out additional, profitable real
estate development opportunities while continuing to use and judiciously expand
our presence in the cinema exhibition and live theatre business, by identifying,
developing, and acquiring cinema and live theatre properties when and where
appropriate. In addition, we will continue to investigate potential
synergistic acquisitions that may not readily fall into either of our two
currently identified segments.
We continue to acquire, to dispose of,
or to reposition assets in accordance with our business plan. For a
description of our acquisitions so far in 2009, see Note 20 – Acquisitions to our June 30,
2009 Condensed Consolidated Financial Statements.
Results
of Operations
As previously stated, with the purchase
of the Consolidated Entertainment cinemas in February 2008 and the addition of
our newly opened Rouse Hill and Dandenong cinemas in Australia, at June 30,
2009, we owned and operated 52 cinemas with 427 screens, had interests in
certain unconsolidated joint ventures and entities that own an additional 4
cinemas with 32 screens and managed 2 cinemas with 9
screens. Regarding real estate, we owned and operated during the
period four ETRC’s that we have developed in Australia and New Zealand; owned
the fee interests in four developed commercial properties in Manhattan and
Chicago, all of which are improved with live theatres, which together comprise
seven stages, and in some cases, ancillary retail and commercial space; owned
the fee interests underlying one of our Manhattan cinemas and hold for
development an additional seven parcels (aggregating approximately 123 acres)
located principally in urbanized areas of Australia and New
Zealand. Two of these parcels, Burwood and Moonee Ponds, comprise
approximately 54 acres, and are in areas designated by the provincial government
of Victoria, Australia as “major principal activity centres.” We are
currently in the planning phases of their development.
Operating expense includes costs
associated with the day-to-day operations of the cinemas and live theatres and
the management of rental properties. Our year-to-year results of
operation were principally impacted by the following:
|
|
·
|
the
above mentioned acquisition on February 22, 2008 of 15 cinemas with 181
screens in Hawaii and California as part of the Consolidated Entertainment
acquisition (as a result of this acquisition, this quarter is the first
like-for-like prior year comparison for our cinema segment);
and
|
|
|
·
|
the
fluctuation in the value of the Australian and New Zealand dollars
vis-à-vis the US dollar resulting in a general decrease in results of
operations for our foreign operations for 2009 compared to
2008.
|
The
tables below summarize the results of operations for each of our principal
business segments for the three (“2009 Quarter”) and six (“2009 Six Months”)
months ended June 30, 2009 and the three (“2008 Quarter”) and six (“2008 Six
Months”) months ended June 30, 2008, respectively (dollars in
thousands):
|
Three
months ended June 30, 2009
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 51,215 | $ | 5,432 | $ | (2,225 | ) | $ | 54,422 | |||||||
|
Operating
expense
|
41,320 | 2,680 | (2,225 | ) | 41,775 | |||||||||||
|
Depreciation
& amortization
|
2,576 | 754 | -- | 3,330 | ||||||||||||
|
Loss
on transfer of real estate held for sale to Continuing
Operations
|
-- | 549 | -- | 549 | ||||||||||||
|
General
& administrative expense
|
765 | 189 | -- | 954 | ||||||||||||
|
Segment
operating income
|
$ | 6,554 | $ | 1,260 | $ | -- | $ | 7,814 | ||||||||
|
Three
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 49,488 | $ | 5,813 | $ | (1,550 | ) | $ | 53,751 | |||||||
|
Operating
expense
|
43,330 | 2,296 | (1,550 | ) | 44,076 | |||||||||||
|
Depreciation
& amortization
|
4,060 | 1,287 | -- | 5,347 | ||||||||||||
|
General
& administrative expense
|
1,129 | 432 | -- | 1,561 | ||||||||||||
|
Segment
operating income
|
$ | 969 | $ | 1,798 | $ | -- | $ | 2,767 | ||||||||
|
Reconciliation
to net income attributable to Reading International, Inc.
shareholders:
|
2009
Quarter
|
2008
Quarter
|
||||||
|
Total
segment operating income
|
$ | 7,814 | $ | 2,767 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
(6 | ) | 181 | |||||
|
General and administrative
expense
|
3,279 | 3,348 | ||||||
|
Operating
income (loss)
|
4,541 | (762 | ) | |||||
|
Interest expense,
net
|
(2,871 | ) | (3,039 | ) | ||||
|
Gain on retirement of
subordinated debt (trust preferred securities)
|
10,714 | -- | ||||||
|
Other income
(loss)
|
(1,921 | ) | 1,671 | |||||
|
Income tax
expense
|
(647 | ) | (407 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
164 | 189 | ||||||
|
Gain on sale of investment in an
unconsolidated entity
|
-- | 2,450 | ||||||
|
Net
income
|
9,980 | 102 | ||||||
|
Net
(income) loss attributable to the noncontrolling interest
|
(90 | ) | 182 | |||||
|
Net
income attributable to Reading International, Inc. common
shareholders
|
$ | 9,890 | $ | 284 | ||||
|
Six
months ended June 30, 2009
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 94,651 | $ | 11,390 | $ | (4,541 | ) | $ | 101,500 | |||||||
|
Operating
expense
|
77,596 | 5,633 | (4,541 | ) | 78,688 | |||||||||||
|
Depreciation
& amortization
|
5,485 | 1,435 | -- | 6,920 | ||||||||||||
|
Loss
on transfer of real estate held for sale to Continuing
Operations
|
-- | 549 | -- | 549 | ||||||||||||
|
General
& administrative expense
|
1,567 | 370 | -- | 1,937 | ||||||||||||
|
Segment
operating income
|
$ | 10,003 | $ | 3,403 | $ | -- | $ | 13,406 | ||||||||
|
Six
months ended June 30, 2008
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 84,831 | $ | 11,763 | $ | (3,116 | ) | $ | 93,478 | |||||||
|
Operating
expense
|
72,301 | 4,410 | (3,116 | ) | 73,595 | |||||||||||
|
Depreciation
& amortization
|
6,669 | 2,382 | -- | 9,051 | ||||||||||||
|
General
& administrative expense
|
1,898 | 598 | -- | 2,496 | ||||||||||||
|
Segment
operating income
|
$ | 3,963 | $ | 4,373 | $ | -- | $ | 8,336 | ||||||||
|
Reconciliation
to net income attributable to Reading International, Inc.
shareholders:
|
2009
Six Months
|
2008
Six Months
|
||||||
|
Total
segment operating income
|
$ | 13,406 | $ | 8,336 | ||||
|
Non-segment:
|
||||||||
|
Depreciation and amortization
expense
|
248 | 360 | ||||||
|
General and administrative
expense
|
6,731 | 7,101 | ||||||
|
Operating
income
|
6,427 | 875 | ||||||
|
Interest expense,
net
|
(7,261 | ) | (5,876 | ) | ||||
|
Gain on retirement of
subordinated debt (trust preferred securities)
|
10,714 | -- | ||||||
|
Other income
(loss)
|
(2,716 | ) | 3,045 | |||||
|
Income tax
expense
|
(999 | ) | (824 | ) | ||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
659 | 547 | ||||||
|
Gain on sale of investment in an
unconsolidated entity
|
-- | 2,450 | ||||||
|
Net
income
|
6,824 | 217 | ||||||
|
Net
income attributable to the noncontrolling interest
|
(328 | ) | (161 | ) | ||||
|
Net
income attributable to Reading International, Inc. common
shareholders
|
6,496 | $ | 56 | |||||
Cinema
Included
in the cinema segment above is revenue and expense from the operations of 52
cinema complexes with 427 screens during the 2009 Quarter and 51 cinema
complexes with 421 screens during the 2008 Quarter and management fee income
from 2 cinemas with 9 screens in both years. The following tables
detail our cinema segment operating results for the three months ended June 30,
2009 and 2008, respectively (dollars in thousands):
|
Three
Months Ended June 30, 2009
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 19,468 | $ | 13,246 | $ | 3,351 | $ | 36,065 | ||||||||
|
Concessions
revenue
|
7,842 | 4,475 | 937 | 13,254 | ||||||||||||
|
Advertising
and other revenues
|
1,141 | 595 | 160 | 1,896 | ||||||||||||
|
Total
revenues
|
28,451 | 18,316 | 4,448 | 51,215 | ||||||||||||
|
Cinema
costs
|
22,373 | 13,379 | 3,111 | 38,863 | ||||||||||||
|
Concession
costs
|
1,254 | 972 | 231 | 2,457 | ||||||||||||
|
Total
operating expense
|
23,627 | 14,351 | 3,342 | 41,320 | ||||||||||||
|
Depreciation
and amortization
|
1,692 | 619 | 265 | 2,576 | ||||||||||||
|
General
& administrative expense
|
596 | 169 | -- | 765 | ||||||||||||
|
Segment
operating income
|
$ | 2,536 | $ | 3,177 | $ | 841 | $ | 6,554 | ||||||||
|
Three
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,862 | $ | 12,145 | $ | 3,627 | $ | 34,634 | ||||||||
|
Concessions
revenue
|
7,732 | 4,225 | 1,089 | 13,046 | ||||||||||||
|
Advertising
and other revenues
|
868 | 715 | 225 | 1,808 | ||||||||||||
|
Total
revenues
|
27,462 | 17,085 | 4,941 | 49,488 | ||||||||||||
|
Cinema
costs
|
22,882 | 13,609 | 3,976 | 40,467 | ||||||||||||
|
Concession
costs
|
1,598 | 975 | 290 | 2,863 | ||||||||||||
|
Total
operating expense
|
24,480 | 14,584 | 4,266 | 43,330 | ||||||||||||
|
Depreciation
and amortization
|
2,762 | 833 | 465 | 4,060 | ||||||||||||
|
General
& administrative expense
|
758 | 362 | 9 | 1,129 | ||||||||||||
|
Segment
operating income (loss)
|
$ | (538 | ) | $ | 1,306 | $ | 201 | $ | 969 | |||||||
|
|
·
|
Cinema
revenue increased for the 2009 Quarter by $1.7 million or 3.5% compared to
the same period in 2008. The 2009 Quarter increase was in large
part from our domestic cinema operations, which accounted for $989,000 of
the increase. We additionally recorded higher local currency
revenues for both our Australia and New Zealand cinema
operations. However, due to a weaker US dollar in 2009, the
increased local revenues translated to somewhat higher Australian revenues
and lower New Zealand revenues for the 2009 Quarter compared to the 2008
Quarter.
|
|
|
·
|
Operating
expense decreased for the 2009 Quarter by $2.0 million or 4.6% compared to
the same period in 2008. This decrease was in part related to
the finalization of purchase accounting for our newly acquired
Consolidated Entertainment cinemas that were effective the fourth quarter
of 2008 resulting in higher straight-line rent and acquired lease costs in
2008 than in 2009. Additionally
we
|
|
|
noted
decreased cinema costs from our Australia and New Zealand cinema
operations primarily due to the impact of currency exchange rates (see
below). Overall, our operating expenses as a ratio to gross
revenue decreased from 87.6% to 80.7% for the 2008 and 2009 Quarters,
respectively.
|
|
|
·
|
Depreciation
and amortization expense decreased for the 2009 Quarter by $1.5 million or
36.6% compared to the same period in 2008 primarily related to currency
exchange rates and the previously mentioned finalization of purchase
accounting for our acquired Consolidated Entertainment
cinemas.
|
|
|
·
|
General
and administrative costs decreased for the 2009 Quarter by $364,000 or
32.2% compared to the same period in 2008 primarily related to cost
cutting measures throughout the segment and to one-time 2008 purchase and
operations costs of our newly acquired Consolidated Entertainment
cinemas.
|
|
|
·
|
For
our statement of operations, Australia and New Zealand quarterly average
exchange rates have decreased by 19.3% and 22.1%, respectively, since
2008, which had an impact on the individual components of our income
statement.
|
|
|
·
|
Because
of the above, cinema segment income increased for the 2009 Quarter by $5.6
million compared to the same period in
2008.
|
The
following tables detail our cinema segment operating results for the six months
ended June 30, 2009 and 2008, respectively (dollars in thousands):
|
Six
Months Ended June 30, 2009
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 37,323 | $ | 23,644 | $ | 5,865 | $ | 66,832 | ||||||||
|
Concessions
revenue
|
14,791 | 7,820 | 1,622 | 24,233 | ||||||||||||
|
Advertising
and other revenues
|
2,192 | 1,072 | 322 | 3,586 | ||||||||||||
|
Total
revenues
|
54,306 | 32,536 | 7,809 | 94,651 | ||||||||||||
|
Cinema
costs
|
43,295 | 24,120 | 5,734 | 73,149 | ||||||||||||
|
Concession
costs
|
2,344 | 1,701 | 402 | 4,447 | ||||||||||||
|
Total
operating expense
|
45,639 | 25,821 | 6,136 | 77,596 | ||||||||||||
|
Depreciation
and amortization
|
3,766 | 1,160 | 559 | 5,485 | ||||||||||||
|
General
& administrative expense
|
1,234 | 333 | -- | 1,567 | ||||||||||||
|
Segment
operating income
|
$ | 3,667 | $ | 5,222 | $ | 1,114 | $ | 10,003 | ||||||||
|
Six
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 28,244 | $ | 24,501 | $ | 7,605 | $ | 60,350 | ||||||||
|
Concessions
revenue
|
10,933 | 8,182 | 2,232 | 21,347 | ||||||||||||
|
Advertising
and other revenues
|
1,446 | 1,249 | 439 | 3,134 | ||||||||||||
|
Total
revenues
|
40,623 | 33,932 | 10,276 | 84,831 | ||||||||||||
|
Cinema
costs
|
33,295 | 26,214 | 8,149 | 67,658 | ||||||||||||
|
Concession
costs
|
2,242 | 1,829 | 572 | 4,643 | ||||||||||||
|
Total
operating expense
|
35,537 | 28,043 | 8,721 | 72,301 | ||||||||||||
|
Depreciation
and amortization
|
4,205 | 1,535 | 929 | 6,669 | ||||||||||||
|
General
& administrative expense
|
1,296 | 588 | 14 | 1,898 | ||||||||||||
|
Segment
operating income
|
$ | (415 | ) | $ | 3,766 | $ | 612 | $ | 3,963 | |||||||
|
|
·
|
Cinema
revenue increased for the 2009 Six Months by $9.8 million or 11.6%
compared to the same period in 2008. The 2009 Six Months
increase was primarily a result of $13.0 million of revenue from our newly
acquired Consolidated Entertainment cinemas offset by decreased results
from our Australia and New Zealand operations primarily due to the impact
of currency exchange rates (see below) including $972,000 from admissions
and $294,000 from concessions and other
revenues.
|
|
|
·
|
Operating
expense increased for the 2009 Six Months by $5.3 million or 7.3% compared
to the same period in 2008. This increase followed the
aforementioned changes in revenues which was somewhat offset by the
finalization of purchase accounting for our newly acquired Consolidated
Entertainment cinemas that were effective the fourth quarter of 2008
resulting in higher straight-line rent and acquired lease costs in 2008
than in 2009. Overall, our operating expenses as a ratio to
gross revenue decreased from 85.2% to 82.0% for the 2008 and 2009 Six
Months, respectively.
|
|
|
·
|
Depreciation
and amortization expense decreased for the 2009 Six Months by $1.2 million
or 17.8% compared to the same period in 2008 related to the same issues as
noted for the quarter above.
|
|
|
·
|
General
and administrative costs decreased for the 2009 Six Months by $331,000 or
17.4% compared to the same period in 2008 related to the same issues as
noted for the quarter above.
|
|
|
·
|
For
our statement of operations, Australia and New Zealand quarterly average
exchange rates have decreased by 16.6% and 19.7%, respectively, since
2008, which had an impact on the individual components of our income
statement.
|
|
|
·
|
Because
of the above, cinema segment income increased for the 2009 Six Months by
$6.0 million compared to the same period in
2008.
|
Real
Estate
The
following tables detail our real estate segment operating results for the three
months ended June 30, 2009 and 2008, respectively (dollars in
thousands):
|
Three
Months Ended June 30, 2009
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 533 | $ | -- | $ | -- | $ | 533 | ||||||||
|
Property
rental income
|
1,430 | 2,227 | 1,242 | 4,899 | ||||||||||||
|
Total
revenues
|
1,963 | 2,227 | 1,242 | 5,432 | ||||||||||||
|
Live
theatre costs
|
370 | -- | -- | 370 | ||||||||||||
|
Property
rental cost
|
1,067 | 880 | 363 | 2,310 | ||||||||||||
|
Total
operating expense
|
1,437 | 880 | 363 | 2,680 | ||||||||||||
|
Depreciation
and amortization
|
81 | 341 | 332 | 754 | ||||||||||||
|
Loss
on transfer of real estate held for sale to continuing
operations
|
-- | 549 | -- | 549 | ||||||||||||
|
General
& administrative expense
|
(2 | ) | 179 | 12 | 189 | |||||||||||
|
Segment
operating income
|
$ | 447 | $ | 278 | $ | 535 | $ | 1,260 | ||||||||
|
Three
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 1,131 | $ | -- | $ | -- | $ | 1,131 | ||||||||
|
Property
rental income
|
411 | 2,517 | 1,754 | 4,682 | ||||||||||||
|
Total
revenues
|
1,542 | 2,517 | 1,754 | 5,813 | ||||||||||||
|
Live
theatre costs
|
540 | -- | -- | 540 | ||||||||||||
|
Property
rental cost
|
495 | 828 | 433 | 1,756 | ||||||||||||
|
Total
operating expense
|
1,035 | 828 | 433 | 2,296 | ||||||||||||
|
Depreciation
and amortization
|
91 | 651 | 545 | 1,287 | ||||||||||||
|
General
& administrative expense
|
2 | 392 | 38 | 432 | ||||||||||||
|
Segment
operating income
|
$ | 414 | $ | 646 | $ | 738 | $ | 1,798 | ||||||||
|
|
·
|
Real
estate revenue decreased for the 2009 Quarter by $381,000 or 6.6% compared
to the same period in 2008. Revenues increased in the U.S.
primarily related to rental revenues from our newly acquired Consolidated
Entertainment cinemas that have ancillary real estate associated with them
and negotiated rent increases on several of our New York
properties. This increase was offset by a $598,000 decrease in
live theater revenue and by decreased real estate revenues from our
Australia and New Zealand properties primarily due to the impact of
currency exchange rates (see
below).
|
|
|
·
|
Operating
expense for the real estate segment increased for the 2009 Quarter by
$384,000 or 16.7% compared to the same period in 2008. This
increase in expense was primarily related to our newly acquired
Consolidated Entertainment cinemas that have ancillary real estate coupled
with increasing utility and other operating costs primarily in our US
properties.
|
|
|
·
|
Depreciation
expense for the real estate segment decreased by $533,000 or 41.4% for the
2009 Quarter compared to the same period in 2008 primarily due to the
impact of currency exchange rates (see
below).
|
|
|
·
|
We
recorded a loss in the 2009 Quarter on transfer of real estate held for
sale to continuing operations of $549,000 related to our Auburn
property.
|
|
|
·
|
General
and administrative costs decreased for the 2009 Quarter by $243,000 or
56.3% compared to the same period in 2008 primarily due cost cutting
measures associated with our Australia operations coupled with the impact
of currency exchange rate decreases (see
below).
|
|
|
·
|
For
our statement of operations, Australia and New Zealand quarterly average
exchange rates have decreased by 19.3% and 22.1%, respectively, since
2008, which had a negative impact on the individual components of our
income statement.
|
|
|
·
|
As
a result of the above, real estate segment income decreased for the 2009
Quarter by $538,000 compared to the same period in
2008.
|
The
following tables detail our real estate segment operating results for the six
months ended June 30, 2009 and 2008, respectively (dollars in
thousands):
|
Six
Months Ended June 30, 2009
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 1,444 | $ | -- | $ | -- | $ | 1,444 | ||||||||
|
Property
rental income
|
2,979 | 4,341 | 2,626 | 9,946 | ||||||||||||
|
Total
revenues
|
4,423 | 4,341 | 2,626 | 11,390 | ||||||||||||
|
Live
theatre costs
|
826 | -- | -- | 826 | ||||||||||||
|
Property
rental cost
|
2,445 | 1,685 | 677 | 4,807 | ||||||||||||
|
Total
operating expense
|
3,271 | 1,685 | 677 | 5,633 | ||||||||||||
|
Depreciation
and amortization
|
164 | 644 | 627 | 1,435 | ||||||||||||
|
Loss
on transfer of real estate held for sale to continuing
operations
|
-- | 549 | -- | 549 | ||||||||||||
|
General
& administrative expense
|
9 | 333 | 28 | 370 | ||||||||||||
|
Segment
operating income
|
$ | 979 | $ | 1,130 | $ | 1,294 | $ | 3,403 | ||||||||
|
Six
Months Ended June 30, 2008
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theatre rental and ancillary income
|
$ | 2,054 | $ | -- | $ | -- | $ | 2,054 | ||||||||
|
Property
rental income
|
924 | 5,022 | 3,763 | 9,709 | ||||||||||||
|
Total
revenues
|
2,978 | 5,022 | 3,763 | 11,763 | ||||||||||||
|
Live
theatre costs
|
1,075 | -- | -- | 1,075 | ||||||||||||
|
Property
rental cost
|
723 | 1,694 | 918 | 3,335 | ||||||||||||
|
Total
operating expense
|
1,798 | 1,694 | 918 | 4,410 | ||||||||||||
|
Depreciation
and amortization
|
181 | 1,271 | 930 | 2,382 | ||||||||||||
|
General
& administrative expense
|
14 | 523 | 61 | 598 | ||||||||||||
|
Segment
operating income
|
$ | 985 | $ | 1,534 | $ | 1,854 | $ | 4,373 | ||||||||
|
|
·
|
Real
estate revenue decreased for the 2009 Six Months by $373,000 or 3.2%
compared to the same period in 2008. Revenues increased in the
U.S. primarily related to rental revenues from our newly acquired
Consolidated Entertainment cinemas that have ancillary real estate
associated with them and negotiated rent increases on several of our New
York properties. This increase was offset
by
|
|
|
decreased
live theatre revenues and real estate revenues from our Australia and New
Zealand properties primarily due to the impact of currency exchange rates
(see below).
|
|
|
·
|
Operating
expense for the real estate segment increased for the 2009 Six Months by
$1.2 million or 27.7% compared to the same period in 2008. This
increase in expense was primarily related to our newly acquired
Consolidated Entertainment cinemas that have ancillary real estate coupled
with increasing utility and other operating costs primarily in our US
properties.
|
|
|
·
|
Depreciation
expense for the real estate segment decreased by $947,000 or 39.8% for the
2009 Six Months compared to the same period in 2008 primarily due to the
impact of currency exchange rates (see
below).
|
|
|
·
|
We
recorded a loss in the 2009 Six Months on transfer of real estate held for
sale to continuing operations of $549,000 related to our Auburn
property.
|
|
|
·
|
General
and administrative costs decreased for the 2009 Six Months by $228,000 or
38.1% compared to the same period in 2008 for the same reasons as the
quarter above.
|
|
|
·
|
For
our statement of operations, Australia and New Zealand quarterly average
exchange rates have decreased by 16.6% and 19.7%, respectively, since
2008, which had a negative impact on the individual components of our
income statement.
|
|
|
·
|
As
a result of the above, real estate segment income decreased for the 2009
Six Months by $970,000 compared to the same period in
2008.
|
Corporate
General and administrative expense
includes expenses that are not directly attributable to other operating
segments. General and administrative expense decreased by $69,000 and
$370,000 in the 2009 Quarter and 2009 Six Months, respectively, compared to same
periods in 2008. This decrease is primarily related to decreases in
professional and outside services and lower administrative travel costs in 2009
compared to 2008. Administrative travel costs were higher in 2008
primarily related to our acquisition of the Consolidated Entertainment
cinemas.
Net interest expense increased by $1.4
million for the 2009 Six Months compared to the 2008 Six Months primarily
related to our ceasing to capitalizing interest on our development properties,
where development has been substantially curtailed resulting in an increase in
interest expense for 2009.
During the 2009 Quarter and 2009 Six
Months, we recorded a $10.7 million gain on retirement of subordinated debt
(trust preferred securities), net of a $749,000 loss on deferred financing costs
associated with the subordinated debt.
For the 2009 Quarter and 2009 Six
Months we recorded other losses of $1.9 million and $2.7 million, respectively,
compared to an other income of $1.7 million and $3.0 million for the 2008
Quarter and 2008 Six Months, respectively. For the 2009 Quarter, the
$1.9 million other loss included a $2.2 million loss on foreign currency
translation, a $1.3 million other-than-temporary loss on marketable securities,
and a $1.5 million gain on a property option termination. The 2009
Six Months included the aforementioned items noted for the 2009 Quarter plus an
additional $746,000 other-than-temporary loss on marketable
securities. The 2008 Quarter other income of $1.7 million was
primarily related to a gain on foreign currency translation of $447,000, a
$314,000 receipt related to our Burstone litigation and $910,000 of insurance
proceeds related to damage caused by Hurricane George in 1998 to one of our
previously owned cinemas in Puerto Rico. The 2008 Six Months of $3.0
million included the aforementioned items noted for the 2009 Quarter plus
settlements on our Burstone litigation of $836,000 and credit card dispute of
$385,000.
Equity
earnings of unconsolidated joint ventures and entities increased by
approximately $112,000 for the 2009 Six Months compared to the same period last
year primarily related to $304,000 of earnings from our Place 57 investment for
the sale of its retail condominium in February 2009. These earnings
were offset by lower cinema earnings from our Mt. Gravatt and Rialto
Distribution investments coupled with the sale of our Botany Cinema investment
in June 2008 for which we had earnings in 2008 which was not repeated in
2009.
Net Income Attributable to
Reading International, Inc. Common Shareholders
During
2009, we recorded net income attributable to Reading International, Inc. common
shareholders of $6.5 million for the 2009 Six Months compared to $56,000 for the
2008 Six Months and $9.9 million for the 2009 Quarter compared to $284,000 for
the 2008 Quarter.
Acquisitions
Manukau Land
Purchase
On April
30, 2009, we entered into an agreement to purchase for $2.9 million (NZ$5.2
million) a property adjacent to our Manukau property. The agreement
is conditioned upon us getting regulatory approval and calls for a deposit of
$147,000 (NZ$258,000) to be paid immediately which is returnable to us if we are
unable to get regulatory approval, a second deposit to be made of $440,000
(NZ$773,000) upon regulatory approval, and the remaining balance to be paid on
the settlement date of March 31, 2010.
Business
Plan, Capital Resources, and Liquidity
Business
Plan
Our
cinema exhibition business plan is to continue to identify, develop, and acquire
cinema properties, where reasonably available, that allow us to leverage our
cinema expertise and technology over a larger operating base. Our
real estate business plan is to continue development of our existing land
assets, focusing principally on uses that incorporate entertainment elements
such as cinemas, to continue to be sensitive to opportunities to convert our
entertainment assets to higher and better uses, or, when appropriate, dispose of
such assets. Since current economic conditions, in our view, are not
conducive to obtaining the pre-construction leasing commitments necessary to
justify commencement of construction, our development efforts are currently
focused on improving and enhancing land entitlements and negotiating with end
users for build to suit projects. In addition, we will actively seek
out potential real estate sites in Australia and New Zealand that show
profitable redevelopment opportunities. We will continue to
investigate potential synergistic acquisitions that may not readily fall into
either of our two currently identified segments.
Contractual
Obligations
The
following table provides information with respect to the maturities and
scheduled principal repayments of our secured debt and lease obligations at June
30, 2009 (in thousands):
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|||||||||||||||||||
|
Debt
|
$ | 6,558 | $ | 7,694 | $ | 84,852 | $ | 25,404 | $ | 58,309 | $ | 81 | ||||||||||||
|
Notes
payable to related parties
|
-- | 14,000 | -- | -- | -- | -- | ||||||||||||||||||
|
Subordinated
notes (trust preferred securities)
|
-- | -- | -- | -- | -- | 27,913 | ||||||||||||||||||
|
Pension
liability
|
3 | 11 | 17 | 23 | 29 | 2,477 | ||||||||||||||||||
|
Lease
obligations
|
12,764 | 25,082 | 24,528 | 23,183 | 20,929 | 84,789 | ||||||||||||||||||
|
Estimated
interest on debt
|
5,478 | 9,898 | 10,625 | 4,415 | 1,811 | 16,795 | ||||||||||||||||||
|
Total
|
$ | 24,803 | $ | 56,685 | $ | 120,022 | $ | 53,025 | $ | 81,078 | $ | 132,055 | ||||||||||||
Estimated interest on long-term debt is
based on the anticipated loan balances for future periods calculated against
current fixed and variable interest rates.
We adopted FASB Interpretation (“FIN”)
48, Accounting for Uncertainty
in Income Taxes on January 1, 2007. As of adoption, the total
amount of gross unrecognized tax benefits for uncertain tax positions was $12.5
million increasing to $14.7 million as of June 30, 2009. We do not
expect a significant tax payment related to these obligations within the next 12
months.
Unconsolidated
Debt
Total
debt of unconsolidated joint ventures and entities was $870,000 and $785,000 as
of June 30, 2009 and December 31, 2008. Our share of unconsolidated
debt, based on our ownership percentage, was $290,000 and $261,000 as of June
30, 2009 and December 31, 2008. This debt is without recourse to
Reading as of June 30, 2009 and December 31, 2008.
Off-Balance Sheet
Arrangements
There are
no off-balance sheet transactions, arrangements or obligations (including
contingent obligations) that have, or are reasonably likely to have, a current
or future material effect on our financial condition, changes in the financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources.
Currency
Risk
A significant portion of our business
is conducted in Australia and New Zealand, and as such, we are subject to
currency risk. Set forth below is a chart indicating the various
exchange rates at certain points in time for the Australian and New Zealand
Dollar vis-à-vis the US Dollar over the past 20 years.
We do not engage in currency hedging
activities. Rather, to the extent possible, we operate our Australian
and New Zealand operations on a self-funding basis. Our policy in
Australia and New Zealand is to match revenues and expenses, whenever possible,
in local currencies. As a result, the majority of our expenses in
Australia and New Zealand have been procured in local currencies. Due
to the developing nature of our operations in Australia and New Zealand and our
historic practice of funding our asset growth through local borrowings, our
revenues are not yet significantly greater than our operating expenses and
interest charges in these countries. As we continue to progress with
our acquisition and development activities in Australia and New Zealand, the
effect of variations in currency values will likely increase.
Liquidity and Capital
Resources
Our ability to generate sufficient cash
flows from operating activities in order to meet our obligations and commitments
drives our liquidity position. This is further affected by our
ability to obtain adequate, reasonable financing and/or to convert
non-performing or non-strategic assets into cash.
Currently,
our liquidity needs arise mainly from:
|
|
·
|
working
capital requirements; and
|
|
|
·
|
debt
servicing requirements.
|
Our U.S.
Union Square Theatre loan matures on January 1, 2010. We will be
discussing with the lender the possibility of rolling over this loan into a new,
five-year term loan.
Under our
2000 City Cinemas transaction, we are evaluating our options regarding
purchasing the remaining asset under this rental transaction, the Village East
building, for approximately $6.0 million. This decision has to be
made by September 30, 2009.
Our
Australian Construction Loan effectively matures on September 30,
2009. As such, we used our available cash reserves to pay off the
loan on July 31, 2009.
Operating
Activities
Cash
provided by operations was $6.2 million in the 2009 Six Months compared to $12.3
million provided by operations in the 2008 Six Months. The decrease
in cash provided by operations of $6.1 million was due primarily
to:
|
|
·
|
increased
cinema operational cash flow primarily from our Consolidated Entertainment
acquisition;
|
offset
by
|
|
·
|
$2.2
million of cash used in operating assets and liabilities for 2009 compared
to $4.5 million of cash provided by operating assets and liabilities for
2008. The cash provided by operating assets and liabilities in
2008 was primarily associated with the timing of operational cash receipts
compared to operational cash payments primarily in our acquired U.S.
cinemas.
|
Investing
Activities
Cash used in investing activities for
the 2009 Six Months decreased by $45.5 million to $12.3 million from $57.8
million compared to the same period in 2008. The $12.3 million cash
used for the 2009 Six Months was primarily related to:
|
|
·
|
$3.0
million in property enhancements to our existing properties;
and
|
|
|
·
|
$11.5
million to purchase marketable securities to exchange for our Reading
International Trust I securities;
|
offset
by
|
|
·
|
$801,000
of change in restricted cash;
|
|
|
·
|
$1.3
million in return of investment of unconsolidated entities;
and
|
|
|
·
|
$284,000
receipt of an option purchase payment for the Auburn
property.
|
The $57.8 million cash used for the
2008 Six Months was primarily related to:
|
|
·
|
$49.2
million to purchase the assets of the Consolidated Entertainment
circuit;
|
|
|
·
|
$2.5
million to purchase real estate assets associated with our Australia
properties investments with Landplan Property Partners Pty Ltd;
and
|
|
|
·
|
$12.1
million in property enhancements to our existing
properties;
|
offset
by
|
|
·
|
$2.0
million of deposit returned upon acquisition of the Consolidated
Entertainment circuit;
|
|
|
·
|
$910,000
of proceeds from insurance settlement;
and
|
|
|
·
|
$3.3
million of cash received from the sale of our interest in the Botany Downs
cinema in New Zealand.
|
Financing
Activities
Cash used
in financing activities for the 2009 Six Months was $4.5 million compared to
$51.1 million of cash provided by financing activities for the same period in
2008 resulting in a decrease of $55.5 million. The $4.5 million in
cash used in the 2009 Six Months was primarily related to:
|
|
·
|
$1.5
million of borrowing on our Australia credit
facilities;
|
offset
by
|
|
·
|
$5.5
million of loan repayments; and
|
|
|
·
|
$489,000
in noncontrolling interest
distributions.
|
The $51.1
million in cash provided in the 2008 Six Months was primarily related
to:
|
|
·
|
$48.0
million of net proceeds from our new GE Capital loan used to finance the
purchase of Consolidated
Entertainment;
|
|
|
·
|
$6.6
million of net proceeds from our Liberty Theatres loan;
and
|
|
|
·
|
$2.6
million of borrowing on our Australia credit
facility;
|
offset
by
|
|
·
|
$5.4
million of loan repayments including $5.3 million to pay down on our GE
Capital loan; and
|
|
|
·
|
$761,000
in distributions to minority
interests.
|
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. Although accounting for our core business of cinema and
live theatre exhibition with a real estate focus is relatively straightforward,
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.
|
These
critical accounting policies are fully discussed in our 2008 Annual Report and
you are advised to refer to that discussion.
Financial Risk
Management
Our
internally developed risk management procedure, seeks to minimize the
potentially negative effects of changes in currency exchange rates and interest
rates on the results of operations. Our primary exposure to
fluctuations in the financial markets is currently due to changes in currency
exchange rates between U.S and Australia and New Zealand, and interest
rates.
As our operational focus continues to
shift to Australia and New Zealand, unrealized foreign currency translation
gains and losses could materially affect our financial position. We
currently manage our currency
exposure
by creating, whenever possible, natural hedges in Australia and New
Zealand. This involves local country sourcing of goods and services
as well as borrowing in local currencies.
Our
exposure to interest rate risk arises out of our long-term debt
obligations. Consistent with our internally developed guidelines, we
seek to reduce the negative effects of changes in interest rates by changing the
character of the interest rate on our long-term debt, converting a variable rate
into a fixed rate. Our internal procedures allow us to enter into
derivative contracts on certain borrowing transactions to achieve this
goal. Our Australian credit facilities provide for floating interest
rates but require that not less than a certain percentage of the loans be
swapped into fixed rate obligations using the derivative contracts.
In
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), we marked our interest
rate swap instruments to market on the consolidated balance sheet resulting in a
decrease in interest expense of $1.1 million and $710,000 during the three and
six months ended June 30, 2009, respectively, and a $754,000 and $815,000
decrease to interest expense during the three and six months ended June 30,
2008, respectively. At June 30, 2009, we have recorded the fair
market value of our interest rate swaps of $314,000 million and $1.0 million as
an other long-term asset and as an other long-term liability,
respectively. At December 31, 2008, we have recorded the fair market
value of our interest rate swaps of $1.4 million as an other long-term
liability. In accordance with SFAS 133, we have not designated any of
our current interest rate swap positions as financial reporting
hedges.
Inflation
We
continually monitor inflation and the effects of changing
prices. Inflation increases the cost of goods and services
used. Competitive conditions in many of our markets restrict our
ability to recover fully the higher costs of acquired goods and services through
price increases. We attempt to mitigate the impact of inflation by
implementing continuous process improvement solutions to enhance productivity
and efficiency and, as a result, lower costs and operating
expenses. In our opinion, the effects of inflation have been managed
appropriately and as a result, have not had a material impact on our operations
and the resulting financial position or liquidity.
Litigation
We are
currently, and are from time to time, involved with claims and lawsuits arising
in the ordinary course of our business. Some examples of the types of
claims are:
|
|
·
|
contractual
obligations;
|
|
|
·
|
insurance
claims;
|
|
|
·
|
IRS
claims;
|
|
|
·
|
employment
matters;
|
|
|
·
|
environmental
matters; and
|
|
|
·
|
anti-trust
issues.
|
Where we
are the plaintiffs, we expense all legal fees on an on-going basis and make no
provision for any potential settlement amounts until received. In
Australia, the prevailing party is entitled to recover its attorneys fees, which
typically works out to be approximately 60% of the amounts actually spent where
first class legal counsel is engaged at customary rates. Where we are
a plaintiff, we have likewise made no provision for the liability for the
defendant’s attorneys' fees in the event we were determined not to be the
prevailing party.
Where we are the defendants, we accrue
for probable damages, which may not be covered by insurance, as they become
known and can be reasonably estimated. In our opinion, any claims and
litigation in which we are currently involved are not reasonably likely to have
a material adverse effect on our business, results of operations, financial
position, or liquidity. However, we do not give any assurance as to
the ultimate outcome of such claims and litigation. The resolution of
such claims and litigation could be material to our operating results for any
particular period, depending on the level of income for such
period. Except as noted below regarding Malulani Investments, Limited
("MIL"), there have been no material changes to our litigation exposure since
our 2008 Annual Report.
Malulani Investments,
Limited
We continue to treat this investment on
a cost basis by recognizing earnings as they are distributed to
us. In December 2006, we commenced a lawsuit against certain officers
and directors of 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. On July 2, 2009, we and Magoon Acquisition and
Development, LLC (“Magoon LLC”) entered into a settlement agreement (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 The Malulani Group
(“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. On July 2, 2009, the lawsuit was settled in accordance with
the Settlement Terms. See Note 21 – Subsequent Events to our June 30, 2008
Condensed Consolidated Financial Statements.
Forward-Looking
Statements
Our
statements in this interim quarterly report contain a variety of forward-looking
statements as defined by the Securities Litigation Reform Act of
1995. Forward-looking statements reflect only our expectations
regarding future events and operating performance and necessarily speak only as
of the date the information was prepared. No guarantees can be given
that our expectation will in fact be realized, in whole or in
part. You can recognize these statements by our use of words such as,
by way of example, “may,” “will,” “expect,” “believe,” and “anticipate” or other
similar terminology.
These
forward-looking statements reflect our expectation after having considered a
variety of risks and uncertainties. However, they are necessarily the
product of internal discussion and do not necessarily completely reflect the
views of individual members of our Board of Directors or of our management
team. Individual Board members and individual members of our
management team may have different views as to the risks and uncertainties
involved, and may have different views as to future events or our operating
performance.
Among the
factors that could cause actual results to differ materially from those
expressed in or underlying our forward-looking statements are the
following:
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·
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With
respect to our cinema operations:
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o
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The
number and attractiveness to movie goers of the films released in future
periods;
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o
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The
amount of money spent by film distributors to promote their motion
pictures;
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o
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The
licensing fees and terms required by film distributors from motion picture
exhibitors in order to exhibit their
films;
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o
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The
comparative attractiveness of motion pictures as a source of entertainment
and willingness and/or ability of consumers (i) to spend their dollars on
entertainment and (ii) to spend their entertainment dollars on movies in
an outside the home environment;
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o
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The
extent to which we encounter competition from other cinema exhibitors,
from other sources of outside of the home entertainment, and from inside
the home entertainment options, such as “home theaters” and competitive
film product distribution technology such as, by way of example, cable,
satellite broadcast, DVD and VHS rentals and sales, and so called “movies
on demand;” and
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o
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The
extent to and the efficiency with which, we are able to integrate
acquisitions of cinema circuits with our existing
operations.
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·
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With
respect to our real estate development and operation
activities:
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o
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The
rental rates and capitalization rates applicable to the markets in which
we operate and the quality of properties that we
own;
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o
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The
extent to which we can obtain on a timely basis the various land use
approvals and entitlements needed to develop our
properties;
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o
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The
risks and uncertainties associated with real estate
development;
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o
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The
availability and cost of labor and
materials;
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o
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Competition
for development sites and tenants;
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o
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Environmental
remediation issues; and
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o
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The
extent to which our cinemas can continue to serve as an anchor tenant
which will, in turn, be influenced by the same factors as will influence
generally the results of our cinema operations;
and
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·
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With
respect to our operations generally as an international company involved
in both the development and operation of cinemas and the development and
operation of real estate; and previously engaged for many years in the
railroad business in the United
States:
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o
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Our
ongoing access to borrowed funds and capital and the interest that must be
paid on that debt and the returns that must be paid on such
capital;
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o
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The
relative values of the currency used in the countries in which we
operate;
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o
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Changes
in government regulation, including by way of example, the costs resulting
from the implementation of the requirements of
Sarbanes-Oxley;
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o
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Our
labor relations and costs of labor (including future government
requirements with respect to pension liabilities, disability insurance and
health coverage, and vacations and
leave);
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o
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Our
exposure from time to time to legal claims and to uninsurable risks such
as those related to our historic railroad operations, including potential
environmental claims and health related claims relating to alleged
exposure to asbestos or other substances now or in the future recognized
as being possible causes of cancer or other health related
problems;
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o
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Changes
in future effective tax rates and the results of currently ongoing and
future potential audits by taxing authorities having jurisdiction over our
various companies; and
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o
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Changes
in applicable accounting policies and
practices.
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The above
list is not necessarily exhaustive, as business is by definition unpredictable
and risky, and subject to influence by numerous factors outside of our control
such as changes in government regulation or
policy,
competition, interest rates, supply, technological innovation, changes in
consumer taste and fancy, weather, and the extent to which consumers in our
markets have the economic wherewithal to spend money on beyond-the-home
entertainment.
Given the
variety and unpredictability of the factors that will ultimately influence our
businesses and our results of operation, it naturally follows that no guarantees
can be given that any of our forward-looking statements will ultimately prove to
be correct. Actual results will undoubtedly vary and there is no
guarantee as to how our securities will perform either when considered in
isolation or when compared to other securities or investment
opportunities.
Finally,
please understand that we undertake no obligation to update publicly or to
revise any of our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable law. Accordingly, you should always note the date to which
our forward-looking statements speak.
Additionally, certain of the
presentations included in this interim quarterly report may contain “non-GAAP
financial measures.” In such case, a reconciliation of this
information to our GAAP financial statements will be made available in
connection with such statements.
Item 3 –
Quantitative and Qualitative Disclosure about Market Risk
The
Securities and Exchange Commission requires that registrants include information
about potential effects of changes in currency exchange and interest rates in
their filings. Several alternatives, all with some limitations, have
been offered. The following discussion is based on a sensitivity
analysis, which models the effects of fluctuations in currency exchange rates
and interest rates. This analysis is constrained by several factors,
including the following:
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·
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It
is based on a single point in time.
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·
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It
does not include the effects of other complex market reactions that would
arise from the changes modeled.
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Although
the results of such an analysis may be useful as a benchmark, they should not be
viewed as forecasts.
At June
30, 2009, approximately 47% and 17% of our assets were invested in assets
denominated in Australian dollars (Reading Australia) and New Zealand dollars
(Reading New Zealand), respectively, including approximately $13.5 million in
cash and cash equivalents. At December 31, 2008, approximately 44%
and 18% of our assets were invested in assets denominated in Australian dollars
(Reading Australia) and New Zealand dollars (Reading New Zealand) including
approximately $19.6 million in cash and cash equivalents.
Our policy in Australia and New Zealand
is to match revenues and expenses, whenever possible, in local
currencies. As a result, a majority of our expenses in Australia and
New Zealand have been procured in local currencies. Due to the
developing nature of our operations in Australia and New Zealand, our revenue is
not yet significantly greater than our operating expense. The
resulting natural operating hedge has led to a somewhat negligible foreign
currency effect on our current earnings. Although foreign currency
has had a nominal effect on our current earnings, the effect of the translation
adjustment on our assets and liabilities noted in our other comprehensive income
was an increase of $19.8 million and $17.5 million for the three and six months
ended June 30, 2009, respectively. As we continue to progress our
acquisition and development activities in Australia and New Zealand, we cannot
assure you that the foreign currency effect on our earnings will be
insignificant in the future.
Historically, our policy has been to
borrow in local currencies to finance the development and construction of our
ETRC’s in Australia and New Zealand whenever possible. As a result,
the borrowings in local currencies have provided somewhat of a natural hedge
against the foreign currency exchange exposure. Even so, and as a
result of our issuance of fully subordinated notes (trust preferred securities)
in 2006, approximately 45% and 69% of our Australian and New Zealand assets,
respectively, remain subject to such exposure unless we elect to hedge our
foreign currency exchange between the US and Australian and New Zealand
dollars. If the foreign currency rates were to fluctuate by 10% the
resulting change in Australian and New Zealand assets would be $8.0 million and
$4.6 million, respectively, and the change in our quarterly net income would be
$189,000 and $59,000, respectively. At the present time, we have no
plan to hedge such exposure.
We record unrealized foreign currency
translation gains or losses that could materially affect our financial
position. As of June 30, 2009 and December 31, 2008, we have recorded
a cumulative unrealized foreign currency translation gain of approximately $26.5
million and $8.8 million, respectively.
Historically, we maintained most of our
cash and cash equivalent balances in short-term money market instruments with
original maturities of three months or less. Some of our money market
investments may decline in value if interest rates increase. Due to
the short-term nature of such investments, a change of 1% in short-term interest
rates would not have a material effect on our financial
condition.
While we
have typically used fixed rate financing (secured by first mortgages) in the
U.S., fixed rate financing is typically not available to corporate borrowers in
Australia and New Zealand. The majority of our Australian and New
Zealand bank loans have variable rates. The Australian facilities
provide for floating interest rates, but require that not less than a certain
percentage of the loans be swapped into fixed rate obligations (see Financial Risk Management
above). If we consider the interest rate swaps, a 1% increase
or decrease in short-term interest rates would have resulted in approximately
$416,000 increase or decrease in our 2009 Six Months Australian and New Zealand
interest expense.
Item 4 –
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that
our disclosure controls and procedures were effective as of the end of the
period covered by this quarterly report.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30,
2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II –
Other Information
Item 1 - Legal
Proceedings
For a
description of legal proceedings, please refer to Item 3 entitled Legal
Proceedings contained in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.
On July
2, 2009, we settled our lawsuit with MIL and certain of its officers, directors
and affiliates. The terms of that settlement are as described in Note
13 – Commitments and
Contingencies to our June 30, 2008 Condensed Consolidated Financial
Statements.
Item 2 - Unregistered Sales of Equity
Securities and
Use of Proceeds
For a description of grants of stock to
certain executives, see the Stock Based Compensation section under see Note 2 –
Stock-Based and Equity
Compensation, above.
Item 3 - Defaults upon
Senior Securities
Not applicable.
Item 4 - Submission of
Matters to a Vote of Securities Holders
None
Item 5 - Other
Information
Not applicable.
Item 6 -
Exhibits
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3.8
|
Amendment
and Restatement of Articles of Incorporation of Reading International,
Inc. as filed with the Nevada Secretary of State on May 22, 2003, filed
herewith.
|
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31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
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31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
|
32
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
READING INTERNATIONAL,
INC.
|
Date:
|
August
7, 2009
|
By:
|
/s/ James J. Cotter
|
|
James
J. Cotter
|
|||
|
Chief
Executive Officer
|
|
Date:
|
August
7, 2009
|
By:
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/s/ Andrzej Matyczynski
|
|
Andrzej
Matyczynski
|
|||
|
Chief
Financial Officer
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