UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2007
or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _______ to ______
Commission
File No. 1-8625
READING
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
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NEVADA
(State
or other jurisdiction of incorporation or organization)
500
Citadel Drive, Suite 300
Commerce,
CA
(Address
of principal executive offices)
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95-3885184
(I.R.S.
Employer Identification Number)
90040
(Zip
Code)
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Registrant’s
telephone number, including Area Code: (213) 235-2240
Securities
Registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Nonvoting Common Stock, $0.01 par value
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American
Stock Exchange
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Class
B Voting Common Stock, $0.01 par value
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American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No þ
If this report is an annual or
transition report, indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes ¨ No þ
Indicate by check mark whether
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act of 1934 during the preceding 12 months (or for shorter
period than the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þNo ¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K of any amendments to this Form 10-K. ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer þ Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No þ
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date. As of March 17, 2007, there were 20,992,909 shares
of Class A Non-voting Common Stock, par value $0.01 per share and 1,495,490
shares of Class B Voting Common Stock, par value $0.01 per share,
outstanding. The aggregate market value of voting and nonvoting stock held
by non-affiliates of the Registrant was $153,983,000
as of March 26, 2007.
READING INTERNATIONAL, INC.
ANNUAL
REPORT ON FORM 10-K
YEAR
ENDED DECEMBER 31, 2007
INDEX
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Item 1 – Our
Business
General Description of Our
Business
Reading International, Inc., a Nevada
corporation (“RDI”), was incorporated in 1999 incident to our reincorporation in
Nevada. However, we trace our corporate roots back to the Reading
Railroad and its corporate predecessors, first incorporated in
1833. Our Class A Nonvoting Common Stock (“Class A Stock”) and Class
B Voting Common Stock (“Class B Stock”) are listed for trading on the American
Stock Exchange under the symbols RDI and RDI.B. Our principal
executive offices are located at 500 Citadel Drive, Suite 300, Commerce,
California 90040. Our general telephone number is (213)
235-2240. Our website can be found at www.readingrdi.com. In
this Annual Report, we from time to time use terms such as the “Company,”
“Reading” and “we,” “us,” or “our” to refer collectively to RDI and our various
consolidated subsidiaries and corporate predecessors.
We are an internationally diversified
company principally focused on the ownership and development of land and brick,
mortar entertainment and real property assets. Our businesses consist
primarily of:
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the
development, ownership and operation of multiplex cinemas in the United
States, Australia, and New Zealand;
and
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the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United States, including
entertainment-themed retail centers (“ETRCs”) in Australia and New Zealand
and live theater assets in Manhattan and Chicago in the United
States.
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Recognizing that we are part of a world
economy, we endeavor to keep a balance between our US and overseas
assets. Taking into account acquisitions made in February 2008 as
described more fully below, we currently have approximately 35% of our assets
(based on book value) in the United States, 44% in Australia and 21% in New
Zealand.
While we do not believe the cinema
exhibition business to be a growth business at this time, we do believe it to be
a business that will likely continue to generate fairly consistent cash flows in
the years ahead even in a recessionary or inflationary
environment. This is based on our belief that people will continue to
spend some reasonable portion of their entertainment dollar on entertainment
outside of the home and that, when compared to other forms of outside the home
entertainment, movies continue to be a popular, and competitively priced
option. However, since we believe the cinema exhibition business to
be a mature business with most markets either adequately screened or
over-screened, we see our future asset growth coming more from our real estate
development activities and from the acquisition of existing cinemas rather than
from the development of new cinemas. Over time, we anticipate that
our cinema operations will become increasingly a source of cash flow to support
our real estate oriented activities, rather than a focus of growth, and that our
real estate activities will, again, over time become the principal thrust of our
business. We also, from time to time, invest in the shares of other
companies, where we believe the business or assets of those companies to be
attractive or to offer synergies to our existing entertainment and real estate
businesses.
Consistent with this philosophy, on
February 22, 2008 we acquired from two commonly owned companies, Pacific
Theatres and Consolidated Amusement Theatres, substantially all of their cinema
assets in Hawaii, San Diego County, and Northern California for $69.3
million. In total, we acquired fourteen mature leasehold cinemas and
the management rights to one additional mature cinema, representing a total of
181 screens. In saying that these cinema are “mature” we mean that
they have been in operation for some years, and are, in our view, proven
performers in their markets. For the fiscal year ended December 28,
2007, we estimate that these theatres produced gross revenues of approximately
$78.0 million. We refer to these cinemas from time to time in this
report as Consolidated Cinemas. While this was a major acquisition
for us, we believe it to have been a reasonably conservative investment, given
the mature status of these assets and the fact that our Chairman and Chief
Operating Officer are both familiar with these assets and the markets in which
they operate due to their prior association with the sellers.
Our acquisition of the Consolidated
Cinemas was financed, principally with a combination of commercial lenders
institutional finance ($50.0 million) and seller finance ($21.0
million). Accordingly, our investment was approximately $2.2 million
to cover for transaction related costs and expenses such as attorneys’ fees,
financing fees,
and
transfer fees. Reading International, our parent company, has
provided a guarantee on the commercial lending up until the time when the
leverage ratio reaches a 2.75 to 1.00. The sellers financing is
recourse to companies having as their only assets the Consolidated Cinemas and
two of our domestic cinemas, our Manville and Angelika Dallas
cinemas.
While we have not yet completed a 2007
audit of the results of the operation of these cinema assets, we believe based
upon information provided to us by the sellers that these cinemas generated
approximately $78.0 million in gross revenue for the twelve months ended
December 31, 2007 as compared to gross revenues of approximately $76.7 million
for the twelve months ended December 31, 2006. This compares to
approximately $103.5 million in revenue for our existing cinemas for the year
ended December 31, 2007. While the ultimate purchase price is subject
to various downward adjustments (including adjustments to reflect currently
anticipated competition from announced cinema developments in the markets
serviced by Consolidated Cinemas), we believe that the purchase price represents
an approximately 5.5X EBITDA multiple, based upon the proforma EBITDA for these
cinemas (calculated without reference to general and administrative costs
incurred at levels above the cinema operating level) used in our evaluation of
the purchase of these assets. We believe that these cinemas
represented an approximately 70% market share of Hawaii and 12% market share of
the San Diego County cinema markets for this period. For book
purposes, we will carrying Consolidated Cinemas at an initial value of $69.3
million, but as previously noted, this price is subject to
adjustment. While no assurances can be given, we currently anticipate
a reduction in this amount of between $6.25 million and $22.7 million, depending
principally upon competitive developments over the next several
years.
We also acquired for 5.1 million
(AUS$6.0 million) a 20% interest in Becker Group Limited (“BGL”), which is in
the art film exhibition and distribution business in Australia and the
television remote and special event broadcast business in Australia and New
Zealand. In February, BGL announced that it had entered into an
agreement to sell its cinema and film distribution business for approximately
$18.4 million (AUS$21.0 million) in cash to Icon Film Distribution Pty Limited
(a company associated with Mel Gibson). BGL is controlled by Prime
Media Group Limited, which owns approximately 76% of the outstanding shares of
that company.
We are currently in discussions with
the owners of other cinema circuits as to the possible acquisition of one or
more of those circuits or in some cases, for portions of the cinema assets being
offered for sale. In New Zealand, SkyCity Cinemas has announced its
interest in selling its New Zealand circuit and we have made a non-binding
proposal to acquire a substantial portion of those assets. However,
no assurances can be given as to the ultimate outcome of those discussions, and
we are limited by our confidentiality arrangements from discussing the details
of our proposals. We are also in discussion with the owner of a
circuit in the United States, but again those discussions are subject to a
confidentiality agreement.
On the real estate front, we acquired
the long-term ground lease interest underlying our Tower Theatre in Sacramento,
we acquired directly fee interests in New Zealand representing some 16,000
square feet of land and some 25,000 square feet of improvements, and through our
affiliate, Landplan Property Partners, Ltd (“Landplan”) acquired two
developmental properties in New Zealand representing some 2.8 million square
feet of land, and 8,700 square feet of current improvements, for a total
purchase price of $20.6 million.
Financing
Historically,
we have endeavored to match the currency in which we have financed our
development with the jurisdiction within which these developments are
located. However, believing that the US Dollar was likely to
materially decrease in value versus the New Zealand and Australian Dollars, in
February 2007 we privately placed $50.0 million of 20-year Trust Preferred
Securities, with dividends fixed at 9.22% for the first five years, to serve as
a long term financing foundation for our real estate assets and to pay down our
New Zealand and Australia Dollar denominated debt.
There are
no principal payments until maturity in 2027 when the notes are paid in
full. Although structured as the issuance of trust preferred
securities by a related trust, the financing is essentially the same as an
issuance of fully subordinated debt: the payments are tax deductible to us and
the default remedies are the same as debt. The net proceeds of this
issuance were used principally to retire all of our then outstanding bank
indebtedness in New Zealand of $34.4 million (NZ$50.0 million) and to pay down
our bank indebtedness in Australia by $5.8 million (AUS$7.4
million).
Summary
In short,
while we do have operating company attributes, we see ourselves principally as a
hard asset company and intend to add to shareholder value by building the value
of our portfolio of tangible assets including both entertainment and other types
of land, brick, and mortar assets. We are endeavoring to maintain a
reasonable balance between our domestic and overseas assets and operations, and
a reasonable balance between our cash generating cinema operations and our cash
consuming real estate development activities. We believe that by
blending the cash generating capabilities of a cinema company with the
investment and development opportunities of a real estate development company,
we are unique among public companies in our business plan.
At
December 31, 2007, our assets include:
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interests
in 44 cinemas comprising some 286
screens;
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fee
ownership of approximately 1.1 million square feet of developed commercial
real estate, and approximately 15.3 million square feet of land (including
approximately 5.2 million square feet of land held for development),
located principally in urbanized areas of Australia, New Zealand and the
United States;
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cash,
cash equivalents and investments in marketable securities aggregating
$20.8 million;
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a
25% interest in the limited liability company that developed Place 57, the 36-story, 68-residential
unit mixed use condominium project on 57th Street near 3rd Avenue in
Manhattan, the principal remaining asset of which is approximately 3,700
square feet of retail space on the ground floor of that building onto 57th
Street;
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an
approximately 20% interest in BGL, described above;
and
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an
18.4% interest in Malulani Investments Limited (“MIL”), a private Hawaiian
corporation whose assets consist primarily of real estate, including
approximately 22,000 acres of land (a portion of which is improved with
the Guenoc Winery and vineyards), located in Napa and Lake Counties, in
California.
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At
December 31, 2007, the book value of our assets was approximately $346.1
million; and as of that same date, we had a consolidated stockholders’ book
equity of approximately $121.4 million. Calculated based on book
value, nearly 68% of our assets, or approximately $235.3 million, relates to our
real estate activities. Calculated based on book value, nearly 78% of
our assets, or approximately $270.9 million, represents assets located in
Australia and New Zealand. However, taking into account our
acquisition of Consolidated Cinemas, this allocation is now approximately 57%
and 65% respectively.
At
December 31, 2007, the allocation between our cinema assets and our non-cinema
assets was approximately 23% and 77%, respectively. However, taking
into account our acquisition of Consolidated Cinemas, this allocation is now
approximately 36% and 64%, respectively.
We believe that, given the nature of
our real estate oriented balance sheet, our development activities, and the
appreciation enjoyed by real estate assets over the past several years, that our
book value substantially understates the fair market value of our
assets.
Summary of Our Cinema
Exhibition Activities
We
conduct our cinema operations on four basic and rather simple
premises:
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first,
notwithstanding the enormous advances that have been made in home
entertainment technology, humans are essentially social beings, and will
continue to want to go beyond the home for their entertainment, provided
that the they are offered clean, comfortable and convenient facilities,
with state of the art technology;
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second,
cinemas can be used as anchors for larger retail developments, and our
involvement in the cinema business can give us an advantage over other
real estate developers or redevelopers who must identify and negotiate
exclusively with third party anchor
tenants;
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third,
pure cinema operators can get themselves into financial difficulty as
demands upon them to produce cinema based earnings growth tempt them into
reinvesting their cash flow into increasingly marginal cinema
sites. While we believe that there will continue to be
attractive cinema acquisition opportunities in the future, and believe
that we have taken advantage of one such opportunity through our purchase
of Consolidated Cinemas, we do not feel pressure to build or acquire
cinemas for the sake of simply adding on units, and intend to focus our
cash flow on our real estate development and operating activities, to the
extent that attractive cinema opportunities are not available to us;
and
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fourth,
we are never afraid to convert an entertainment property to another use,
if that is a higher and better use of our property, or to sell individual
assets, if we are presented with an attractive opportunity. Our
former Sutton Theater, for example, provided the real estate base for our
Place 57 development.
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Our
current cinema assets are described in the following chart:
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Wholly
Owned
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Consolidated1
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Unconsolidated2
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Managed3
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Totals
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Australia
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16
cinemas
120
screens
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3
cinemas
16
screens
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1
cinema4
16
screens
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None
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20
cinemas
152
screens
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New
Zealand
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9
cinemas
48
screens
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None
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6
cinemas5
30
screens
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None
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15
cinemas
78
screens
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United
States
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6
cinemas
41
screens
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1
cinema6
6
screens
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None
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2
cinemas
9
screens
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9
cinemas
56
screens
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Totals
without Consolidated Cinemas
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31
cinemas
209
screens
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4
cinemas
22
screens
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7
cinemas
46
screens
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2
cinemas
9
screens
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44
cinemas
286
screens
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Consolidated
Cinemas
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14
cinemas
173
screens
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None
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None
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1
cinemas
8
screens
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15
cinemas
181
screens
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Totals
with Consolidated Cinemas
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45
cinemas
382
screens
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4
cinemas
22
screens
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7
cinemas
46
screens
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3
cinemas
17
screens
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59
cinemas
467
screens
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1 Cinemas
owned and operated through consolidated, but not wholly owned, majority owned
subsidiaries.
2 Cinemas
owned and operated through unconsolidated subsidiaries.
3 Cinemas
in which we have no ownership interest, but which are operated by us under
management agreements.
6 The
Angelika Film Center and Café in Manhattan is owned by a limited liability
company in which we own a 50% interest with rights to
manage.
We focus on the ownership and operation
of three categories of cinemas:
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first,
modern stadium seating multiplex cinemas featuring conventional film
product;
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second,
specialty and art cinemas, such as our Angelika Film Centers in Manhattan
and Dallas and the Rialto cinema chain in New Zealand;
and
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third,
in some markets, particularly small town markets that will not support the
development of a modern stadium design multiplex cinema, conventional
sloped floor cinemas.
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With the
exception of certain of our joint venture cinemas, we operate and book all of
our cinemas on an “in-house” basis, through cinema executives located in
Manhattan, Melbourne, Australia and Wellington, New Zealand.
Summary of Our Real Estate
Activities
Our real estate activities have
historically consisted principally of:
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the
ownership of fee or long term leasehold interests in properties used in
our cinema exhibition and live theater activities or which were acquired
in anticipation of the development of cinemas or
ETRCs;
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the
acquisition of fee interests for the development of cinemas or ETRCs;
and
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the
redevelopment of existing cinema sites to their highest and best
use.
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For example, Place 57, a 36-story
68-residential unit mixed-use condominium project on 57th Street
near 3rd Avenue
was the result of the redevelopment of one of our Manhattan cinema
sites. Recently, however, we have begun to diversify into other types
of real estate investments.
In 2006, we formed Landplan Property
Partners, Ltd, to identify, acquire and develop or redevelop properties on an
opportunistic basis. Typically, properties are acquired or held in
individual special purpose entities. We refer to Landplan Property
Partners, Ltd, collectively with these special purpose entities as
“Landplan.” As of December 31 2007, Landplan has acquired one
property in Australia and two properties in New Zealand for an aggregate
investment of $16.0 million.
In addition, we have acquired an
approximately 18.4% common equity interest in Malulani Investments Limited, a
closely held Hawaiian company which currently owns approximately 22,000 acres of
agricultural land in Northern California. Included among Malulani’s
assets are the Guenoc Winery, consisting of approximately 400 acres of vineyard
land and a winery configured to bottle up to 120,000 cases of wine annually and
Langtry Estates and Vineyards. This land and commercial real estate
holdings are encumbered by debt.
To date, we have developed, in
Australia and New Zealand, three ETRCs comprising approximately 337,000 square
feet of development and the shopping center component of a fourth proposed ETRC,
comprising some 100,000 square of development. The 100,000 square
feet of shopping center space in this fourth proposed ETRC is fully leased, and
it is anticipated that the cinema component will be completed in
2009.
Our US holdings include the fee
interest in three live theatres in Manhattan (the Union Square, Orpheum and
Minetta Lane) a multi-stage live theatre in Chicago (the Royal George) and a 75%
interest in the limited liability company that owns the fee interest in our
Cinemas 1, 2 & 3 property in Manhattan.
In total, taking into account the
acquisition of Consolidated Cinemas, on a consolidated basis, we own
approximately 15.3 million square feet of land and approximately 2.3 million
square feet of improvements, of which approximately 1.7 million square feet is
leased by us as tenant under various cinema leases.
Our real estate activities, holdings,
and development are described in more detail in the Item 2 –
Properties.
Certain Segment and
Geographical Distribution Information
Financial Information about our various
segments is set out in Note 22 – Business Segments and Geographic
Area Information.
The following table sets forth the book
value of our property and equipment by geographical area as of December 31, 2007
(dollars in thousands):
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December 31,
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2007
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2006
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Australia
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$ | 90,956 | $ | 86,317 | ||||
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New
Zealand
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44,030 | 38,772 | ||||||
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United
States
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43,188 | 45,578 | ||||||
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Property
and equipment
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$ | 178,174 | $ | 170,667 | ||||
The
following table sets forth our revenues by geographical area (dollars in
thousands):
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December 31,
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2007
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2006
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2005
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Australia
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$ | 63,657 | $ | 53,434 | $ | 47,181 | ||||||
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New
Zealand
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24,371 | 21,230 | 20,179 | |||||||||
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United
States
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31,207 | 31,461 | 30,745 | |||||||||
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Total
Revenues
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$ | 119,235 | $ | 106,125 | $ | 98,105 | ||||||
We Are a Controlled Company
under American Stock Exchange Rules and Regulations
We are a “Controlled Company” under
Section 801(a) of the American Stock Exchange Company
Guide. Accordingly, we are not subject to the American Stock Exchange
requirements that at least half of our directors be independent or that we have
an independent nominating committee.
As of December 31, 2007, we had
outstanding 20,987,115 shares of our Class A Stock and 1,495,490 shares of our
Class B Stock. As of this same date, Mr. James J. Cotter was our
controlling stockholder, with fully diluted beneficial ownership of 1,123,888
shares of our Class B Stock, representing approximately 70.4% of such
shares. In addition, Mr. Cotter, his affiliates, and members of his
immediate family are the fully diluted beneficial owners of 5,610,833 shares of
our Class A Stock. Collectively, their beneficial ownership
represents approximately 30.0% of our aggregate outstanding Class A Stock and
Class B Stock.
Mr. Cotter and two of his children,
Margaret Cotter and James J. Cotter, Jr., currently serve as three of the eight
members of our Company’s Board of Directors. Mr. James J. Cotter, Jr.
is the Vice-Chairman of our Company. Ms. Ellen Cotter, also a child
of Mr. Cotter, Sr., is the Chief Operating Officer for our Domestic Cinemas and
will be responsible for running the recently acquired Consolidated
Cinemas. A company wholly owned by Ms. Margaret Cotter manages our
live theater operations. Sutton Hill Capital (a partnership in which
Mr. Cotter (i) owns a 50% interest) owns a 25% interest in the limited liability
company that owns our Cinemas 1, 2 & 3 property in Manhattan, (ii) owns the
ground lease interest and is the sublandlord under our sublease of our Village
East property, also in Manhattan, and (iii) holds notes issued by RDI in the
amount of $14.0 million.
The Cotter Family has advised us that
they consider their investment in our Company to be a long term investment, and
that they do not currently contemplate any change of control transaction with
respect to the Company or any material portion of its assets.
A discussion of related party
transactions is set forth in Note 25 – Related Parties and
Transactions to the 2007 Consolidated Financial Statements.
A More Detailed Description
of Our Business
Our Pacific Rim Cinema
Operations (Australia and New Zealand)
General
On a consolidated basis, we currently
own or operate 19 cinemas consisting of 136 screens in Australia, and 15 cinemas
with 78 screens in New Zealand. We also own, directly or indirectly,
50% unincorporated joint venture interests in six cinemas, consisting of 30
screens, in New Zealand and a 33% unincorporated joint venture interest in a
16-screen cinema in the Brisbane area of Australia.
We commenced activities in Australia in
mid-1995, conducting business in Australia through our wholly owned subsidiary,
Reading Entertainment Australia Pty Ltd (“REA” and, collectively with its
consolidated subsidiaries, “Reading Australia”).
We commenced operations in New Zealand
in 1997, conducting operations in New Zealand through our wholly owned
affiliate, Reading New Zealand Limited (“RNZ” and collectively with its
consolidated subsidiaries, “Reading New Zealand”).
Our Australian and New Zealand cinemas
derive approximately 73% of their 2007 revenues from box office
receipts. Ticket prices vary by location, and provide for reduced
rates for senior citizens and children. Box office receipts are
reported net of state and local sales or service taxes. Show times
and features are placed in advertisements in local newspapers with the costs of
such advertisements paid by the exhibitor. Film distributors may
advertise certain feature films and pay the cost of such
advertising. Film rental costs average approximately 42% of box
office revenues in Australia and in New Zealand.
Concession sales account for
approximately 24% and 22% of our total 2007 revenues in Australia and New
Zealand, respectively. Concession products primarily include popcorn,
candy, and soda; although certain of Reading’s Australia and New Zealand cinemas
have licenses for the sale and consumption of alcoholic
beverages. During 2007, we realized a gross margin on concession
sales of approximately 22% and 26% in Australia and New Zealand,
respectively.
Screen
advertising and other revenues contributed approximately 4% and 5% of our total
2007 revenues in Australia and New Zealand, respectively. The screen
advertising business in Australia and New Zealand has moved to prominently 35mm
film advertisements by national advertisers. Local advertising is
undertaken by individual cinema operators on a site-by-site basis and is largely
undertaken via the improved technology offered by digital
projection. Our cinemas, where it is applicable, undertake slide
advertising as an ancillary function to the overall cinema
business.
Joint Venture
Interests
Two of our cinemas, consisting of 11
screens and located in country towns, are owned by Australia Country Cinemas
Pty, Limited (“ACC”), a company owned 75% by Reading Australia and 25% by a
company owned by an individual familiar with the market for cinemas in country
towns. ACC has a limited right of first refusal to develop any cinema
sites identified by Reading Australia that are located in country
towns. Our interest in this joint venture is reported on a
consolidated basis.
One of our cinemas, a 5-screen facility
in Melbourne, is owned by a joint venture in which we have a 66.6%
unincorporated joint venture interest with the original owner. Our
interest in this joint venture is likewise reported on a consolidated
basis.
Through
Rialto Entertainment, we are a 50% joint venture partner with SkyCity Leisure
Ltd (“Sky”) in Rialto Cinemas, the largest art cinema circuit in New
Zealand. The joint venture owns or manages five cinemas with 22
screens in the New Zealand cities of Auckland, Wellington, Dunedin, Hamilton,
and Christchurch. All of the cinemas are in leased
facilities. Our interest in this joint venture is accounted for using
the equity method.
We also
own a one-third interest in Rialto Distribution. Rialto Distribution,
an unincorporated joint venture, is engaged in the business of distributing art
film in New Zealand and Australia. The remaining 2/3rd
interest is owned by the founders of the company, who have been in the art film
distribution business since 1993. While prior to our acquisition of
this interest in late 2005, we have not historically been involved in the
distribution of film, we believe that this investment complements our cinema
exhibition operations in Australia and New Zealand and could potentially
complement our art film exhibition activities in the United
States. Our interest in this joint venture is accounted for using the
equity method.
One of our cinemas, consisting of eight
screens, in Botany Downs, New Zealand is held in a 50/50 unincorporated joint
venture with Everard Entertainment. We also have a 33% unincorporated
joint venture interest in a 16-screen multiplex cinema located in a suburb of
Brisbane, and operated under the Birch Carroll & Coyle name. Our
interest in these joint ventures is accounted for using the equity
method.
Management of
Cinemas
Our employees manage Reading
Australia’s wholly owned and consolidated cinemas and Reading New Zealand’s
wholly owned cinemas. Our six New Zealand joint venture cinemas are
operated by two joint ventures in which Reading New Zealand is, directly or
indirectly, a 50% joint venture partner. While our employees are
actively involved in the management of the Botany Downs joint venture, the
management of the five cinemas operated under the Rialto name is, generally
speaking, performed by Sky, while we are principally responsible for the booking
of the Rialto Cinemas. The 16-screen Brisbane joint venture cinema is
operated under the supervision of a management committee over which each of the
joint venture partners holds certain veto rights and is managed by Birch Carroll
& Coyle.
Background Information
Concerning Australia
Australia is a self-governing and fully
independent member of the Commonwealth of Nations. The constitution
resembles that of the United States in that it creates a federal form of
government, under which the powers of the central government are specified and
all residual powers are left to the states. The country is organized
into five mainland states (New South Wales, Queensland, South Australia,
Victoria and Western Australia), one island state (Tasmania) and two territories
(Australian Capital Territory and the Northern Territory).
The ceremonial supreme executive is the
British monarch, represented by the governor-general and in each of the six
states by a governor. These officials are appointed by the British
monarch, but appointments are always recommended by the Australian
government. True executive power rests with the prime minister, the
leader of the majority party in the House of Representatives. The
legislature is bicameral, with a Senate and a House of Representatives, and the
ministers are appointed by the prime minister from the membership of the House
and the Senate. The organization of the state government is similar
to that of the central government. Each state has an appointed
governor, an elected premier, and a legislature.
Australia is the sixth largest country
in the world in landmass with a population of approximately 20.4 million
people. This population is concentrated in a few coastal urban areas,
with approximately 4.1 million in the greater Sydney area, 3.9 million in the
greater Melbourne area, 1.8 million in the Brisbane area, 1.5 million in Perth
and 1.1 million in Adelaide. Australia is one of the richest
countries in the world in terms of natural resources per capita and one of the
most economically developed countries in the world, although vast areas of the
interior, known as “the Outback,” remain all but uninhabited. The
principal language is English, and the largest part of the population traces its
origin to Britain and Europe, although an increasing portion of the population
has emigrated from the Far East. Australian taste in film has
historically been similar to that of American audiences.
Internal trade is dominated by the two
most populous states, New South Wales (mainly Sydney) and Victoria (mainly
Melbourne). Together these two states account for a majority of all
wholesale trade and a significant percentage of retail sales. At the
present time, Australia’s principal trading partners are Japan and the European
Union.
Australia
does not restrict the flow of currency into the country from the U.S. or out of
Australia to the U.S. Also, subject to certain review procedures,
U.S. companies are typically permitted to operate businesses and to own real
estate. On July 1, 2000, Australia implemented a goods and services
tax (“GST”) on all goods and services at a consistent rate of 10%. We
do not believe that the GST has had a significant impact on our
business.
Background Information
Concerning New Zealand
New Zealand is also a self-governing
member of the Commonwealth of Nations. It is comprised of two large
islands, and numerous small islands, with a total land area of approximately
104,500 square miles. The country has a population of approximately
4.1 million people, most of who are of European descent and the principal
language is English. Wellington, with a population of approximately
550,000, is the capital and Auckland, with a population of approximately 1.3
million, is the largest city. Most of the population lives in urban
areas.
New Zealand is a prosperous country
with a high standard of social services. The national economy is
largely dependent upon the export of raw and processed foods, timber, and
machinery. Principally a trading nation, New Zealand exports about
30% of its gross national product. In the past (particularly before
the United Kingdom entered the Common Market in 1973), New Zealand’s marketing
focused on a small number of countries, principally the United
Kingdom. Currently, only approximately 5% of New Zealand’s trade is
with the United Kingdom. Australia and the United States are New
Zealand’s principal trading partners. New Zealand’s economy remains
sensitive to fluctuations in demand for its principal exports.
Like Australia, New Zealand has a
largely ceremonial governor-general, appointed by the Queen of
England. However, the executive branch is run by a prime minister,
typically the leader of the majority party in Parliament, and appointed
ministers (typically chosen from the members of Parliament). The
Parliament is elected by universal adult suffrage using a mixed member
proportional system. Under this system, each voter casts two votes at
the federal level, one for a local representative and one for a
party. Fifty percent of the 120 seats in Parliament are determined by
the direct election of local representatives, and the remaining fifty percent
are elected based
upon the number of votes garnered by the parties. The Prime Minister
and his cabinet serve so long as they retain the confidence of the
Parliament.
With the exception of special excise
taxes on tobacco, liquor, petroleum products and motor vehicles the only general
sales tax is a GST imposed on all such services at the consistent rate of
12.5%. In effect, by a series of refunds, GST is only paid by the
end-user of the goods or services in question. Resident companies pay
income tax at a rate of 33%; however, dividend imputation credits generally
prevent double taxation of company profits. There are no restrictions
on repatriation of capital or profits, but some payments to overseas parties are
subject to withholding tax. There is no capital gains tax, and there
are tax treaties with many countries, including the United States.
The laws for monitoring and approving
significant overseas investment into New Zealand reflect the country’s generally
receptive attitude towards such investment and the generally facilitating nature
of the country’s foreign investment policies. One hundred percent
overseas ownership can be approved in nearly all industry sectors, including
motion picture exhibition and distribution. A review process is also
applicable to certain land transactions and the purchase of businesses or assets
having a value of NZ$100,000 or more.
Licensing/Pricing
Films exhibited in Australia and New
Zealand are licensed under agreements with major film distributors and several
local distributors who distribute specialized films. Film exhibitors
are provided with an opportunity to view films prior to negotiating with the
film distributor the commercial terms applicable to its
release. Films are licensed on a film-by-film, theater-by-theater
basis. Reading Australia and Reading New Zealand license films from
all film distributors as appropriate to each of our cinema
location. Generally, film payment terms are based upon various
formulas that provide for payments based upon a specified percentage of box
office receipts.
Competition
The film exhibition market in both
Australia and New Zealand is highly concentrated and, in certain cases in
Australia, vertically integrated. The principal exhibitors in
Australia include a joint venture of Greater Union and Village (GUV) in certain
suburban multiplexes. The major exhibitors control approximately 68%
of the total cinema box office: Village/Greater Union/Birch Carroll and Coyle
45% and Hoyts Cinemas (“Hoyts”) 21%. Greater Union have 243 screens
nationally; Village 218 screens; Birch Carroll & Coyle (a subsidiary of
Greater Union) 230 screens and Hoyts 333 screens. By comparison, our
cinemas represent approximately 6% of the total box office.
The major players in New Zealand are
Sky Cinemas with 94 screens nationally, Reading with 59 screens (not including
partnerships), and Hoyts with 61 screens. The major exhibitors in New
Zealand control approximately 71% of the total box office: Sky Cinemas 31%,
Reading 21% and Hoyts 19%, (Sky and Reading market share figures again do not
include any partnership theaters). Sky has announced that it is
interested in selling its cinema assets and is currently conducting a controlled
auction of those assets. We have made a proposal to acquire a portion
of those assets. We understand that Hoyts is also interested in
acquiring all or some substantial portion of those assets. Due to
antitrust limitations, we believe it unlikely that either Hoyts or we would be
permitted by the New Zealand anti-trust authorities to acquire all of Sky’s New
Zealand cinema assets.
In 2003, we acquired a 33%
unincorporated joint venture interest in an existing 16-screen cinema located in
suburban Brisbane that is currently owned in principal part by Village and Birch
Carroll & Coyle. This is our only joint venture arrangement with
any of the Major Exhibitors in Australia. We are a 50/50 joint
venture partner with Sky in the Rialto circuit in New Zealand.
Greater Union is the owner of Birch
Carroll & Coyle. Generally speaking, all new multiplex cinema
projects announced by Village are being jointly developed by a joint venture
comprised of Greater Union and Village. These companies have
substantial capital resources. Village had a publicly reported
consolidated net worth of approximately $709.8 million (AUS$808.8 billion) at
June 30, 2007. The Greater Union organization does not separately
publish financial reports, but its parent, Amalgamated Holdings, had a publicly
reported consolidated net worth of approximately $445.4 million (AUS$507.6
million) at June 30, 2007. Hoyts does not separately publish
financial reports. Hoyts is currently owned by Pacific Equity
Partners.
The industry is also somewhat
vertically integrated in that Roadshow Film Distributors serves as a distributor
of film in Australia and New Zealand for Warner Brothers and New Line
Cinema. Films produced or distributed by the majority of the local
international independent producers are also distributed by Roadshow Film
Distributors. Hoyts has also begun involvement in film production and
distribution.
In our view, the principal competitive
restraint on the development of our business in Australia and New Zealand is the
limited availability of good sites for future development. We already
have access to substantially all first run film on competitive terms at all of
our cinemas. However, our competitors and certain major commercial
real estate interests have historically utilized land use development laws and
regulations in Australia to prevent or delay our construction of freestanding
cinemas in new entertainment oriented complexes, particularly where those
complexes are located outside of an established central business district or
shopping center development. We also face ongoing competition for
alternative sources of entertainment, including, in particular, increased
compensation from in-the-home viewing alternatives. These competitive
issues are discussed in greater detail below under the caption, Competition, and under the
caption, Item 1A - Risk Factors.
Currency
Risk
Generally speaking, we do not engage in
currency hedging. Rather, to the extent practicable, we operate our
Australian and New Zealand operations on a self-funding basis. Other
than the capitalization of existing debt from time to time, no funds have been
contributed from our U.S. operations to our Australia or New Zealand operations
since 2001 until our February 2007 Trust Preferred Offering described
below. The book value, stated in U.S. dollars, of our net assets in
Australia and New Zealand, (assets less third party liabilities and without
intercompany debt), at December 31, 2007 are as follows (dollars in
thousands):
|
Net
Assets
|
||||
|
Reading
Australia
|
$ | 81,318 | ||
|
Reading
New Zealand
|
71,214 | |||
|
Net
Assets
|
$ | 152,532 | ||
In 2006, we determined that it would be
beneficial to have a layer of long-term fully subordinated debt financing to
help support our long-term real estate assets. On February 5, 2007 we
issued $50.0 million in 20-year fully subordinated notes, interest fixed for
five years at 9.22%, to a trust which we control, and which in turn issued $50.0
million in trust preferred securities in a private placement. There
are no principal payments until maturity in 2027 when the notes are paid in
full. The trust is essentially a pass through, and the transaction is
accounted for on our books as the issuance of fully subordinated
notes. The placement generated $48.4 million in net proceeds, which
were used principally to retire all of our bank indebtedness in New Zealand
$34.4 million (NZ$50.0 million) and to retire a portion of our bank indebtedness
in Australia $5.8 million (AUS$7.4 million). This is a departure from
our historic practice of borrowing principally in local currencies and adds an
increased element of currency risk to our Company. We believe that
this currency risk is mitigated by the comparatively favorable interest rate and
the long-term nature of the fully subordinated notes. Since February
5, 2007 through December 31, 2007, the US dollar has dropped vis-à-vis both the
Australian and the New Zealand dollar.
Virtually all of our operating costs in
Australia and New Zealand are denominated in the respective currencies of these
two countries. Our concessions are purchased locally, and our film
rental is calculated as a percentage of box office receipts. We have
also attempted to keep our general and administrative costs localized, although
in recent periods, we have begun concentrating more of our financial reporting,
control and analysis functions in our Los Angeles corporate
headquarters.
Set forth below is a chart of the
exchange ratios between these three currencies over the past ten
years:
Seasonality
Major films are generally released to
coincide with the school holiday periods, particularly the summer
holidays. Accordingly, our Australian and New Zealand operations
typically record greater revenues and earnings during the first half of the
calendar year.
Employees
Reading Australia has 23 full time
executive and administrative employees and approximately 707 cinema and property
employees. None of our Australia based employees is
unionized. Reading New Zealand has 8 full time executive and
administrative employees and approximately 261 cinema and property level
employees. On January 26, 2007, we entered into a collective
agreement with the employees of our Courtenay Central complex which has an
18-month term. This agreement defines the terms of engagement of our
employees and is consistent with other industry
agreements. Notwithstanding the unionization effort in New Zealand,
we believe our relations with our employees to be generally good.
Our Domestic
Cinemas
General
We currently operate 237 screens in 24
cinemas in the United States (including 3 managed cinemas with 17
screens). Our domestic cinema operations engage in the exhibition of
mainstream general release film in our conventional cinemas, such as the Cinemas
1, 2 & 3, the Village East Theatre and the East 86th Street
Cinema in Manhattan and the Manville 12 in Manville, New Jersey and the
Consolidated Cinemas. We also engage in the exhibition of art and
specialty film at our art cinemas such as the Angelika Film Centers in
Manhattan, Dallas, Houston and Plano and the Tower Theatre in Sacramento,
California.
Most of
our domestic cinemas are leased, other than the Cinemas 1, 2 & 3 property
(which is owned by a subsidiary in which we have a 75% interest) and three
cinemas which are operated pursuant to management contracts. Our
Angelika cinema in Manhattan is owned by a limited liability company owned 50%
by us and 50% by a subsidiary of National Auto Credit, but it is under our
management. Three of our cinemas are held pursuant
to
ground
leases which in each case allow long-term renewal rights and provide us with
flexibility for altering the use of the property: our Manville 12 in New Jersey,
Kapolei 16 in Hawaii, and the Tower Theatre in Sacramento. A fourth
theatre, the Village East in Manhattan, is held pursuant to a sublease of a long
term ground lease, and we have an option under that sublease to acquire the
ground lease estate held by our sublandlord.
In recent years, the domestic cinema
exhibition industry has gone through major retrenchment and consolidation,
creating considerable uncertainty as to the direction of the domestic film
exhibition industry, and our role in that industry. Several major
cinema exhibition companies have gone through bankruptcy over the past five
years, or have been otherwise financially restructured. Regal Cinemas
emerged from bankruptcy and combined with Edwards and United Artists (which also
went through bankruptcy) to create a circuit that has now grown to approximately
6,388 screens, in approximately 527 cinemas. AMC now has
approximately 5,138 screens in approximately 359 cinemas in the United States
and Canada. Landmark Theaters, the largest art and specialty film
exhibitor in the United States, has also emerged from bankruptcy and is now
owned by a private company controlled by Mark Cuban (an individual with a
reported personal net worth of $2.3 billion). These companies, having
used bankruptcy to restructure their debt and to rid themselves of burdensome
leases and in some cases to consolidate, are now much stronger competitors than
they were just a few years ago.
A significant number of older
conventional screens have, as a result of this consolidation process, been taken
out of the market. We estimate that the total domestic screen count
has decreased from 37,396 in 2000 to 36,165 in 2005. Industry
analysts project further consolidation in the industry, as players such as
Cablevision seek to divest their domestic cinema exhibition
assets. Accordingly, while we believe that recent developments may in
some ways have aided the overall health of the domestic cinema exhibition
industry, there remains considerable uncertainty as to the impact of this
consolidation trend on us and our domestic cinema exhibition business, as we are
forced to compete with these stronger and reinvigorated competitors and the
significant market share commanded by these competitors.
There is also considerable uncertainty
as to the future of digital exhibition and in-the-home entertainment
alternatives. In the case of digital exhibition, there is currently
considerable discussion within the industry as to the benefits and detriments of
moving from conventional film projection to digital projection
technology. There are issues:
|
|
·
|
as
to when it will be available on an economically attractive
basis;
|
|
|
·
|
as
to who will pay for the conversion from conventional to digital technology
between exhibitors and
distributors;
|
|
|
·
|
as
to what the impact will be on film licensing expense;
and
|
|
|
·
|
as
to how to deal with security and potential pirating issues if film is
distributed in a digital format.
|
Several
major exhibitors have now announced plans to convert their cinemas to digital
projection. At some point, this will compel us likewise to incur the
costs of conversion, as the costs of digital production are much less than the
cost of conventional film production, from the studio’s point of view and as
distributors will, at some point in time cease distributing film
prints. We estimate that, at the present time, it would likely cost
in the range of $23.7 million for us to convert our wholly owned cinemas to
digital distribution on a worldwide basis.
In the
case of in-the-home entertainment alternatives, the industry is faced with the
significant leaps achieved in recent periods in both the quality and
affordability of in-the-home entertainment systems and in the accessibility to
entertainment programming through cable, satellite, and DVD distribution
channels. These alternative distribution channels are putting
pressure on cinema exhibitors to reduce the time period between theatrical and
secondary release dates, and certain distributors are talking about possible
simultaneous or near simultaneous releases in multiple channels of
distribution. These are issues common to both our domestic and
international cinema operations.
Our domestic cinemas derive
approximately 40% of their revenues from box office receipts. Ticket
prices vary by location, and provide for reduced rates for senior citizens and
children. Box office receipts are reported net of state and local
sales or service taxes. Show times and features are placed in
advertisements in local newspapers and, in some cases, Reading contributes a
small percentage of these costs. Film distributors may also advertise
certain feature films and those costs are generally paid by
distributors. Film rental expense represented approximately 39% of
box office receipts for 2007.
Concession sales account for
approximately 20% of total revenues. Concession products primarily
include popcorn, candy and soda, but Reading’s art cinemas typically offer a
wider variety of concession offerings. Our Angelika cinemas in
Manhattan, Dallas, Houston, and Plano include café facilities, and the
operations in Dallas, Houston, and Plano are licensed to sell alcoholic
beverages. Our domestic cinemas achieved a gross margin on concession
sales of approximately 14% for 2007.
Screen
advertising and other revenues contribute approximately 8% of total revenues for
2007. Other sources of revenue include revenues from theater rentals
for meetings, conferences, special film exhibitions and vending machine receipts
or rentals.
Licensing/Pricing
Film product is available from a
variety of sources ranging from the major film distributors such as Columbia,
Disney, Buena Vista, DreamWorks, Fox, MGM, Paramount, Warner Bros and Universal,
to a variety of smaller independent film distributors such as
Miramax. The major film distributors dominate the market for
mainstream conventional films. Similarly, most art and specialty
films come from the art and specialty divisions of these major distributors,
such as Fox’s Searchlight and Disney’s Miramax. Generally speaking,
film payment terms are based upon an agreed upon percentage of box office
receipts.
Until recently, the surplus of screens
currently available to distributors had eroded the bargaining power of the
exhibitors and that bargaining power has been on the side of the
distributors. However, with the emergence of the mega circuits, it
appears that the balance of power may be somewhat shifting towards the
exhibitors. Indeed, as discussed in greater detail below, we believe
that in certain situations, our access to first-run film has been adversely
affected by the market power of exhibitors such as Regal and AMC.
Competition
The principal factor in the success or
failure of a particular cinema is access to popular film products. If
a particular film is only offered at one cinema in a given market, then
customers wishing to see that film will, of necessity, go to that
cinema. If two or more cinemas in the same market offer the same
film, then customers will typically take into account factors such as the
relative convenience and quality of the various cinemas. In many
markets, the number of prints in distribution is less than the number of
exhibitors seeking that film for that market, and distributors typically take
the position that they are free to provide or not provide their films to
particular exhibitors, at their complete and absolute discretion.
Accordingly, competition for films can
be intense, depending upon the number of cinemas in a particular
market. Our ability to obtain top grossing first run feature films
may be adversely impacted by our comparatively small size, and the limited
number of screens we can supply to distributors. Moreover, as a
result of the dramatic and recent consolidation of screens into the hands of a
few very large and powerful exhibitors such as Regal and AMC, these mega
exhibition companies are in a position to offer distributors access to many more
screens in major markets than we can. Accordingly, distributors may
decide to give preferences to these mega exhibitors when it comes to licensing
top grossing films, rather than deal with independents such as
ourselves. The situation is different in Australia and New Zealand
where typically every major multiplex cinema has access to all of the film
currently in distribution, regardless of the ownership of that multiplex
cinema.
In addition, the competitive situation
facing our Company is uncertain given the ongoing development of in-the-home
entertainment alternatives such as DVD, cable and satellite distribution of
films, and the increasing quality and declining cost of in-the-home
entertainment components.
Seasonality
Traditionally, the exhibition of
mainstream commercial films has been somewhat seasonal, with most of the
revenues being generated over the summer and Christmas holiday
seasons. However, with the increasing number of releases, this
seasonality is becoming less of a factor. The exhibition of art and
specialty films has historically been less seasonal than the exhibition of
mainstream commercial films.
All of our domestic cinemas are managed
by our officers and employees. Angelika Film Center, LLC (the owner
of the Angelika Film Center & Café in the Soho district of New York), is
owned by us on a 50/50 basis with a subsidiary of National Auto Credit, Inc
(“NAC”). However, we manage that theater pursuant to a management
contract. Furthermore, the operating agreement of Angelika Film
Center, LLC provides that, in the event of deadlock our Chairman will cast the
deciding vote.
Employees
At December 31, 2007, we employed
approximately 354 individuals to operate our domestic cinemas and to attend to
our real property operations. On January 31, 2003, we renegotiated
our collective bargaining agreement with the projectionist union with respect to
our Manhattan cinemas. We negotiated a termination of our contract
with the union effective January 31, 2007. Our principal executive
and administrative offices are located in Commerce,
California. Approximately 7 executives and 23 other employees are
located at our executive offices in Commerce and Manhattan. We
believe our relations with our employees to be good.
With the acquisition of Consolidated
Cinemas, we took on an additional 580 employees in Hawaii and
California. We also assumed two union contracts, previously
negotiated by the sellers of those assets. These contracts have terms
through August 2008.
Our Real Estate
Activities
General
While we report our real estate as a
separate segment, it has historically operated as an integral portion of our
overall business. Since our entry into the cinema exhibition
business, our real estate activities have principally been in support of that
business. Accordingly, in this Annual Report, consistent with our
practice in prior periods, we have described our real estate activities as an
integrated portion of our cinema operating and development
activities.
However, in light of our view that
future growth opportunities in the cinema industries are now quite limited in
the countries in which we operate, and, as we have no current plan to enter any
new foreign markets, we intend to focus more on our real estate activities as a
separate business activity.
Our real estate activities, holdings,
and development are described in more detail in the Item 2 –
Properties.
Landplan Property Partners,
Ltd
In 2006,
we formed Landplan Property Partners, Ltd, to identify, acquire and develop or
redevelop properties on an opportunistic basis. In connection with
the formation of Landplan, we entered into an agreement with Mr. Doug Osborne
pursuant to which (i) Mr. Osborne will serve as the chief executive officer of
Landplan and (ii) Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”),
will perform certain property management services for Landplan. The
agreement provides for Mr. Osborne to hold an equity interest in the entities
formed to hold these properties; such equity interest to be (i) subordinate to
our right to an 11% compounded return on investment and (ii) subject to
adjustment depending upon various factors including the term of the investment
and the amount invested. Generally speaking, this equity interest
will range from 27.5% to 15%.
Malulani
Investments
In
addition, we have acquired an approximately 18.4% common equity interest in
Malulani Investments Limited (MIL), a closely held Hawaiian company which
currently owns developed real estate principally in California, and Hawaii, and
approximately 22,000 acres of agricultural land in Northern
California. Included among Malulani’s assets are the Guenoc Winery,
consisting of approximately 400 acres of vineyard land and a winery configured
to bottle up to 120,000 cases of wine annually and Langtry Estates and
Vineyards. This land and commercial real estate holdings are
encumbered by debt. To date, our requests to management for
information about MIL, including consolidated financial information, have not
been honored. We have brought litigation against MIL and
certain of its directors in an effort to improve our access to information,
including consolidated financial information. While we believe that
we should prevail in our efforts in this regard, as in all litigation matters,
no assurances can be given.
Incident
to that investment, we have entered into a shareholders’ agreement with Magoon
Acquisition & Development, LLC (“Magoon LLC”), which includes certain rights
of first refusal and cost sharing provisions and which grants to James J. Cotter
(our Chairman, Chief Executive Officer and controlling shareholder), a proxy to
vote the shares held by Magoon LLC in MIL and in MIL's parent company, The
Malulani Group, Limited (“TMG”). Magoon LLC owns approximately 12% of
MIL and 30% of TMG. Accordingly, through Mr. Cotter, we currently
vote 30% of the shares of MIL and TMG which represents a voting interest
sufficient to elect one representative to the boards of directors of each of
these two companies. Through the use of this voting power, we have
elected Mr. Cotter to the Board of Directors of MIL. The shareholders
agreement also gives us the right to cause Magoon LLC to join with us in the
formation of a limited liability company which we would control, and which would
provide to us, after return of capital on a last in, first out basis, a 20%
preferred allocation of profits and distributions.
In
January of this year, we contributed 100 shares of the Class A Common Stock
(representing approximately 0.04% of our interest in MIL) to the RDI Employee
Investment Fund, LLC (the “Employee Fund”). The Employee Fund
currently has 49 members, in addition to Reading.
Investing
in our securities involves risk. Set forth below is a summary of
various risk factors which you should consider in connection with your
investment in our company. This summary should be considered in the
context of our overall Annual Report on Form 10K, as many of the topics
addressed below are discussed in significantly greater detail in the context of
specific discussions of our business plan, our operating results, and the
various competitive forces that we face.
Business Risk
Factors
We are
currently engaged principally in the cinema exhibition and real estate
businesses. Since we operate in two business segments (cinema
exhibition and real estate), we have discussed separately the risks we believe
to be material to our involvement in each of these segments. We have
discussed separately certain risks relating to the international nature of our
business activities, our use of leverage, and our status as a controlled
corporation. Please note, that while we report the results of our
live theatre operations as real estate operations – since we are principally in
the business or renting space to producers rather than in licensing or producing
plays ourselves – the cinema exhibition and live theatre businesses share
certain risk factors and are, accordingly, discussed together
below.
Cinema Exhibition and Live
Theatre Business Risk Factors
We
operate in a highly competitive environment, with many competitors who are
significantly larger and may have significantly better access to funds than do
we.
We are a
comparatively small cinema operator and face competition from much larger cinema
exhibitors. These larger circuits are able to offer distributors more
screens in more markets – including markets where they may be the exclusive
exhibitor – than can we. In some cases, faced with such competition,
we may not be able to get access to all of the films we want, which may
adversely affect our revenues and profitability.
These
larger competitors may also enjoy (i) greater cash flow, which can be used to
develop additional cinemas, including cinemas that may be competitive with our
existing cinemas, (ii) better access to equity capital and debt, and (iii)
better visibility to landlords and real estate developers, than do
we.
In the
case of our live theatres, we compete for shows not only with other “for profit”
off-Broadway theaters, but also with not-for-profit operators and, increasingly,
with Broadway theaters. We believe our live theaters are generally
competitive with other off-Broadway venues. However, due to the increased cost
of staging live theater productions, we are seeing an increasing tendency for
plays which would historically have been staged in an off-Broadway theatre,
moving directly to larger Broadway venues.
We
face competition from other sources of entertainment and other entertainment
delivery systems.
Both our
cinema and live theatre operations face competition from developing “in-home”
sources of entertainment. These include competition from DVDs, pay
television, cable and satellite television, the internet and other sources of
entertainment, and video games. The quality of in-house entertainment
systems has increased while the cost of such systems has decreased in recent
periods, and some consumers may prefer the security of an at-home entertainment
experience to the more public experience offered by our cinemas and live
theaters. The movie distributors have been responding to these
developments by, in some cases, decreasing the period of time between cinema
release and the date such product is made available to “in-home” forms of
distribution.
The
narrowing of this so-called “window” for cinema exhibition may be problematic
since film licensing fees have historically been front end loaded. On
the other hand, the significant quantity of films produced in recent periods has
probably had more to do, at least to date, with the shortening of the time most
movies play in the cinemas, than any shortening of the cinema exhibition
window. In recent periods, there has been discussion about the
possibility of eliminating the cinema window altogether for certain films, in
favor of a simultaneous release in multiple channels of distribution, such as
theaters, pay-per-view, and DVD. However, again to date, this move
has been strenuously resisted by the cinema exhibition industry and we view the
total elimination of the cinema exhibition window, while theoretically possible,
to be unlikely.
We also
face competition from various other forms of beyond-the-home entertainment,
including sporting events, concerts, restaurants, casinos, video game arcades,
and nightclubs. Our cinemas also face competition from live theatres
and visa versa.
Our
cinemas operations depend upon access to film that is attractive to our patrons
and our live theatre operations depend upon the continued attractiveness of our
theaters to producers.
Our
ability to generate revenues and profits is largely dependent on factors outside
of our control; specifically the continued ability of motion picture and live
theater producers to produce films and plays that are attractive to audiences,
and the willingness of these producers to license their films to our cinemas and
to rent our theatres for the presentation of their plays. To the
extent that popular movies and plays are produced, our cinema and live theatre
activities are ultimately dependent upon our ability, in the face of competition
from other cinema and live theater operators, to book these movies and plays
into our facilities.
Adverse
economic conditions could materially affect our business by reducing
discretionary income.
Cinema
and live theater attendance is a luxury, not a
necessity. Accordingly, a decline in the economy resulting in a
decrease in discretionary income, or a perception of such a decline, may result
in decreased discretionary spending, which could adversely affect our cinema and
live-theatre businesses.
Our
screen advertising revenues may decline.
Over the
past several years, cinema exhibitors have been looking increasingly to screen
advertising as a way to boost income. No assurances can be given that
this source of income will be continuing or that the use of such advertising
will not ultimately prove to be counter productive by giving consumers a
disincentive to choose going to the movies over at-home entertainment
alternatives.
We
face uncertainty as to the timing and direction of technological innovations in
the cinema exhibition business and as to our access to those
technologies.
It is
generally assumed that eventually, and perhaps in the relatively near future,
cinema exhibition will change over from film projection to digital projection
technology. Such technology offers various cost benefits to both
distributors and exhibitors. While the cost of such a conversion
could be substantial, it is presently difficult to forecast the costs of such
conversion, as it is not presently clear how these costs would be allocated as
between exhibitors and distributors. Also, we anticipate that, as
with most technologies, the cost of the equipment will reduce significantly over
time. As technologies are always evolving, it is, of course, also
possible that other new technologies may evolve that will adversely affect the
competitiveness of current cinema exhibition technology.
Real Estate Development and
Ownership Business Risks.
We
operate in a highly competitive environment, in which we must compete against
companies with much greater financial and human resources than we
have.
We have
limited financial and human resources, compared to our principal real estate
competitors. In recent periods, we have relied heavily on outside
professionals in connection with our real estate development
activities. Many of our competitors have significantly greater
resources than do we and may be able to achieve greater economies of scale than
can we.
Risks Related to the Real
Estate Industry Generally
Our
financial performance will be affected by risks associated with the real estate
industry generally.
Events and conditions generally
applicable to developers, owners and operators of real property will affect our
performance as well. These include (i) changes in the national,
regional and local economic climate; (ii) local conditions such as an oversupply
of, or a reduction in demand for commercial space and/or entertainment oriented
properties; (iii) reduced attractiveness of our properties to tenants; (iv)
competition from other properties; (v) inability to collect rent from tenants;
(vi) increased operating costs, including real estate taxes, insurance premiums
and utilities; (vii) costs of complying with changes in government regulations;
and (viii) the relative illiquidity of real estate
investments. In
addition, periods of economic slowdown or recession, rising interest rates or
declining demand for real estate, or the public perception that any of these
events may occur, could result in declining rents or increased lease
defaults.
We
may incur costs complying with the Americans with Disabilities Act and similar
laws.
Under the Americans with Disabilities
Act and similar statutory regimes in Australia and New Zealand or under
applicable state law, all places of public accommodation (including cinemas and
theaters) are required to meet certain governmental requirements related to
access and use by persons with disabilities. A determination that we
are not in compliance with those governmental requirements with respect to any
of our properties could result in the imposition of fines or an award of damages
to private litigants. The cost of addressing these issues could be
substantial. Fortunately, the great majority of our facilities were
built after the adoption of the Americans with Disabilities Act.
Illiquidity
of real estate investments could impede our ability to respond to adverse
changes in the performance of our properties.
Real estate investments are relatively
illiquid and, therefore, tend to limit our ability to vary our portfolio
promptly in response to changes in economic or other conditions. Many
of our properties are either (i) “special purpose” properties that could not be
readily converted to general residential, retail or office use, or (ii)
undeveloped land. In addition, certain significant expenditures
associated with real estate investment, such as real estate taxes and
maintenance costs, are generally not reduced when circumstances cause a
reduction in income from the investment and competitive factors may prevent the
pass-though of such costs to tenants.
Real
estate development involves a variety of risks.
Real
estate development includes a variety of risks, including the
following:
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The identification and
acquisition of suitable development
properties. Competition for suitable development
properties is intense. Our ability to identify and acquire
development properties may be limited by our size and
resources. Also, as we and our affiliates are considered to be
“foreign owned” for purposes of certain Australia and New Zealand
statutes, we have been in the past, and may in the future be, subject to
regulations that are not applicable to other persons doing business in
those countries.
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The procurement of necessary
land use entitlements for the project. This process can
take many years, particularly if opposed by competing
interests. Competitors and community groups (sometimes funded
by such competitors) may object based on various factors including, for
example, impacts on density, parking, traffic, noise levels and the
historic or architectural nature of the building being
replaced. If they are unsuccessful at the local governmental
level, they may seek recourse to the courts or other
tribunals. This can delay projects and increase
costs.
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The construction of the
project on time and on budget. Construction risks
include the availability and cost of finance; the availability and costs
of material and labor, the costs of dealing with unknown site conditions
(including addressing pollution or environmental wastes deposited upon the
property by prior owners), inclement weather conditions, and the ever
present potential for labor related
disruptions.
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The leasing or sell-out of the
project. Ultimately, there are the risks involved in the
leasing of a rental property or the sale of condominium or built-for-sale
property. Leasing or sale can be influenced by economic factors
that are neither known nor knowable at the commencement of the development
process and by local, national, and even international economic
conditions, both real and
perceived.
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The refinancing of completed
properties. Properties are often developed using
relatively short-term loans. Upon completion of the project, it
may be necessary to find replacement financing for these
loans. This process involves risk as to the availability of
such permanent or other take-out financing, the interest rates, and the
payment terms applicable to such financing, which may be adversely
influenced by local, national, or international factors. To
date, we have been successful in negotiating development loans with roll
over or other provisions mitigating our need to refinance immediately upon
completion of construction.
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The
ownership of properties involves risk.
The
ownership of investment properties involves risks, such as: (i)
ongoing leasing and re-leasing risks, (ii) ongoing financing and re-financing
risks, (iii) market risks as to the multiples offered by buyers of investment
properties, (iv) risks related to the ongoing compliance with changing
governmental regulation clause (iv) (including, without limitation,
environmental laws and requirements to remediate environmental contamination
that may exist on a property, even though not deposited on the property by us)
(v) relative illiquidity compared to some other types of assets, and (vi)
susceptibility of assets to uninsurable risks, such as biological, chemical or
nuclear terrorism. Furthermore, as our properties are typically
developed around an entertainment use, the attractiveness of these properties to
tenants, sources of finance and real estate investors will be influenced by
market perceptions of the benefits and detriments of such entertainment type
properties.
International Business
Risks
Our
international operations are subject to a variety of risks, including the
following:
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Risk of currency
fluctuations. While we report our earnings and assets in
US dollars, substantial portions of our revenues and of our obligations
are denominated in either Australian or New Zealand
dollars. The value of these currencies can vary significantly
compared to the US dollar and compared to each other. We
typically have not hedged against these currency fluctuations, but rather
have relied upon the natural hedges that exist as a result of the fact
that our film costs are typically fixed as a percentage of box office, and
our local operating costs and obligations are likewise typically
denominated in local currencies.
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Risk of adverse government
regulation. At the present time, we believe that
relations between the United States, Australia, and New Zealand are
good. However, no assurances can be given that this
relationship will continue and that Australia and New Zealand will not in
the future seek to regulate more highly the business done by US companies
in their countries.
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Risks Associated with
Certain Discontinued Operations
Certain
of our subsidiaries were previously in industrial businesses. As a
consequence, properties that are currently owned or may have in the past been
owned by these subsidiaries may prove to have environmental
issues. While we have, where we have knowledge of such environmental
issues and are in a position to make an assessment as to our exposure,
established what we believe to be appropriate reserves, we are exposed to the
risk that currently unknown problems may be discovered. These
subsidiaries are also exposed to potential claims related to exposure of former
employees to coal dust, asbestos, and other materials now considered to be, or
which in the future may be found to be, carcinogenic or otherwise injurious to
health.
Operating Results, Financial
Structure and Certain Tax Matters
We
have negative working capital.
In recent
years, as we have invested our cash in new acquisitions and the development of
our existing properties, we have moved from a positive to a negative working
capital situation. This negative working capital, which we consider
to be akin to an interest free loan, is typical in the cinema exhibition
industry, since revenues are received in advance of our obligation to pay film
licensing fees, rent and other costs. At the present time, we have
credit facilities in place which, if drawn upon, could be used to eliminate this
negative working capital position.
We
have substantial short to medium term debt.
Generally
speaking, we have financed our operations through relatively short-term
debt. No assurances can be given that we will be able to refinance
this debt, or if we can, that the terms will be reasonable. However,
as a counterbalance to this debt, we have significant unencumbered real property
assets, which could be sold to pay debt or encumbered to assist in the
refinancing of existing debt, if necessary. In February 2007, we
issued $50.0 million in 20-year Trust Preferred Securities, and utilized the net
proceeds principally to retire short-term bank debt in New Zealand and
Australia. However, the interest rate on our Trust Preferred
Securities is only fixed for five years, and since we have used US Dollar
denominated obligations to retire debt denominated in New Zealand and Australian
Dollars, this transaction and use of net proceeds has increased our exposure to
currency risk.
With the
acquisition of Consolidated Cinemas we have taken on substantial additional
debt. This transaction was, in essence, 100% financed, resulting in
an increase in our debt for book purposes from $177.2 million at December 31,
2007 to $248.2 million as of February 22, 2008.
We
have substantial lease liabilities.
Most of
our cinemas operate in leased facilities. These leases typically have
cost of living or other rent adjustment features and require that we operate the
properties as cinemas. A down turn in our cinema exhibition business
might, depending on its severity, adversely affect the ability of our cinema
operating subsidiaries to meet these rental obligations. Even if our
cinema exhibition business remains relatively constant, cinema level cash flow
will likely be adversely affected unless we can increase our revenues
sufficiently to offset increases in our rental liabilities.
The
Internal Revenue Service has given us notice of a claimed liability of $20.9
million in back taxes, plus interest of $17.9 million.
While we
believe that we have good defenses to this liability, the claimed exposure is
substantial compared to our net worth, and significantly in excess of our
current or anticipated near term liquidity. This contingent liability
is discussed in greater detail under Item 3 – Legal Proceedings: Tax
Audit. If we were to lose on this matter, we would also be confronted
with a potential additional $5.4 million in taxes to the California Franchise
Tax Board, plus interest of approximately $4.6 million.
Our
stock is thinly traded.
Our stock
is thinly traded, with an average daily volume in 2007 of only approximately
4,900 shares. This can result in significant volatility, as demand by
buyers and sellers can easily get out of balance.
Ownership Structure,
Corporate Governance and Change of Control Risks
The
interests of our controlling stockholder may conflict with your
interests.
Mr. James
J. Cotter beneficially owns 70.4% of our outstanding Class B Voting Common
Stock. Our Class A Non-Voting Common Stock is essentially
non-voting, while our Class B Voting Common Stock represents all of the
voting power of our Company. As a result, as of December 31,
2007, Mr. Cotter controlled 70.4% of the voting power of all of our outstanding
common stock. For as long as Mr. Cotter continues to own shares of
common stock representing more than 50% of the voting power of our common stock,
he will be able to elect all of the members of our board of directors and
determine the outcome of all matters submitted to a vote of our stockholders,
including matters involving mergers or other business combinations, the
acquisition or disposition of assets, the incurrence of indebtedness, the
issuance of any additional shares of common stock or other equity securities and
the payment of dividends on common stock. Mr. Cotter will also have
the power to prevent or cause a change in control, and could take other actions
that might be desirable to Mr. Cotter but not to other
stockholders. In addition, Mr. Cotter and his affiliates have
controlling interests in companies in related and unrelated
industries. In the future, we may participate in transactions with
these companies (see Note 25 – Related Parties and
Transactions).
Since
we are a Controlled Company, our Directors have determined to take advantage of
certain exemptions provide by the American Stock Exchange from the corporate
governance rules adopted by that Exchange.
Generally
speaking, the American Stock Exchange requires listed companies to meet certain
minimum corporate governance provisions. However, a Controlled
Corporation, such as we, may elect not to be governed by certain of these
provisions. Our board of directors has elected to exempt our Company
from requirements that (i) at least a majority of our directors be independent,
(ii) nominees to our board of directors be nominated by a committee comprised
entirely of independent directors or by a majority of our Company’s independent
directors, and (iii) the compensation of our chief executive officer be
determined or recommended to our board of directors by a compensation committee
comprised entirely of independent directors or by a majority of our Company’s
independent directors. Notwithstanding the determination by our board
of directors to opt-out of these American Stock Exchange requirements, a
majority of our board of directors is nevertheless currently comprised of
independent directors, and our compensation committee is nevertheless currently
comprised entirely of independent directors.
Item 1B -
Unresolved Staff Comments
Not applicable.
Item 2 –
Properties
Executive and Administrative
Offices
We lease approximately 8,000 square
feet of office space in Commerce, California to serve as our executive
headquarters. During 2005, we purchased a 9,000 square foot office
building in Melbourne, Australia, to serve as the headquarters for our Australia
and New Zealand operations. We occupy approximately 2,000 square feet
of our Village East leasehold property for administrative purposes.
Entertainment
Properties
Leasehold
Interests
As of December 31, 2007, we lease
approximately 1.6 million square feet of completed cinema space in the United
States, Australia, and New Zealand as follows:
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Aggregate
Square Footage
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Approximate
Range of Remaining Lease Terms (including renewals)
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United
States
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339,000
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5 –
42 years
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Australia
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869,000
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29
– 40 years
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New
Zealand
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402,000
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5 –
10 years
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On
February 22, 2008, we acquired Consolidated Cinemas, comprising approximately
727,000 square feet of cinema improvements. This has increased our
worldwide aggregate square footage of property under lease to approximately 2.3
million square feet and our aggregate square footage of property under lease in
the United States of 1.1 million square feet.
Fee
Interests
In Australia, we owned as of December
31, 2008 approximately 3.2 million square feet of land at eight locations plus
one strata title estate consisting of 22,000 square feet. Most of
this land is located in the greater metropolitan areas of Brisbane, Melbourne,
Perth, and Sydney, including the 50.6-acre Burwood site in suburban
Melbourne.
In New Zealand, we own a 190,000 square
foot site, which includes an existing 245,000 square foot, nine level parking
structure in the heart of Wellington, the capital of New Zealand. All
but 38,000 square feet of the Wellington site has been developed as an ETRC
which incorporates the existing parking garage. The remaining land is
currently leased and is slated for development as phase two of our Wellington
ETRC. We own the fee interests underlying three additional cinemas in
New Zealand, which properties include approximately 12,000 square feet of
ancillary retail space. In 2007, we acquired through our
Landplan subsidiary an approximately 64-acre parcel of land in the
transportation corridor between the Auckland airport and the Auckland central
business district. That land is currently zoned and used exclusively
for agricultural purposes, and we are working to rezone the property for
commercial/industrial use. Also through Landplan, we acquired a
1.0-acre property on Lake Taupo, a popular recreational
destination. At the time we acquired our Lake Taupo property, it was
improved as a motel. We are currently in the process of redeveloping
that property into condominiums.
Since the close of 2007, we have
acquired or entered into agreements to acquire approximately 50,000 square foot
of property in Taringa, Australia, comprising four contiguous properties, which
we intend to develop. The aggregate purchase price of these
properties is $11.3 million (AUS$12.9 million), of which $1.7 million (AUS$2.0
million) relates to the three properties that have been acquired and $9.6
million (AUS$10.9 million) relates to the one property that is still under
contract which is subject to certain rezoning conditions.
In the United States, we owned as of
December 31, 2007, on a consolidated basis, approximately 121,000 square feet of
improved real estate comprised of four live theater buildings which include
approximately 58,000 square feet of leasable space, the fee interest in our
Cinemas 1, 2 & 3 in Manhattan (held through a limited liability company in
which we have a 75% managing member interest), and a residential condominium
unit in Los Angeles, used as executive office and residential space by our
Chairman and Chief Executive Officer.
Live Theaters (Liberty
Theaters)
Included among our real estate holdings
are four “Off Broadway” style live theaters, operated through our Liberty
Theaters subsidiary. We lease theater auditoriums to the producers of
“Off Broadway” theatrical productions and provide various box office and
concession services. The terms of our leases are, naturally,
principally dependent upon the commercial success of our
tenants. STOMP has been playing at our Orpheum Theatre for many
years. While we attempt to choose productions that we believe will be
successful, we have no control over the production itself. At the
current time, we have three single auditorium theaters in
Manhattan:
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the
Minetta Lane (399 seats);
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the
Orpheum (364 seats); and
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the
Union Square (499 seats).
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We also
own a four auditorium theater complex, the Royal George in Chicago (main stage
452 seats, cabaret 199 seats, great room 100 seats and gallery 60
seats). We own the fee interest in each of these
theaters. Two of the properties, the Union Square and the Royal
George, have ancillary retail and office space.
We are
basically in the business of leasing theatre space, and accordingly we do not
typically invest in plays. However, we may from time to time
participate as a minority investor in order to facilitate the production of a
play at one of our facilities, and do from time to time rent space on a basis
that allows us to share in a productions revenues or
profits. Revenues, expenses, and profits are reported as apart of the
real estate segment of our business.
Joint Venture
Interests
We also hold real estate through
several unincorporated joint ventures, two 75% owned subsidiaries, and one
majority-owned subsidiary, as described below:
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in
Australia, we own a 66% unincorporated joint venture interest in a leased
5-screen multiplex cinema in Melbourne, a 75% interest in a subsidiary
company that leases two cinemas with eleven screens in two Australian
country towns, and a 33% unincorporated joint venture interest in a
16-screen leasehold cinema in a suburb of
Brisbane.
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in
New Zealand, we own a 50% unincorporated joint venture interest in an
eight-screen mainstream cinema in a suburb of Auckland and we own a 50%
unincorporated joint venture interest in five cinemas with 22 screens in
the New Zealand cities of Auckland, Christchurch, Wellington, Dunedin, and
Hamilton.
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in
the United States, we own a 50% membership interest in Angelika Film
Center, LLC, which holds the lease to the approximately 17,000 square foot
Angelika Film Center & Café in the Soho district of
Manhattan. We also hold the management rights with respect to
this asset. We also own a 75% managing member
interest in the limited liability company that owns our Cinemas 1, 2 &
3 property.
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Real Estate
Development
We are engaged through Reading
Australia and Reading New Zealand in real estate development. We have
to date developed three Entertainment-Themed Retail Center Developments
(so-called ETRCs) each of which consist of a multiplex cinema, complementary
restaurant and retail facilities, and convenient parking on land that we own or
control. These centers are located in Perth and Auburn (a suburb of
Sydney) in Australia and Wellington in New Zealand. We have completed
the retail portions of a fourth ETRC (located in a suburb of Brisbane in
Australia) and have completed the entitlement process for the construction of
the cinema component, which we are in the process of evaluating.
In addition, we are pursuing the
development of four additional sites in Australia and three sites in New
Zealand. The largest of these are our projects at Burwood and Moonee
Ponds, both located in the area of Melbourne, Victoria, and our projects at
Wellington and Manukau (a suburb of Auckland) in New Zealand.
Australia
Auburn,
New South Wales
We own 109,000 square foot ETRC in
Auburn anchored by a 10 screen, 57,000 square foot cinema commonly known as “Red
Yard.” Adjacent to this property, we own approximately 93,000 square
feet of the site that is currently unimproved, and is intended to provide
expansion space for phase II of our Red Yard project. The centre also
includes an 871 space subterranean parking garage. The Auburn City
Council, in coordination with other local governments, is currently reviewing
the land use parameters for the areas adjacent to Parramatta Road in which our
property is located. Parramatta Road, which runs adjacent to Homebush
Bay, the site of the 2000 Olympic Games, is one of the busiest arterial roadways
in the greater Sydney area, and is considered by many to be the “gateway” to
Sydney. Consequently, there is significant community interest in
rezoning the uses along this road. As a major landowner in this area,
we intend to be actively involved in this process and are hopeful that this
rezoning process will materially enhance the value of our remaining unimproved
parcel. We have deferred further work on phase II until we get a
better idea of the opportunities that may be opened by this rezoning
process. This unimproved parcel is currently carried on our books at
$2.4 million (AUS$2.7 million). We are currently considering whether
to sell this property, and have to date received a number of offers which we are
actively considering.
Burwood,
Victoria
The biggest real estate project in our
pipeline is the development of our 50.6-acre Burwood Project, a suburban area
within the Melbourne metropolitan area. In December 1995, we acquired
the site initially as a potential ETRC location. In late 2003, that
site was designated as a “major activity centre” by the Victorian State
Government and in February 2006 was rezoned to permit a broad range of
entertainment, retail, commercial and residential uses. On February
20, 2006, the Victoria State Government approved a rezoning of that parcel from
an industrial classification to a mixed-use classification allowing a broad
range of entertainment, retail, commercial and residential uses. We
are continuing to work to remediate environmental issues at the site and to
refine that zoning, so as to be able to achieve commercial levels of density on
the site.
We contemplate developing the project
in a series of phases, with final completion sometime in 2015. While
the land use issues are now resolved, individual development plans will need to
be prepared and approved for each of the phases, dealing with issues such as
project design and traffic management. Ultimately, we estimate that
the total project will require development funding of approximately $500.0
million. We currently carry this property on our books at $42.0
million (AUS$47.8 million).
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the
site is the largest undeveloped parcel of land in the Burwood Heights
“major activity centre” and the largest undeveloped parcel of land in any
“major activity centre” in Victoria. Approximately 430,000
people live within five miles of the site, which is well served by both
public transit and surface streets. We estimate that
approximately 70,000 people pass by the site each
day.
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we
anticipate that the project will be built in phases, over a significant
period of years, and will not likely be completed before sometime in
2015. The initial phase, however, will likely be an ETRC, as
this is the area of development and construction with which we are most
familiar.
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we
do not currently have any funding in place for the development, and are
paying for current master planning activities out of cash flow and working
capital. The permitted uses outlined in the rezoning for the
site are being defined through a Development Plan Overlay review by local
government. We currently estimate that complete build-out of
the site will require funding in the range of $500.0 million (AUS$570.0
million).
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our
original cost basis in the site is approximately $4.2 million (AUS$5.3
million). The property was originally acquired in 1996, but was
revalued upward in connection with our Consolidation in 2001, which was
treated as a purchase for accounting purposes. This revaluation
was made prior to the designation of the site as a “major activity center”
in 2004. The current book value of this property under
construction is $42.0 million (AUS$47.8
million).
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We
are currently working to refine our entitlements for the site, with the
intention of increasing densities to commercially reasonable
levels.
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as
the property was used by its prior owner as a brickworks, it has been
necessary to remove or encapsulate the contaminated soil that resulted
from those operations from the site before it can be used for
mixed-use
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retail,
entertainment, commercial and residential purposes. During
2007, we conducted further testing on the site and developed a plan to
address these environmental concerns. Substantially all of the
contaminated soil slated for removal has now been removed. As
of December 31, 2007, we estimate that the total site preparation costs
associated with the removal of this contaminated soil will be $7.9 million
(AUS$9.0 million) and accordingly are not, in our view, material to the
overall projected development costs for the
project.
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Indooroopilly,
Brisbane
In
September 2006, we acquired a land area of 11,000 square feet, and a two-story
3,000 square foot building. We paid US$1.8 million (AUS$2.3 million)
for the land. The site is zoned for commercial
purposes. We have obtained approval to develop the property to be a
28,000 square foot grade A commercial office building comprising six floors of
office space and two basement levels of parking with 33 parking
spaces. We expect to spend US$8 million (AUS$9.4 million) in
development costs. We plan to complete the project in December
2008.
Moonee
Ponds, Victoria
We are
also in the planning stages of the development for our 3.3-acre Moonee Ponds
site. This property is within the Moonee Ponds designated “Principal
Activity Area,” allowing high-density development. Accordingly, our
plans for that property will be necessarily influenced by the manner in which
adjacent properties are developed within the “Principal Activity
Area.” We are currently in the planning phase for a multi-use
development. This site is located within the Moonee Ponds “Principal
Activity Area” as designated by the Victorian State Government. The
site represents an accumulation of three parcels, the last of which was acquired
in 2006. We acquired 2.9 acres of the property in April 1997, for a
purchase price of $4.9 million (AUS$6.4 million). The remaining 0.4
acres was acquired in September 2006 for a purchase price of $2.5 million
(AUS$3.3 million). We intend to work towards the finalization of a
plan for the development of this site during 2008.
Newmarket,
Queensland
On November 28, 2005, we opened some of
the retail elements of our Newmarket ETRC, a 100,000 square foot retail facility
situated on an approximately 177,000 square foot parcel in Newmarket, a suburban
of Brisbane, the remainder of the retail areas being rented out during the first
half of 2006. Plans for a 6-screen cinema as part of the project have
been approved by applicable governmental authorities, and it is anticipated that
construction of this entertainment component will commence later this
year.
New
Zealand
Lake
Taupo, New Zealand
In 2007,
through Landplan Property Partners, we acquired a 1.0-acre property on Lake
Taupo, a popular recreational destination, for approximately $4.9 million
(NZ$6.9 million).. At the time we acquired our Lake Taupo property,
it was improved as a motel. We are currently in the process of
redeveloping that property into condominiums.
Manukau,
New Zealand
This is an approximately 64-acre site
located in the transit corridor between Auckland Airport and the Auckland
central business district. We acquired the property in July 2007 for
$9.3 million (NZ$12.1 million). The property is currently zoned for
agricultural uses only and used for grazing. We intend to develop a
master land use plan for the property and to work to effect a zoning change
permitting a more intense use for the land. We believe that the
property can be rezoned and developed for a mixture of commercial/industrial
uses.
Wellington,
New Zealand
We are
currently the owner operator of an approximately 160,000 square foot ETRC in
Wellington, New Zealand, known as Courtenay Central. The existing
ETRC consists of a 10 screen cinema and approximately 38,000 square feet of
retail space. The property also includes a separate nine level
parking structure, with approximately
1,086
parking spaces. During 2006, approximately 3.5 million people went
through the center. We are currently reviewing our options for the
second phase of our Wellington ETRC. While we were successful in
obtaining regulatory approval during 2006 for an approximately 162,000 square
foot expansion of our existing centre, the timing of the development of that
space will ultimately depend upon the retail market in Wellington, which has not
been strong in recent periods. Accordingly, our plans for that site
are currently in a holding pattern, while we wait for demand for retail space to
improve and consider other complementary entertainment center uses for the
property. The 38,000 square foot pad intended to support this second
phase is currently carried on our books at $2.9 million (NZ$3.7 million), and is
being currently rented on a month-to-month basis as a car sales
yard. The retail market has significantly softened in Wellington and
this has delayed our ability to secure suitable anchor tenants for the
development. Accordingly, phase II is currently in a holding pattern
as we wait for the retail market to improve and consider alternative uses for
the property.
Real Estate
Holdings
Our current real estate holdings are
described in detail in Item 2, Properties, below. At December 31,
2007, we owned fee interests in approximately 920,000 square feet of income
producing properties (including certain properties principally occupied by our
cinemas). In the case of properties leased to our cinema operations,
these number include an internal allocation of “rent” for such
facilities.
|
Property1
|
Square
Feet of Improvements
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Auburn
100
Parramatta Road
Auburn,
NSW, Australia
|
57,000
/ 57,000
Plus
an 871-space subterranean parking structure
|
71%
|
$31,380,000
|
|
Belmont
Knutsford
Ave and Fulham St
Belmont,
WA, Australia
|
19,000
/ 49,000
|
80%
|
$13,263,000
|
|
Cinemas
1, 2 & 32
1003
Third Avenue
Manhattan,
NY, USA
|
0 /
24,000
|
N/A
|
$23,674,000
|
|
Courtenay
Central
100
Courtenay Place
Wellington,
New Zealand
|
38,000
/ 68,000
Plus
a 245,000 square foot parking structure
|
76%
|
$24,343,000
|
|
Invercargill
Cinema
29
Dee Street
Invercargill,
New Zealand
|
7,000
/ 20,000
|
85%
|
$2,996,000
|
|
Maitland
Cinema
Ken
Tubman Drive
Maitland,
NSW, Australia
|
0 /
22,000
|
N/A
|
$2,088,000
|
|
Minetta
Lane Theatre
18-22
Minetta Lane
Manhattan,
NY, USA
|
0 /
9,000
|
N/A
|
$8,228,000
|
|
Napier
Cinema
154
Station Street
Napier,
New Zealand
|
5,000
/ 18,000
|
100%
|
$3,102,000
|
|
Newmarket3
Newmarket,
QLD, Australia
|
93,000
/ 0
|
99%
|
$37,874,000
|
|
Orpheum
Theatre
126
2nd
Street
Manhattan,
NY, USA
|
0 /
5,000
|
N/A
|
$3,256,000
|
|
Royal
George
1633
N. Halsted Street
Chicago,
IL, USA
|
37,000
/ 23,000
Plus
21,000 square feet of parking
|
91%
|
$3,306,000
|
|
Rotorua
Cinema
1281
Eruera Street
Rotorua,
New Zealand
|
0 /
19,000
|
N/A
|
$2,827,000
|
|
Union
Square Theatre
100
E. 17th
Street
Manhattan,
NY, USA
|
21,000
/ 17,000
|
100%
|
$8,971,000
|
1 A number
of our properties include entertainment components rented to one or more of our
subsidiaries. The rental area and percentage leased numbers are net
of such entertainment components as is the book value. Book value and
rental information are as of December 31, 2007.
2 This
property is owned by a limited liability company in which we hold a 75% managing
interest. The remaining 25% is owned by Sutton Hill Investments, LLC,
a company owned in equal parts by our Chairman and Chief Executive Officer, Mr.
James J. Cotter, and Michael Forman, a major shareholder in our
Company.
3 The
rental components of this project have been opened for business. The
cinema component is, however, still in the design phase and not anticipated to
open until some time in 2009.
In
addition, in certain cases we have long-term leases which we view more akin to
real estate investments than cinema leases As of December 31, 2007, we had
approximately 179,000 square foot of space subject to such long-term
leases.
|
Property1
|
Square
Footage
(rental/entertainment)
|
Percentage
Leased
|
Gross
Book Value
(in
U.S. Dollars)
|
|
Manville
|
0 /
63,000
|
N/A
|
$1,642,000
|
|
Tower
|
0 /
16,000
|
N/A
|
$ 151,000
|
|
Village
East
|
5,000
/ 37,000
|
100%
|
$2,589,000
|
|
Waurn
Ponds
|
6,000
/ 52,000
|
100%
|
$6,177,000
|
1 A number
of our properties include entertainment components rented to one or more of our
subsidiaries. The rental area and percentage leased numbers are net
of such entertainment components. Book value, however, includes the
entire investment in the leased property, including any cinema
fit-out. Rental and book value information is as of December 31,
2006.
Other
Property Interests and Investments
Domestic
Minority
Investments in Real Estate Companies
Place
57, Manhattan
We own a
25% membership interest in the limited liability company that has developed the
site of our former Sutton Cinema on 57th Street
just east of 3rd Avenue
in Manhattan, as a 143,000 square foot residential condominium tower, with the
ground floor retail unit and the resident manager’s apartment. The
project is essentially sold out, as all of the residential units have been
conveyed and only the ground floor commercial unit is still available for
sale. We are currently looking for a tenant for the commercial space,
which faces on to 57th Street.
At December 31, 2007, all debt on the project had been repaid, and we had
received distributions totaling $9.8 million from this project, on an investment
of $3.0 million made in 2004.
Malulani
Investments, Limited
We own an
18.4% equity interest in Malulani Investments, Limited (“MIL”) a closely held
private company organized under the laws of the State of Hawaii. The
assets of MIL consist principally of commercial properties in Hawaii and
California. MIL’s assets include the Guenoc Winery and approximately
22,000 acres of contiguous property located in Northern
California. Approximately 400 acres of the property in California
consists of vineyards, while the remainder is used for agricultural
purposes. The property is currently subdivided into approximately 60
separate legal parcels. This land and commercial real estate holdings
are encumbered by debt. To date, our requests to management for
information about MIL, including consolidated financial information, have not
been honored. We have brought litigation against MIL and
certain of its directors in an effort to improve our access to information,
including consolidated financial information. While we believe that
we should prevail in our efforts in this regard, as in all litigation matters,
no assurances can be given.
In
connection with this investment we have entered into a shareholders agreement
with Magoon Acquisition and Development, LLC, a limited liability company
organized under the laws of the state of California (“Magoon
LLC”). Magoon LLC owns an approximately 12% equity interest in MIL
and a 30% interest in The Malulani Group, Limited, a closely held private
Hawaiian corporation (“TMG”), and the owner of 70% equity interest in
MIL. That shareholders agreement grants to us voting control over the
MIL and TMG shares held by Magoon, LLC, and provides for various rights of first
refusal and cost sharing. In addition, the shareholders agreement
grants to us the right to require Magoon LLC to contribute its MIL and TMG
shares into a new limited liability company, which would also own our MIL
shares, of which we would be the sole managing member. As the sole
managing member, we would be entitled to receive 20% of any distributions as a
management fee, after return of capital to the members. MIL and TMG
both have cumulative voting, and together with Magoon LLC, we have elected James
J. Cotter to serve as a member of the Board of Directors of MIL.
Non-operating
Properties
We own
the fee interest in 25 parcels comprising 195 acres in Pennsylvania and
Delaware. These acres consist primarily of vacant land. We
believe the value of these properties to be immaterial to our asset base, and
while they are available for sale, we are not actively involved in the marketing
of such properties. With the exception of certain properties located
in Philadelphia (including the raised railroad bed leading to the old Reading
Railroad Station), the properties are principally located in rural areas of
Pennsylvania and Delaware.
Additionally,
we own a condominium in the Los Angeles, California area which is used for
offsite corporate meetings and by our Chief Executive Officer when he is in
town.
Australia
Melbourne Office
Building
On
September 29, 2005, we purchased an office building in Melbourne, Australia for
$2.0 million (AUS$2.6 million) to serve as the headquarters for our Australia
and New Zealand operations. We fully financed this property by
drawing on our Australian Credit Facility.
Item 3 –
Legal Proceedings
Tax
Audit/Litigation
The
Internal Revenue Service (the “IRS”) completed its audits of the tax return of
Reading Entertainment Inc. (RDGE) for its tax years ended December 31, 1996
through December 31, 1999 and the tax return of Craig Corporation (CRG) for its
tax year ended June 30, 1997. With respect to both of these
companies, the principal focus of these audits was the treatment of the
contribution by RDGE to our wholly owned subsidiary, Reading Australia, and
thereafter the subsequent repurchase by Stater Bros. Inc. from Reading Australia
of certain preferred stock in Stater Bros. Inc. (the “Stater Stock”) received by
RDGE from CRG as a part of a private placement of securities by RDGE which
closed in October 1996. A second issue involving equipment-leasing
transactions entered into by RDGE (discussed below) is also
involved.
By
letters dated November 9, 2001, the IRS issued reports of examination proposing
changes to the tax returns of RDGE and CRG for the years in question (the
“Examination Reports”). The Examination Report for each of RDGE and
CRG proposed that the gains on the disposition by RDGE of Stater Stock, reported
as taxable on the RDGE return, should be allocated to CRG. As
reported, the gain resulted in no additional tax to RDGE inasmuch as the gain
was entirely offset by a net operating loss carry forward of
RDGE. This proposed change would result in an additional tax
liability for CRG of approximately $20.9 million plus interest of approximately
$17.9 million as of December 31, 2007. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $4.6 million as of December 31,
2007. Accordingly, this proposed change represented, as of December
31, 2007, an exposure of approximately $48.8 million.
Moreover,
California has “amnesty” provisions imposing additional liability on taxpayers
who are determined to have materially underreported their taxable
income. While these provisions have been criticized by a number of
corporate taxpayers to the extent that they apply to tax liabilities that are
being contested in good faith, no assurances can be given that these new
provisions will be applied in a manner that would mitigate the impact on such
taxpayers. Accordingly, these provisions may cause an additional $4.0
million exposure to CRG, for a total exposure of approximately $52.8
million. We have accrued $4.5 million as a probable loss in relation
to this exposure and believe that the possible total settlement amount will be
between $4.0 million and $52.8 million.
In early
February 2005, we had a mediation conference with the IRS concerning this
proposed change. The mediation was conducted by two mediators, one of
whom was selected by the taxpayer from the private sector and one of whom was an
employee of the IRS. In connection with this mediation, we and the
IRS each prepared written submissions to the mediators setting forth our
respective cases. In its written submission, the IRS noted that it
had offered to settle its claims against us at 30% of the proposed change, and
reiterated this offer at the mediation. This offer constituted, in
effect, an offer to settle for a payment of $5.0 million federal tax, plus
interest, for an aggregate settlement amount of approximately $8.0
million. Based on advice of counsel given after reviewing the
materials submitted by the IRS to the mediation panel, and the oral presentation
made by the IRS to the mediation panel and the comments of the mediators
(including the IRS mediator), we determined not to accept this
offer.
Notices
of deficiency (“N/D”) dated June 29, 2006 were received with respect to each
of RDGE and CRG determining proposed deficiencies of $20.9 million
for CRG and a total of $349,000 for RDGE for the tax years 1997, 1998 and
1999.
We intend
to litigate aggressively these matters in the U.S. Tax Court and an appeal was
filed with the court on September 26, 2006. While there are always
risks in litigation, we believe that a settlement at the level currently offered
by the IRS would substantially understate the strength of our position and the
likelihood that we would prevail in a trial of these matters. We are
currently in the discovery process, and do not anticipate a trial of this issue
before 2010.
Since
these tax liabilities relate to time periods prior to the Consolidation of CDL,
RDGE, and CRG into Reading International, Inc. and since RDGE and CRG continue
to exist as wholly owned subsidiaries of RII, it is expected that any adverse
determination would be limited in recourse to the assets of RDGE or CRG, as the
case may be, and not to the general assets of RII. At the present
time, the assets of these subsidiaries are comprised principally of RII
securities. Accordingly, we do not anticipate, even if there were to
be an adverse judgment in favor of the IRS that the satisfaction of that
judgment would interfere with the internal operation or result in
any
levy upon
or loss of any of our material operating assets. The satisfaction of
any such adverse judgment would, however, result in a material dilution to
existing stockholder interests.
The N/D
issued to RDGE does not cover its tax year 1996 which will be held in abeyance
pending the resolution of the CRG case. An adjustment to 1996 taxable
income for RDGE would result in a refund of alternative minimum tax paid that
year. The N/D issued to RDGE eliminated the gains booked by RDGE in
1996 as a consequence of its acquisition certain computer equipment and sale of
the anticipated income stream from the lease of such equipment to third parties
and disallowed depreciation deductions that we took with respect to that
equipment in 1997, 1998 and 1999. Such disallowance has the effect of
decreasing net operating losses but did not result in any additional regular
federal income tax for such years. However, the depreciation
disallowance would increase RDGE state tax liability for those years by
approximately $170,000 plus interest. The only tax liability
reflected in the RDGE N/D is alternative minimum tax in the total amount of
approximately $349,000 plus interest. On September 26, 2006, we filed
an appeal on this N/D with the U.S. Tax Court.
Environmental and Asbestos
Claims
Certain
of our subsidiaries were historically involved in railroad operations, coal
mining and manufacturing. Also, certain of these subsidiaries appear
in the chain of title of properties which may suffer from
pollution. Accordingly, certain of these subsidiaries have, from time
to time, been named in and may in the future be named in various actions brought
under applicable environmental laws. Also, we are in the real estate
development business and may encounter from time to time unanticipated
environmental conditions at properties that we have acquired for
development. These environmental conditions can increase the cost of
such projects, and adversely affect the value and potential for profit of such
projects. We do not currently believe that our exposure under
applicable environmental laws is material in amount.
From time
to time, we have claims brought against us relating to the exposure of former
employees of our railroad operations to asbestos and coal dust. These
are generally covered by an insurance settlement reached in September 1990 with
our insurance carriers. However, this insurance settlement does not
cover litigation by people who were not our employees and who may claim second
hand exposure to asbestos, coal dust and/or other chemicals or elements now
recognized as potentially causing cancer in humans.
We are in
the process of remediating certain environmental issues with respect to our
50-acre Burwood site in Melbourne. That property was at one time used
as a brickwork, and we have discovered petroleum and asbestos at the
site. During 2007, we developed a plan for the remediation of these
materials, in some cases through removal and in other cases through
encapsulation. The total site preparation costs associated with the
removal of this contaminated soil is estimated to be $7.9 million (AUS$9.0
million). As of December 31, 2007, we had incurred a total of $7.1
million (AUS$8.1 million) of these costs. We do not believe that this
has added materially to the overall development cost of the site, as much of the
work is being done in connection with excavation and other development activity
already contemplated for the property.
Whitehorse Center
Litigation
On October 30, 2000, we commenced
litigation in the Supreme Court of Victoria at Melbourne, Commercial and Equity
Division, against our joint venture partner and the controlling stockholders of
our joint venture partner in the Whitehorse Shopping Center. That
action is entitled Reading Entertainment Australia Pty, Ltd vs. Burstone
Victoria Pty, Ltd and May Way Khor and David Frederick Burr, and was brought to
collect on a promissory note (the “K/B Promissory Note”) evidencing a loan that
we made to Ms. Khor and Mr. Burr and that was guaranteed by Burstone Victoria
Pty, Ltd (“Burstone” and collectively with Ms. Khor and Mr. Burr, the “Burstone
Parties”). This loan balance has been previously written off and is
no longer recorded on our books. The Burstone Parties asserted in
defense certain set-offs and counterclaims, alleging, in essence, that we had
breached our alleged obligations to proceed with the development of the
Whitehorse Shopping Center, causing the Burstone Parties damages. The
matter is currently on appeal. However, if the trial court is
ultimately sustained the result will be a payment from the Burstone Parties to
us of $1.1 million (AUS$1.2 million), as of December 31, 2007. That
amount continues to accrue interest at the rate of approximately
10%.
Mackie
Litigation
On November 7, 2005, we were sued in
the Supreme Court of Victoria at Melbourne by a former construction contractor
with respect to the discontinued development of an ETRC at Frankston,
Victoria. The action is entitled Mackie Group Pty Ltd v. Reading
Properties Pty Ltd, and in it the former contractor seeks payment of a claimed
fee in the amount of $788,000 (AUS$1.0 million). We do not believe
that any such fee is owed, and are contesting the claim. Discovery
has now been completed by both parties. The next step in the
litigation is likely to be mediation.
In a hearing conducted on November 22
and 29, 2006, Reading successfully defended an application for summary judgment
brought by Mackie and was awarded costs for part of the preparation of its
defense to the application. A bill of costs has been prepared by a
cost consultant in the sum of $20,000 (AUS$25,000) (including
disbursements). On 27 April 2007, we received payment from Khor &
Burr for those costs in the sum of $17,000 (AUS$19,000).
A
mediation was held in this matter on 12 July 2007, at which time the matter
failed to settle. Reading has subsequently made an offer of
compromise to Mackie Group in the sum of $150,000 plus party/party costs, which
has not been accepted. The matter has not yet been fixed for trial,
however orders have now been made for the preparation of material for trial, and
we expect that the matter will be set down for trial before the end of the
year.
Malulani Investments
Litigation
In December 2006, we commenced a
lawsuit against certain officers and directors of Malulani Investments Limited
(“MIL”) alleging various direct and derivative claims for breach of fiduciary
duty and waste and seeking, among other things, access to various company books
and records. As certain of these claims were brought derivatively,
MIL was also named as a defendant in that litigation. That case is
called Magoon Acquisition
& Development, LLC; a California limited liability company, Reading
International, Inc.; a Nevada corporation, and James J. Cotter vs. Malulani
Investments, Limited, a Hawaii Corporation, Easton T. Mason; John R. Dwyer, Jr.;
Philip Gray; Kenwei Chong (Civil No. 06-1-2156-12 (GWBC) and is currently
pending before Judge Chang in the circuit Court of the First circuit State of
Hawaii, in Honolulu.
On July 26, 2007, the Court granted
TMG’s motion to intervene in the Hawaii action. On March 24, 2008,
MIL filed a counter claim against us, alleging that we are green mailers, that
our purpose in bringing the lawsuit was to harass and harm MIL, and that we
should be liable to MIL for the damage resulting from our harassment, including
the bringing of our lawsuit (the “MIL Counterclaim”).
We do not believe that we have any
meaningful exposure with respect to the MIL Counterclaim, and intend to continue
to prosecute our claims against the Defendant Directors. We have
filed a counterclaim against TMG, alleging various breached of fiduciary duty on
its part, as the controlling shareholder of MIL, and are currently seeking
permission to amend our initial complaint to add additional allegations
principally growing out of the ongoing conduct by the Defendant Directors since
the filing of our initial complaint. The action is currently in its
discovery phase, with trail currently set for November of this
year.
Other Claims – Credit Card
Claims
During 2006, the bank, which
administers our credit card activities, asserted a claim of potential loss
suffered in relation to the use by third parties of counterfeit credit cards and
related credit card company fines. At the end of 2006, we expected
the associated claims from the bank and credit card companies for these losses
and fines to total approximately $1.2 million. For this reason, we
expensed $1.2 million during the year ending December 31,
2006. During 2007, the majority of the credit card claims and
penalties were assessed and paid resulting in realized losses of $429,000 and
$160,000 for the years ending December 31, 2007 and 2006, respectively, and
returned restricted cash of $551,000 during 2007. The restricted cash
balance at December 31, 2007 was $59,000 relating to the remaining unresolved
credit card claims.
Item 4 –
Submission of Matters to a Vote of Security Holders
At our
2007, Annual Meeting of Stockholders held on May 10, 2007, the stockholders
voted on the following proposals:
|
|
·
|
by
the following vote, our eight directors were reelected to serve on the
Board of Directors until the 2008 Annual Meeting of
Stockholders:
|
|
Election
of Directors
|
For
|
Withheld
|
|
James
J. Cotter
|
1,117,201
|
28
|
|
Eric
Barr
|
1,117,201
|
28
|
|
James
J. Cotter, Jr.
|
1,117,201
|
28
|
|
Margaret
Cotter
|
1,117,201
|
28
|
|
William
D. Gould
|
1,117,201
|
28
|
|
Edward
L. Kane
|
1,117,201
|
28
|
|
Gerard
P. Laheney
|
1,117,201
|
28
|
|
Alfred
Villaseñor
|
1,117,201
|
28
|
PART
II
Item 5 – Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
|
(a)
|
Market Price of and
Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
|
Market
Information
Reading
International, Inc., a Nevada corporation (“RDI” and collectively with our
consolidated subsidiaries and corporate predecessors, the “Company,” “Reading”
and “we,” “us,” or “our”), was incorporated in 1999 and, following the
consummation of a consolidation transaction on December 31, 2001 (the
“Consolidation”), is now the owner of the consolidated businesses and assets of
Reading Entertainment, Inc. (“RDGE”), Craig Corporation (“CRG”), and Citadel
Holding Corporation (“CDL”). Until the consolidation of CDL, RDGE,
and CRG on December 31, 2001, our common stock was listed and quoted on the
American Stock Exchange (“AMEX”) under the symbols CDL.A and
CDL.B. Following the consolidation, we changed our name to
RDI. Effective January 2, 2002, our common stock traded on the
American Stock Exchange under the symbols RDI.A and RDI.B. In March
2004, we changed our nonvoting stock symbol from RDI.A to RDI.
The
following table sets forth the high and low closing prices of the RDI and RDI.B
common stock for each of the quarters in 2007 and 2006 as reported by
AMEX:
|
Class
A Nonvoting
|
Class
B Voting
|
||||||||||||||||
|
Common Stock
|
Common Stock
|
||||||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
2007:
|
Fourth
Quarter
|
$ | 10.22 | $ | 9.60 | $ | 10.50 | $ | 10.00 | ||||||||
|
Third
Quarter
|
$ | 10.64 | $ | 9.53 | $ | 10.75 | $ | 9.40 | |||||||||
|
Second
Quarter
|
$ | 9.34 | $ | 8.35 | $ | 9.57 | $ | 8.30 | |||||||||
|
First
Quarter
|
$ | 8.70 | $ | 8.18 | $ | 8.50 | $ | 8.00 | |||||||||
|
2006:
|
Fourth
Quarter
|
$ | 8.53 | $ | 7.77 | $ | 8.35 | $ | 7.65 | ||||||||
|
Third
Quarter
|
$ | 8.18 | $ | 7.75 | $ | 8.00 | $ | 7.35 | |||||||||
|
Second
Quarter
|
$ | 8.42 | $ | 7.89 | $ | 8.35 | $ | 7.50 | |||||||||
|
First
Quarter
|
$ | 8.62 | $ | 7.50 | $ | 8.60 | $ | 7.30 | |||||||||
Holders
of Record
The
number of holders of record of our Class A and Class B Stock in 2007 was
approximately 3,500 and 300, respectively. On March 26, 2007, the
closing price per share of our Class A Stock was $9.42, and the closing price
per share of our Class B Stock was $10.20.
Dividends
on Common Stock
We have
never declared a cash dividend on our common stock and we have no current plans
to declare a dividend; however, we review this matter on an ongoing
basis.
|
(b)
|
Recent Sales of
Unregistered Securities; Use of Proceeds from Registered
Securities
|
None.
|
(c)
|
Purchases of Equity
Securities by the Issuer and Affiliated
Purchasers
|
None.
Item 6 –
Selected Financial Data
The table
below sets forth certain historical financial data regarding our
Company. This information is derived in part from, and should be read
in conjunction with our consolidated financial statements included in Item 8 of
this Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007
Annual Report”), and the related notes to the consolidated financial statements
(dollars in thousands, except per share amounts).
|
At or for the Year Ended December
31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Revenue
|
$ | 119,235 | $ | 106,125 | $ | 98,105 | $ | 84,089 | $ | 73,911 | ||||||||||
|
Gain
(loss) from discontinued operations
|
$ | 1,912 | $ | -- | $ | 12,231 | $ | (469 | ) | $ | (288 | ) | ||||||||
|
Operating
income (loss)
|
$ | 5,149 | $ | 2,415 | $ | (6,372 | ) | $ | (6,322 | ) | $ | (5,839 | ) | |||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | $ | (8,463 | ) | $ | (5,928 | ) | |||||||
|
Basic
earnings (loss) per share – continuing operations
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | $ | (0.37 | ) | $ | (0.26 | ) | ||||||
|
Basic
earnings (loss) per share – discontinued operations
|
$ | 0.09 | $ | -- | $ | 0.55 | $ | (0.02 | ) | $ | (0.01 | ) | ||||||||
|
Basic
earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | $ | (0.39 | ) | $ | (0.27 | ) | |||||||
|
Diluted
earnings (loss) per share – continuing operations
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | $ | (0.37 | ) | $ | (0.26 | ) | ||||||
|
Diluted
earnings (loss) per share – discontinued operations
|
$ | 0.09 | $ | -- | $ | 0.55 | $ | (0.02 | ) | $ | (0.01 | ) | ||||||||
|
Diluted
earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | $ | (0.39 | ) | $ | (0.27 | ) | |||||||
|
Other
Information:
|
||||||||||||||||||||
|
Shares
outstanding
|
22,482,605 | 22,476,355 | 22,485,948 | 21,998,239 | 21,899,290 | |||||||||||||||
|
Weighted
average shares outstanding
|
22,478,145 | 22,425,941 | 22,249,967 | 21,948,065 | 21,860,222 | |||||||||||||||
|
Weighted
average dilutive shares outstanding
|
22,478,145 | 22,674,818 | 22,249,967 | 21,948,065 | 21,860,222 | |||||||||||||||
|
Total
assets
|
$ | 346,071 | $ | 289,231 | $ | 253,057 | $ | 230,227 | $ | 222,866 | ||||||||||
|
Total
debt
|
$ | 177,195 | $ | 130,212 | $ | 109,320 | $ | 72,879 | $ | 60,765 | ||||||||||
|
Working
capital (deficit)
|
$ | 6,345 | $ | (6,997 | ) | $ | (14,282 | ) | $ | (6,915 | ) | $ | (154 | ) | ||||||
|
Stockholders’
equity
|
$ | 121,362 | $ | 107,659 | $ | 99,404 | $ | 102,010 | $ | 108,491 | ||||||||||
|
EBIT
|
$ | 8,098 | $ | 12,734 | $ | 6,671 | $ | (4,339 | ) | $ | (2,650 | ) | ||||||||
|
Depreciation
and amortization
|
$ | 11,921 | $ | 13,212 | $ | 12,384 | $ | 11,823 | $ | 10,952 | ||||||||||
|
Add: Adjustments
for discontinued operations
|
$ | -- | $ | -- | $ | 567 | $ | 1,915 | $ | 1,907 | ||||||||||
|
EBITDA
|
$ | 20,019 | $ | 25,946 | $ | 19,622 | $ | 9,399 | $ | 10,209 | ||||||||||
|
Debt
to EBITDA
|
8.85 | 5.02 | 5.57 | 7.75 | 5.95 | |||||||||||||||
|
Capital
expenditure (including acquisitions)
|
$ | 42,414 | $ | 16,389 | $ | 53,954 | $ | 33,180 | $ | 5,809 | ||||||||||
|
Number
of employees at 12/31
|
1,383 | 1,451 | 1,523 | 1,677 | 1,453 | |||||||||||||||
EBIT
presented above represents net income (loss) adjusted for interest expense
(calculated net of interest income) and income tax expense. EBIT is
presented for informational purposes to show the significance of depreciation
and amortization in the calculation of EBITDA. We use EBIT in our
evaluation of our operating results since we believe that it is useful as a
measure of financial performance, particularly for us as a multinational
company. We believe it is a useful measure of financial performance
principally for the following reasons:
|
|
·
|
since
we operate in multiple tax jurisdictions, we find EBIT removes the impact
of the varying tax rates and tax regimes in the jurisdictions in which we
operate.
|
|
|
·
|
in
addition, we find EBIT useful as a financial measure that removes the
impact from our effective tax rate of factors not directly related to our
business operations, such as, whether we have acquired operating assets by
purchasing those assets directly, or indirectly by purchasing the stock of
a company that might hold such operating
assets.
|
|
|
·
|
the
use of EBIT as a financial measure also (i) removes the impact of tax
timing differences which may vary from time to time and from jurisdiction
to jurisdiction, (ii) allows us to compare our performance to that
achieved by other companies, and (iii) is useful as a financial measure
that removes the impact of our historically significant net loss
carryforwards.
|
|
|
·
|
the
elimination of net interest expense helps us to compare our operating
performance to those companies that may have more or less debt than we
do.
|
EBITDA
presented above is net income (loss) adjusted for interest expense (again,
calculated net of interest income), income tax expense, and in addition
depreciation and amortization expense. We use EBITDA in our
evaluation of our performance since we believe that EBITDA provides a useful
measure of financial performance and value. We believe this
principally for the following reasons:
|
|
·
|
we
believe that EBITDA is an industry comparative measure of financial
performance. It is, in our experience, a measure commonly used
by analysts and financial commentators who report on the cinema exhibition
and real estate industries and a measure used by financial institutions in
underwriting the creditworthiness of companies in these
industries. Accordingly, our management monitors this
calculation as a method of judging our performance against our peers and
market expectations and our
creditworthiness.
|
|
|
·
|
also,
analysts, financial commentators, and persons active in the cinema
exhibition and real estate industries typically value enterprises engaged
in these businesses at various multiples of
EBITDA. Accordingly, we find EBITDA valuable as an indicator of
the underlying value of our
businesses.
|
We expect
that investors may use EBITDA to judge our ability to generate cash, as a basis
of comparison to other companies engaged in the cinema exhibition and real
estate businesses and as a basis to value our company against such other
companies.
Neither
EBIT nor EBITDA is a measurement of financial performance under accounting
principles generally accepted in the United States of America and should not be
considered in isolation or construed as a substitute for net income or other
operations data or cash flow data prepared in accordance with accounting
principles generally accepted in the United States for purposes of analyzing our
profitability. The exclusion of various components such as interest,
taxes, depreciation and amortization necessarily limit the usefulness of these
measures when assessing our financial performance, as not all funds depicted by
EBITDA are available for management’s discretionary use. For example,
a substantial portion of such funds are subject to contractual restrictions and
functional requirements to service debt, to fund necessary capital expenditures
and to meet other commitments from time to time as described in more detail in
this Annual Report on Form 10-K.
EBIT and
EBITDA also fail to take into account the cost of interest and
taxes. Interest is clearly a real cost that for us is paid
periodically as accrued. Taxes may or may not be a current cash item
but are nevertheless real costs which, in most situations, must eventually be
paid. A company that realizes taxable earnings in high tax
jurisdictions may be ultimately less valuable than a company that realizes the
same amount of taxable earnings in a low tax jurisdiction. EBITDA
fails to take into account the cost of depreciation and amortization and the
fact that assets will eventually wear out and have to be replaced.
EBITDA,
as calculated by us, may not be comparable to similarly titled measures reported
by other companies. A reconciliation of net income (loss) to EBIT and
EBITDA is presented below (dollars in thousands):
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | $ | (8,463 | ) | $ | (5,928 | ) | |||||||
|
Add: Interest
expense, net
|
8,163 | 6,608 | 4,473 | 3,078 | 2,567 | |||||||||||||||
|
Add: Income
tax expense
|
2,038 | 2,270 | 1,209 | 1,046 | 711 | |||||||||||||||
|
EBIT
|
$ | 8,098 | $ | 12,734 | $ | 6,671 | $ | (4,339 | ) | $ | (2,650 | ) | ||||||||
|
Add:Depreciation
and amortization
|
11,921 | 13,212 | 12,384 | 11,823 | 10,952 | |||||||||||||||
|
Adjustments
for discontinued operations:
|
||||||||||||||||||||
|
Add: Interest
expense, net
|
-- | -- | 310 | 839 | 856 | |||||||||||||||
|
Add: Depreciation
and amortization
|
-- | -- | 257 | 1,076 | 1,051 | |||||||||||||||
|
EBITDA
|
$ | 20,019 | $ | 25,946 | $ | 19,622 | $ | 9,399 | $ | 10,209 | ||||||||||
Item 7 –
Management’s Discussions and Analysis of Financial Condition and Results of
Operations
The following review should be read in
conjunction with the consolidated financial statements and related notes
included in our 2007 Annual Report. Historical results and percentage
relationships do not necessarily indicate operating results for any future
periods.
Overview
Today, our businesses consist primarily
of:
|
|
·
|
the
development, ownership and operation of multiplex cinemas in the United
States, Australia, and New Zealand;
and
|
|
|
·
|
the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United States, including
entertainment-themed retail centers (“ETRCs”) in Australia and New Zealand
and live theater assets in Manhattan and Chicago in the United
States.
|
We manage
our worldwide cinema businesses under various different brands:
|
|
·
|
in
the US, under the Reading, Angelika Film Center, Consolidated Amusements,
and City Cinemas brands;
|
|
|
·
|
in
Australia, under the Reading brand;
and
|
|
|
·
|
in
New Zealand, under the Reading, Berkeley Cinemas, and Rialto
brands.
|
While we do not believe the cinema
exhibition business to be a growth business at this time, we do believe it to be
a business that will likely continue to generate fairly consistent cash flows in
the years ahead. This is based on our belief that people will
continue to spend some reasonable portion of their entertainment dollar on
entertainment outside of the home and that, when compared to other forms of
outside the home entertainment, movies continue to be a popular and
competitively priced option. While we intend to be opportunistic in
adding to our existing cinema portfolio (and to continue to work to expand our
art cinema operations), we believe it likely that, going forward, we will be
reinvesting a greater percentage of our free cash flow in our general real
estate development. Over time, we anticipate that our cinema
operations will become an increasing source of cash flow to support our real
estate oriented activities and that our real estate activities will become the
principal thrust of our business.
In short, while we do have operating
company attributes, we see ourselves principally as a hard asset company that
will add to shareholder value by building the value of our portfolio of tangible
assets.
Business
Climate
Cinema
Exhibition - General
There is continuing uncertainty in the
film industry as to the future of digital exhibition and in-the-home
entertainment alternatives. In the case of digital exhibition, there
is currently considerable discussion within the industry as to the benefits and
detriments of moving from conventional film projection to digital projection
technology. There are issues as to when it will be available on an
economically attractive basis, as to who will pay for the conversion from
conventional to digital technology between exhibitors and distributors, as to
what the impact will be on film licensing expense, and as to how to deal with
security and potential pirating issues if film is distributed in a digital
format. In the case of in-the-home entertainment alternatives, the
industry is faced with the significant leaps achieved in recent periods in both
the quality and affordability of in-the-home entertainment systems and in the
accessibility to entertainment programming through cable, satellite, and DVD
distribution channels. These are issues common to both our domestic
and international cinema operations.
Cinema Exhibition –
Australia / New Zealand
The film exhibition industry in
Australia and New Zealand is highly concentrated and somewhat vertically
integrated in that one of the Major Exhibitors, Roadshow Film Distributors, also
serves as a distributor of film in Australia and New Zealand for Warner Bros.
and New Line. Films produced or distributed by the majority of the
local international independent producers are also distributed by
Roadshow. Typically, the Major Exhibitors own the newer multiplex and
mega-plex cinemas, while the independent exhibitors typically have older and
smaller cinemas. Accordingly, we believe it likely that the Major
Exhibitors may control upwards of 65% of the total cinema box office in
Australia and New Zealand. Also, the Major Exhibitors have in recent
periods built a number of new multiplexes as joint venture partners or
under-shared facility arrangements, and have historically not engaged in
head-to-head competition, except in the downtown areas of Sydney and
Melbourne.
Cinema Exhibition – North
America
In North America, distributors may find
it more commercially appealing to deal with major exhibitors, rather than to
deal with independents like us, which tends to suppress supply screens in a very
limited number of markets. This competitive disadvantage has
increased significantly in recent periods with the development of mega circuits
like Regal and AMC, who are able to offer distributors access to screens on a
truly nationwide basis, or on the other hand, to deny access if their desires
with respect to film supply are not satisfied.
These consolidations have adversely
affected our ability to get film in certain domestic markets where we compete
against major exhibitors. With the restructuring and consolidation
undertaken in the industry, and the emergence of increasingly attractive in-home
entertainment alternatives, strategic cinema acquisitions by our North American
operation can be a way to combat such a competitive disadvantage.
Real Estate – Australia and
New Zealand
Commercial
and retail property values have remained high in Australia and New Zealand due
to sound economic growth and, until recently, controlled interest
rates. New Zealand has enjoyed consistent growth in rentals and
values with some recent signs that this has plateaued in the short
term. Project commencements have declined with indications that
construction prices will tighten this year. There are continuing
signs that large Australian-based funds are actively seeking out opportunities
in New Zealand.
The Australian commercial sector of the
real estate market has remained buoyant in Australia during 2007. The
large institutional funds are still seeking out prime assets with premium prices
being paid for good retail and commercial investments and development
opportunities. Leasing interest in growth areas such as Brisbane is
driving positive returns. Many large residential unit developments in
Sydney and Melbourne have however resulted in some oversupply and this sector
has softening values.
Real Estate – North
America
In the
U.S., our real estate interests are predominantly centered on our live theatre
rental operations, with the exception of one property relating to a cinema asset
that we operate. In addition, our geographic focus of real estate
holdings is narrowed to New York and Illinois, and there specifically Manhattan
and Chicago.
The four
properties that we own relative to our live theatre operations are therefore
affected by i) our ability to secure the right live production and ii) the
potential for redevelopment of any one site. Any ancillary rental
stream, which would be affected by the general state of the US property market,
is minor compared to that. Likewise, the rental stream of the one
cinema that we own depends solely on our cinema operation, and its value to us
depends on this and its redevelopment potential.
The
market for redevelopment sites in Manhattan and Chicago has begun to stabilize
from the rapid rise in appreciation values over the past few years.
Business
Segments
As indicated above, our two primary
business segments are cinema exhibition and the holding and development of real
estate. These segments are summarized as follows:
Cinema
Exhibition
One of
our primary businesses consists of the ownership and operation of
cinemas. At December 31, 2007 we:
|
|
·
|
directly
operated 35 cinemas with 231
screens;
|
|
|
·
|
had
interests in certain unconsolidated joint ventures in which we have
varying interests, which own an additional 7 cinemas with 46
screens;
|
|
|
·
|
managed
2 cinemas with 9 screens;
|
|
|
·
|
had
entered into an agreement for lease with respect to a new 8-screen cinema
currently under development in a regional shopping center located in a
fast growing suburban area in Australia. It is anticipated that
this cinema will open in March 2008;
and
|
Consistent
with our philosophy to look for opportunities in the cinema exhibition industry,
on February 22, 2008 we acquired from two related companies, Pacific Theatres
and Consolidated Amusement Theatres, substantially all of their cinema assets in
Hawaii of nine complexes (98 screens), San Diego County of four complexes (51
screens), and Northern California of two complexes (32 screens). In
total, we acquired fourteen mature leasehold cinemas and the management rights
to one additional mature cinema with 8 screens. In saying that these
cinema are “mature” we mean that they have been in operation for some years, and
are, in our view, proven performers in their markets. We refer to
these cinemas from time to time in this report as Consolidated
Cinemas.
Our
cinema revenue consists of admissions, concessions, and
advertising. The cinema operating expense consists of the costs
directly attributable to the operation of the cinemas including
employee-related, occupancy, and operating costs and film rent
expense. Cinema revenue and expense fluctuates with the availability
of quality first-run films and the numbers of weeks the first–run films stay in
the market.
Rental Real Estate
Holdings
For fiscal 2007, our rental generating
real estate holdings consisted of the following properties:
|
|
·
|
our
Belmont, Western Australia ETRC, our Auburn, New South Wales ETRC and our
Wellington, New Zealand ETRC;
|
|
|
·
|
our
Newmarket shopping center in Newmarket, Queensland, a suburb of
Brisbane. The center is ultimately intended to be an ETRC, and
we recently obtained final government approvals for the construction of an
approximately 33,000 square foot cinema as a part of the
complex;
|
|
|
·
|
three
single auditorium live theaters in Manhattan (Minetta Lane, Orpheum, and
Union Square) and a four auditorium live theater complex in Chicago (The
Royal George) and, in the case of the Union Square and the Royal George
their accompanying ancillary retail and commercial
tenants;
|
|
|
·
|
a
New Zealand property rented to an unrelated third party, to be held for
current income and long-term
appreciation;
|
|
|
·
|
our
Lake Taupo property in New Zealand that is currently improved with a motel
which we are in the process of renovating its units to be
condominiums. A portion of this property includes unimproved
land that we do not intend to develop;
and
|
|
|
·
|
the
ancillary retail and commercial tenants at some of our non-ETRC cinema
properties.
|
In
addition, we have approximately 5.3 million square feet of unimproved real
estate held for development in Australia and New Zealand, discussed in greater
detail below, and certain unimproved land in the United States that was used in
our historic activities. We also own an 8,783 square foot commercial
building in Melbourne, which serves as our administrative headquarters for
Australia and New Zealand.
In 2007,
we acquired the following real property interests:
|
|
·
|
Manukau
Land. On July 27, 2007, we purchased through a Landplan
Property Partners property trust a 64.0 acre parcel of undeveloped
agricultural real estate for approximately $9.3 million (NZ$12.1
million). We intend to rezone the property from its current
agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can
be given that such rezoning will be achieved, or if achieved, that it will
occur in the near term.
|
|
|
·
|
New Zealand Commercial
Property. On June 29, 2007, we acquired a commercial
property for $5.9 million (NZ$7.6 million), rented to an unrelated third
party, to be held for current income and long-term
appreciation.
|
|
|
·
|
Cinemas 1, 2, & 3
Building. On June 28, 2007, we purchased the building
associated with our Cinemas 1, 2, & 3 for $100,000 from Sutton Hill
Capital (“SHC”). Our option to purchase that building has been
previously disclosed, and was granted to us by SHC at the time that we
acquired the underlying ground lease from SHC on June 1,
2005. As SHC is a related party to our corporation, our Board’s
Audit and Conflicts Committee, comprised entirely of outside independent
directors, and subsequently our entire Board of Directors unanimously
approved the purchase of the property. The Cinemas 1, 2 & 3
is located on 3rd Avenue between 59th and 60th
Streets.
|
|
|
·
|
Lake Taupo
Property. On February 14, 2007, we acquired, through a
Landplan Property Partners property trust, a 1.0 acre parcel of commercial
real estate for approximately $4.9 million (NZ$6.9
million). The property was improved with a motel, but we are
currently renovating the property’s units to be condominiums. A
portion of this property includes unimproved land that we do not intend to
develop. This land was determined to have a fair value of $1.8
million (NZ$2.6 million) at the time of purchase and is included on our
balance sheet as land held for sale. The remaining property and
its cost basis of $3.1 million (NZ$4.3 million) was included in property
under development. The operating activities of the motel are
not material.
|
|
|
·
|
Tower Ground
Lease. On February 8, 2007, we purchased the tenant’s
interest in the ground lease underlying the building lease for one of our
domestic cinemas for $493,000.
|
In 2006,
we acquired the following real property interests:
|
|
·
|
Indooroopilly
Land. On September 18, 2006, we purchased a 0.3 acre
property for $1.8 million (AUS$2.3 million) as part of our Landplan
Property Partners initiative. We have obtained approval to
develop the property to be a 28,000 square foot grade A commercial office
building comprising six floors of office space and two basement levels of
parking with 33 parking spaces. We expect to spend US$8.2
million (AUS$9.4 million) in development costs. We plan to
complete the project in December
2008.
|
|
|
·
|
Moonee Ponds
Land. On September 1, 2006, we purchased two parcels of
land aggregating 0.4 acres adjacent to our Moonee Ponds property for $2.5
million (AUS$3.3 million). This acquisition increases our
holdings at Moonee Ponds to 3.3 acres and gives us frontage facing the
principal transit station servicing the area. We are currently
working to finalize plans for the development of this property into a
mixed-use entertainment based retail and commercial
complex.
|
|
|
·
|
Malulani
Investments. On June 28, 2006, we acquired for $1.8
million, an 18.4% equity interest in Malulani Investments, Limited
(“MIL”), a closely held Hawaiian company which currently owns
approximately 763,000 square feet of developed commercial real estate
principally in California, Hawaii, and Texas, and approximately 22,000
acres of agricultural land in Northern California. Included
among MIL’s assets is the Guenoc Winery, consisting of approximately 400
acres of vineyard land and a winery equipped to bottle up to 120,000 cases
of wine annually. This land and commercial real estate holdings
are encumbered by debt.
|
Property Held For or Under
Development
For fiscal 2007, our investments in
property held for or under development consisted of:
|
|
·
|
an
approximately 50.6 acre property located in the Burwood area of Melbourne,
Australia, recently rezoned from an essentially industrial zone to a
priority zone allowing a variety of retail, entertainment, commercial and
residential uses and currently in the planning stages of
development;
|
|
|
·
|
an
approximately 3.3 acre property located in the Moonee Ponds area of
Melbourne, Australia. We are currently working to finalize
plans for the development of this property into a mixed use entertainment
based retail and commercial
complex;
|
|
|
·
|
an
approximately 0.9 acre property located adjacent to the Courtenay Central
ETRC in Wellington, New Zealand. We have received all necessary
governmental approvals to develop the site for retail, commercial and
entertainment purposes as Phase II of our existing ETRC. We
anticipate the construction of an approximately 162,000 square foot retail
project which, when completed, will be integrated into the common areas of
our existing ETRC;
|
|
|
·
|
a
25% interest, representing an investment of $3.0 million, in the company
redeveloping the site of our old Sutton Cinema site in Manhattan, New
York. The property has been redeveloped as an approximately
100,000 square foot residential condominium project with ground floor
retail and marketed under the name “Place
57.” In 2006, the joint venture was able to close on the
sales of 59 condominiums resulting in gross sales of $117.7 million and
equity earnings from unconsolidated joint venture to us of $8.3
million. During 2007, this joint venture sold the remaining
eight residential condominiums resulting in gross sales of $25.7 million
and equity earnings from unconsolidated joint venture to us of $1.3
million. Only the commercial unit is still available for
sale;
|
|
|
·
|
a
0.3 acre property with a two-story 3,464 square foot building
Indooroopilly, Brisbane, Australia. We have obtained approval
to develop the property to be a 28,000 square foot grade A commercial
office building comprising six floors of office space and two basement
levels of parking with 33 parking spaces. We expect to spend
US$8 million (AUS$9.4 million) in development costs. We plan to
complete the project in December
2008;
|
|
|
·
|
the
Manukau land parcel was purchased on July 27, 2007 through a Landplan
Property Partners property trust a 64.0 acre parcel of undeveloped
agricultural real estate for approximately $9.3 million (NZ$12.1
million). We intend to rezone the property from its current
agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can
be given that such rezoning will be achieved, or if achieved, that it will
occur in the near term; and
|
|
|
·
|
a
1.0-acre parcel of commercial real estate located in Lake Taupo, New
Zealand. The property was improved with a motel, but we are
currently renovating the property’s units to be
condominiums.
|
Property Held For
Sale
At December 31, 2007, the adjacent
unimproved land to our recently purchased Lake Taupo property acquired in 2007
was held for sale.
Recent Business
Developments
We look
to take advantage of those opportunities that may present themselves to expand
strategically our existing cinema circuits. However, we do not intend
to acquire cinema assets simply for the sake of growing. Rather, we
intend to be disciplined in our approach to acquiring and developing cinema
assets.
We have,
in the past, and may, in the future, dispose of, or put to alternative use some
or all of our interests in various operating assets, in order to maximize the
values of such assets. Generally speaking, since the Consolidation,
we have disposed of our non-cinema and non-real estate related assets so as to
focus on our principal two businesses.
During
the past 24 months, we have engaged in the following transactions which we
believe are consistent with our business plan:
|
·
|
Consolidated
Cinemas. On October 8, 2007, we entered into agreements
to acquire leasehold interests in 15 cinemas then owned by Pacific
Theatres Exhibition Corp. and its’ affiliates. The cinemas,
which are located in the United States, contain 181 screens with annual
revenue of approximately $78.0 million. The aggregate purchase
price of the cinemas and related assets is $69.3 million. This
acquisition closed on February 22,
2008.
|
|
·
|
Manukau
Land. On July 27, 2007, we purchased through a Landplan
Property Partners property trust a 64.0 acre parcel of undeveloped
agricultural real estate for approximately $9.3 million (NZ$12.1
million). We intend to rezone the property from its current
agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can
be given that such rezoning will be achieved, or if achieved, that it will
occur in the near term.
|
|
·
|
New Zealand Commercial
Property. On June 29, 2007, we acquired a commercial
property for $5.9 million (NZ$7.6 million), rented to an unrelated third
party, to be held for current income and long-term
appreciation. The purchase price allocation for this
acquisition is $1.2 million (NZ$1.6 million) allocated to land and $4.7
million (NZ$6.1 million) allocated to
building.
|
|
·
|
Lake Taupo
Property. On February 14, 2007, we acquired, through a
Landplan Property Partners property trust, a 1.0 acre parcel of commercial
real estate for approximately $4.9 million (NZ$6.9
million). The property was improved with a motel, but we are
currently renovating the property’s units to be condominiums. A
portion of this property includes unimproved land that we do not intend to
develop. This land was determined to have a fair value of $1.8
million (NZ$2.6 million) at the time of purchase and is included on our
balance sheet as land held for sale. The remaining property and
its cost basis of $3.1 million (NZ$4.3 million) was included in property
under development. The operating activities of the motel are
not material.
|
|
·
|
Cinemas 1, 2, & 3
Building. On June 28, 2007, we purchased the building
associated with our Cinemas 1, 2, & 3 for $100,000 from Sutton Hill
Capital (“SHC”). Our option to purchase that building has been
previously disclosed, and was granted to us by SHC at the time that we
acquired the underlying ground lease from SHC on June 1,
2005. As SHC is a related party to our corporation, our Board’s
Audit and Conflicts Committee, comprised entirely of outside independent
directors, and subsequently our entire Board of Directors unanimously
approved the purchase of the property. The Cinemas 1, 2 & 3
is located on 3rd Avenue between 59th and 60th
Streets.
|
|
·
|
Tower Ground
Lease. On February 8, 2007, we purchased the tenant’s
interest in the ground lease underlying the building lease for one of our
domestic cinemas. The purchase price of $493,000 was paid in
two installments; $243,000 was paid on February 8, 2007 and $250,000 was
paid on June 28, 2007.
|
|
·
|
Place 57,
Manhattan. We own a 25% membership interest in the
limited liability company that has been developing the site of our former
Sutton Cinema on 57th
Street just east of 3rd
Avenue in Manhattan, as a 143,000 square foot residential condominium
tower, with the ground floor retail unit and the resident manager’s
apartment. All of the residential units have now been sold and
only the commercial unit is still available for sale. As of
December 31, 2007, we had received distributions totaling $9.8 million
from the earnings of this project and we have received $1.9 million of
return of capital investment.
|
|
·
|
Indooroopilly
Land. On September 18, 2006, we purchased a 0.3 acre
property for $1.8 million (AUS$2.3 million) as part of our newly
established Landplan Property Partners initiative. We have
obtained approval to develop the property to be a 28,000 square foot grade
A commercial office building comprising six floors of office space and two
basement levels of parking with 33 parking spaces. We expect to
spend US$8.2 million (AUS$9.4 million) in development costs. We
plan to complete the project in December
2008.
|
|
·
|
Moonee Ponds
Land. On September 1, 2006, we purchased two parcels of
land aggregating 0.4 acres adjacent to our Moonee Ponds property for $2.5
million (AUS$3.3 million). This acquisition increased our
holdings at Moonee Ponds to 3.3 acres and gave us frontage facing the
principal transit station servicing the area. We are now in the
process of developing the entire site and anticipate completion of this
project in 2008.
|
|
·
|
Berkeley
Cinemas. On August 28, 2006, we sold to our joint
venture partner our interest in the cinemas at Whangaparaoa, Takapuna and
Mission Bay, New Zealand, the Berkeley Cinema Group, for $4.6 million
(NZ$7.2 million) in cash and the assumption of $1.6 million (NZ$2.5
million) in debt. The sale resulted in a gain on sale of
unconsolidated joint venture in 2006 of $3.4 million (NZ$5.4
million). See Note 11 – Investments in and Advances to
Unconsolidated Joint Ventures and Entities for the Berkeley Cinema
Group Condensed Balance Sheet and Statement of
Operations.
|
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6
million). This 8-screen, leasehold cinema had previously been
included in our Berkeley Cinemas Joint Venture investment and was not previously
consolidated for accounting purposes. Subsequent to April 1, 2006, we
have consolidated this entity into our financial statements.
As a
result of these transactions, the only cinema owned by this joint venture is the
Botany Downs cinema, located in suburban Auckland.
|
·
|
Malulani Investments,
Ltd. On June 26, 2006, we acquired for $1.8 million, an
18.4% interest in a private real estate company with holdings principally
in California, Texas and Hawaii including, the Guenoc Winery located on
approximately 22,000 acres of land located in Northern
California. This land and commercial real estate holdings are
encumbered by debt.
|
|
·
|
Queenstown
Cinema. Effective February 23, 2006, we purchased a
3-screen leasehold cinema in Queenstown, New Zealand for $939,000 (NZ$1.4
million). We funded this acquisition through internal
sources.
|
|
·
|
Newmarket
Property: At the end of 2005 and during the first few
months of 2006, we opened the retail elements of our Newmarket ETRC, a
100,373 square foot retail facility situated on an approximately 177,497
square foot parcel in Newmarket, a suburb of Brisbane. The
total construction costs for the site were $26.7 million (AUS$34.2
million) including $1.4 million (AUS$1.9 million) of capitalized
interest. This project was funded through our $78.8 million
(AUS$100.0 million) Australian Corporate Credit Facility with the Bank of
Western Australia, Ltd.
|
Critical Accounting
Policies
The Securities and Exchange Commission
defines critical accounting policies as those that are, in management’s view,
most important to the portrayal of the company’s financial condition and results
of operations and the most demanding in their calls on judgment. We
believe our most critical accounting policies relate to:
|
|
·
|
impairment
of long-lived assets, including goodwill and intangible
assets;
|
|
|
·
|
tax
valuation allowance and obligations;
and
|
|
|
·
|
legal
and environmental obligations.
|
We review long-lived assets, including
goodwill and intangibles, for impairment as part of our annual budgeting
process, in the fourth quarter, and whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be fully
recoverable. We review internal management reports on a monthly basis
as well as monitor current and potential future competition in film markets for
indications of potential impairment. We evaluate our long-lived
assets using historical and projected data of cash flow as our primary indicator
of potential impairment and we take into consideration, the seasonality of our
business. If the sum of the estimated future cash flows,
undiscounted, were to be less than the carrying amount of the asset, then an
impairment would be recognized for the amount by which the carrying value of the
asset exceeds its estimated fair value based on a discounted cash flow
calculation. Goodwill and intangible assets are evaluated on a
reporting unit basis. The impairment evaluation is based on the
present value of estimated future cash flows of the segment plus the expected
terminal value. There are significant assumptions and estimates used
in determining the future cash flows and terminal value. Accordingly,
actual results could vary materially from such estimates. We recorded
an impairment loss for one of our cinema locations for the year ended December
31, 2007.
We record our estimated future tax
benefits and liabilities arising from the temporary differences between the tax
bases of assets and liabilities and amounts reported in the accompanying
consolidated balance sheets, as well as operating loss carry
forwards. We estimate the recoverability of any tax assets recorded
on the balance sheet and provide any necessary allowances as
required. As of December 31, 2007, we had recorded approximately
$57.9 million of deferred tax assets related to the temporary differences
between the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets, as well as operating loss carry
forwards and tax credit carry forwards. These deferred tax assets
were fully offset by a valuation allowance in the same amount, resulting in a
net deferred tax asset of zero. The recoverability of deferred tax
assets is dependent upon our ability to generate future taxable
income. There is no assurance that sufficient future taxable income
will be generated to benefit from our tax loss carry forwards and tax credit
carry forwards.
Due to
our historical involvement in the railroad industry under RDGE, we have a number
of former employees of RDGE claiming monetary compensation for hearing loss,
black lung and other asbestos related illness suffered as a result of their past
employment with RDGE. With respect to the personal injury claims, our
insurance carrier generally pays approximately 98% of the claims and we do not
believe that we have a significant exposure. However, we can give no
assurance that such reimbursement will continue. In addition, we have
an environmental contamination dispute with the City of Philadelphia that has
been on going for some time and an EPA claim in relation to one of our formerly
owned railroad sites. We intend to defend vigorously our positions,
as we believe a complete disclosure about the property was made at the time we
sold the property: however, no assurances can be given that we will
prevail.
From time
to time, we are involved with claims and lawsuits arising in the ordinary course
of our business which may include contractual obligations; insurance claims; IRS
claims; employment matters; and anti-trust issues, among other
matters.
Results of
Operations
We currently operate two operating
segments: Cinema and Real Estate. Our cinema segment includes the
operations of our consolidated cinemas. Our real estate segment
includes the operating results of our commercial real estate holdings, cinema
real estate, live theater real estate and ETRCs. Effective the fourth
quarter of 2006, we have changed the presentation of our segment reporting such
that our intersegment revenues and expenses are reported separately from our
segments’ operating activity. The effect of this change is to include
intercompany rent revenues and rent expenses into their respective cinema and
real estate business segments. The revenues and expenses for 2005
have been adjusted to conform to the current year presentation. We
believe that this presentation more accurately portrays how our operating
decision makers’ view the operations, how they assess segment performance, and
how they make decisions about allocating resources to the segments.
The
tables below summarize the results of operations for our principal business
segments for the years ended December 31, 2007, 2006 and 2005 (dollars in
thousands).
|
Year
Ended December 31, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 103,467 | $ | 21,887 | $ | (6,119 | ) | $ | 119,235 | |||||||
|
Operating
expense
|
83,875 | 8,324 | (6,119 | ) | 86,080 | |||||||||||
|
Depreciation
& amortization
|
6,942 | 4,418 | -- | 11,360 | ||||||||||||
|
General
& administrative expense
|
3,195 | 831 | -- | 4,026 | ||||||||||||
|
Segment
operating income
|
$ | 9,455 | $ | 8,314 | $ | -- | $ | 17,769 | ||||||||
|
Year
Ended December 31, 2006
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 94,048 | $ | 17,285 | $ | (5,208 | ) | $ | 106,125 | |||||||
|
Operating
expense
|
75,350 | 7,365 | (5,208 | ) | 77,507 | |||||||||||
|
Depreciation
& amortization
|
8,648 | 4,080 | -- | 12,728 | ||||||||||||
|
General
& administrative expense
|
3,658 | 782 | -- | 4,440 | ||||||||||||
|
Segment
operating income
|
$ | 6,392 | $ | 5,058 | $ | -- | $ | 11,450 | ||||||||
|
Year
Ended December 31, 2005
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 86,760 | $ | 16,523 | $ | (5,178 | ) | $ | 98,105 | |||||||
|
Operating
expense
|
72,665 | 7,359 | (5,178 | ) | 74,846 | |||||||||||
|
Depreciation
& amortization
|
8,323 | 3,674 | -- | 11,997 | ||||||||||||
|
General
& administrative expense
|
6,802 | 328 | -- | 7,130 | ||||||||||||
|
Segment
operating income (loss)
|
$ | (1,030 | ) | $ | 5,162 | $ | -- | $ | 4,132 | |||||||
|
Reconciliation
to net income:
|
2007
|
2006
|
2005
|
|||||||||
|
Total
segment operating income
|
$ | 17,769 | $ | 11,450 | $ | 4,132 | ||||||
|
Non-segment:
|
||||||||||||
|
Depreciation and amortization
expense
|
561 | 484 | 387 | |||||||||
|
General and administrative
expense
|
12,059 | 8,551 | 10,117 | |||||||||
|
Operating
income (loss)
|
5,149 | 2,415 | (6,372 | ) | ||||||||
|
Interest expense,
net
|
(8,163 | ) | (6,608 | ) | (4,473 | ) | ||||||
|
Other income
(expense)
|
(505 | ) | (1,998 | ) | 19 | |||||||
|
Minority
interest
|
(1,003 | ) | (672 | ) | (579 | ) | ||||||
|
Gain on disposal of discontinued
operations
|
1,912 | -- | 13,610 | 1 | ||||||||
|
Loss from discontinued
operations
|
-- | -- | (1,379 | ) | ||||||||
|
Income tax
expense
|
(2,038 | ) | (2,270 | ) | (1,209 | ) | ||||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
2,545 | 9,547 | 1,372 | |||||||||
|
Gain on sale of unconsolidated
joint venture
|
-- | 3,442 | -- | |||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | |||||
Cinema
Segment
Effective
the fourth quarter of 2006, we have changed the presentation of our segment
reporting such that our intersegment revenues and expenses are reported
separately from our segments’ operating activity. The effect of this
change is to include intercompany rent revenues and rent expenses into their
respective cinema and real estate business segments. The revenues and
expenses for 2005 have been adjusted to conform to the current year
presentation.
The
following tables and discussion which follows detail our operating results for
our 2007, 2006 and 2005 cinema segment, adjusted to reflect the discontinuation,
in June 2005, of our Puerto Rico cinema operations, respectively (dollars in
thousands):
|
Year
Ended December 31, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,647 | $ | 41,722 | $ | 14,683 | $ | 75,052 | ||||||||
|
Concessions
revenue
|
5,314 | 13,577 | 4,302 | 23,193 | ||||||||||||
|
Advertising
and other revenues
|
2,043 | 2,277 | 902 | 5,222 | ||||||||||||
|
Total
revenues
|
26,004 | 57,576 | 19,887 | 103,467 | ||||||||||||
|
Cinema
costs
|
18,385 | 44,460 | 15,868 | 78,713 | ||||||||||||
|
Concession
costs
|
1,029 | 3,017 | 1,116 | 5,162 | ||||||||||||
|
Total
operating expense
|
19,414 | 47,477 | 16,984 | 83,875 | ||||||||||||
|
Depreciation
and amortization
|
2,003 | 3,212 | 1,727 | 6,942 | ||||||||||||
|
General
& administrative expense
|
2,140 | 1,036 | 19 | 3,195 | ||||||||||||
|
Segment
operating income
|
$ | 2,447 | $ | 5,851 | $ | 1,157 | $ | 9,455 | ||||||||
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 18,891 | $ | 36,564 | $ | 13,109 | $ | 68,564 | ||||||||
|
Concessions
revenue
|
5,472 | 11,288 | 4,001 | 20,761 | ||||||||||||
|
Advertising
and other revenues
|
1,710 | 2,098 | 915 | 4,723 | ||||||||||||
|
Total
revenues
|
26,073 | 49,950 | 18,025 | 94,048 | ||||||||||||
|
Cinema
costs
|
18,176 | 38,743 | 13,763 | 70,682 | ||||||||||||
|
Concession
costs
|
1,047 | 2,584 | 1,037 | 4,668 | ||||||||||||
|
Total
operating expense
|
19,223 | 41,327 | 14,800 | 75,350 | ||||||||||||
|
Depreciation
and amortization
|
1,890 | 5,445 | 1,313 | 8,648 | ||||||||||||
|
General
& administrative expense
|
2,614 | 1,027 | 17 | 3,658 | ||||||||||||
|
Segment
operating income (loss)
|
$ | 2,346 | $ | 2,151 | $ | 1,895 | $ | 6,392 | ||||||||
|
Year
Ended December 31, 2005
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Admissions
revenue
|
$ | 17,802 | $ | 33,142 | $ | 11,926 | $ | 62,870 | ||||||||
|
Concessions
revenue
|
4,979 | 10,505 | 3,618 | 19,102 | ||||||||||||
|
Advertising
and other revenues
|
1,646 | 2,233 | 909 | 4,788 | ||||||||||||
|
Total
revenues
|
24,427 | 45,880 | 16,453 | 86,760 | ||||||||||||
|
Cinema
costs
|
17,869 | 38,045 | 12,157 | 68,071 | ||||||||||||
|
Concession
costs
|
1,054 | 2,448 | 1,092 | 4,594 | ||||||||||||
|
Total
operating expense
|
18,923 | 40,493 | 13,249 | 72,665 | ||||||||||||
|
Depreciation
and amortization
|
1,822 | 5,537 | 964 | 8,323 | ||||||||||||
|
General
& administrative expense
|
5,839 | 982 | (19 | ) | 6,802 | |||||||||||
|
Segment
operating income (loss)
|
$ | (2,157 | ) | $ | (1,132 | ) | $ | 2,259 | $ | (1,030 | ) | |||||
Cinema Results for 2007
Compared to 2006
|
|
·
|
cinema
revenue increased in 2007 by $9.4 million or 10.0% compared to
2006. The geographic activity of our revenues can be summarized
as follows:
|
|
|
o
|
United
States - Revenues in the United States decreased by $69,000 or
0.3%. This decrease in revenues was attributable to a decrease
in admissions revenues of $244,000 and concessions revenues of $158,000
offset by in increase in advertising and other revenues of
$333,000. The decrease in admissions and concessions revenues
resulted from lower year-end holiday admissions compared to last
year. The increase in others revenues related to more screen
rentals during 2007 than in 2006.
|
|
|
o
|
Australia
- Revenues in Australia increased by $7.6 million or
15.3%. This increase in revenues was attributable to an
increase in admissions revenues of $5.2 million related to an increase in
box office admissions of 118,000 coupled with a $0.52 increase in average
ticket price, concessions revenues of $2.3 million, and advertising and
other revenues of $179,000. This increase in revenues was
primarily related to more appealing film product in late 2007 compared to
the film offerings in 2006 coupled with an increase in the average
admissions price of 5.3%.
|
|
|
o
|
New
Zealand - Revenues in New Zealand increased by $1.9 million or
10.3%. This increase in revenues was attributable to an
increase in admissions revenues of $1.6 million primarily related to a
$0.42 increase in average ticket price, an increase in concessions
revenues of $301,000, and a decrease in advertising and other revenues of
$13,000. This increase in revenues was primarily related to
improved film product in 2007 compared to
2006.
|
|
|
·
|
operating
expense increased in 2007 by $8.5 million or 11.3% compared to
2006. The year on year comparison of operating expenses held
steady in relation to revenues at 81% in 2007 compared to 80% in
2006.
|
|
|
o
|
United
States - Operating expenses in the United States increased by $191,000 or
1.0%.
|
|
|
o
|
Australia
- Operating expenses in Australia increased by $6.2 million or
14.9%. This increase was in line with the above-mentioned
increase in cinema revenues.
|
|
|
o
|
New
Zealand - Operating expenses in New Zealand increased by $2.2 million or
14.8%. This increase was somewhat in line with the increase in
revenues noted above.
|
|
|
·
|
depreciation
expense decreased in 2007 by $1.7 million or 19.7% compared to
2006. This decrease is primarily related to several Australia
cinema assets reaching the end of their depreciable lives as of December
31, 2006.
|
|
|
·
|
general
and administrative expense decreased in 2007 by $463,000 or 12.7% compared
to 2006. The change was primarily related to a decrease in
legal costs associated with our anti-trust claims against Regal and
certain distributors.
|
|
|
·
|
the
Australia and New Zealand annual average exchange rates have changed by
11.4% and 13.5%, respectively, since 2006, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income was
minimal.
|
|
|
·
|
cinema
segment operating income increased in 2007 by $3.1 million compared to
2006 primarily resulting from our improved cinema operations in each
region, our increased admissions from better film product, and a reduction
in general and administrative expense primarily associated with legal
expenses.
|
Cinema Results for 2006
Compared to 2005
|
|
·
|
cinema
revenue increased in 2006 by $7.3 million or 8.4% compared to
2005. The geographic activity of our revenues can be summarized
as follows:
|
|
|
o
|
United
States - Revenues in the United States increased by $1.6 million or
6.7%. This increase in revenues was attributable to an increase
in admissions revenues by $1.1 million, concessions revenues by $493,000,
and advertising and other revenues by $64,000. The significant
increase in admissions revenues resulted from higher admissions related in
part to more appealing film product in 2006 compared to the film offerings
in 2005.
|
|
|
o
|
Australia
- Revenues in Australia increased by $4.1 million or 8.9%. This
increase in revenues was attributable to an increase in admissions
revenues by $3.4 million, concessions revenues by $783,000, and
advertising offset by a decrease in other revenues of
$135,000. This increase in revenues was primarily related to
more appealing film product in 2006 compared to the film offerings in
2005.
|
|
|
o
|
New
Zealand - Revenues in New Zealand increased by $1.6 million or
9.6%. This increase in revenues was attributable to an increase
in admissions revenues by $1.2 million, concessions revenues by $383,000,
and advertising and other revenues by $6,000. This increase in
revenues was primarily related to the acquisition of the Queenstown cinema
in February 2006 and the inclusion of 100% of the revenues from the Palms
cinema after our purchase of the remaining 50% which we did not already
own, at the beginning of the second quarter of
2006.
|
|
|
·
|
operating
expense increased in 2006 by $2.7 million or 3.7% compared to
2005.
|
|
|
o
|
United
States - Operating expenses in the United States increased by only
$300,000 or 1.6%. This small increase was due to efforts to
hold operating costs steady even with increased
admissions.
|
|
|
o
|
Australia
- Operating expenses in Australia increased by only $834,000 or
2.1%. This small increase was due to efforts to hold operating
costs steady even with increased
admissions.
|
|
|
o
|
New
Zealand - Operating expenses in New Zealand increased by $1.6 million or
11.7%. This increase was due to higher admissions and
concessions predominately resulting from the addition of the Queenstown
and Palms cinemas in 2006.
|
|
|
·
|
depreciation
expense increased in 2006 by $325,000 or 3.9% compared to
2005. The increase was primarily from our 2006 acquisitions in
New Zealand of the Queenstown Cinema in February 2006 and the Palms Cinema
in early April 2006.
|
|
|
·
|
general
and administrative expense decreased in 2006 by $3.1 million or 46.2%
compared to 2005. The change was primarily related to a
decrease in legal costs associated with our anti-trust claims against
Regal and certain distributors.
|
|
|
·
|
cinema
segment operating income increased in 2006 by $7.4 million compared to
2005 primarily resulting from our improved cinema operations in each
region, our increased admissions from better film product, and a dramatic
reduction in general and administrative expense, driven by a reduction in
legal expenses.
|
Real Estate
Segment
As
discussed above, our other major business segment is the development and
management of real estate. These holdings include our rental live
theaters, certain fee owned properties used in our cinema business, and
unimproved real estate held for development. Effective the fourth
quarter of 2006, we have changed the presentation of our segment reporting such
that our intersegment revenues and expenses are reported separately from our
segments’ operating activity. The effect of this change is to include
intercompany rent revenues and rent expenses into their respective cinema and
real estate business segments. The revenues and expenses for 2005
have been adjusted to conform to the current year presentation. The
tables and discussion which follow detail our operating results for our 2007,
2006 and 2005 real estate segment adjusted to reflect the sale of our Glendale
property in May 2005 (dollars in thousands):
|
Year
Ended December 31, 2007
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theater rental and ancillary income
|
$ | 4,043 | $ | -- | $ | -- | $ | 4,043 | ||||||||
|
Property
rental income
|
1,534 | 9,336 | 6,974 | 17,844 | ||||||||||||
|
Total
revenues
|
5,577 | 9,336 | 6,974 | 21,887 | ||||||||||||
|
Live
theater costs
|
2,105 | -- | -- | 2,105 | ||||||||||||
|
Property
rental cost
|
1,210 | 3,076 | 1,933 | 6,219 | ||||||||||||
|
Total
operating expense
|
3,315 | 3,076 | 1,933 | 8,324 | ||||||||||||
|
Depreciation
and amortization
|
376 | 2,355 | 1,687 | 4,418 | ||||||||||||
|
General
& administrative expense
|
15 | 665 | 151 | 831 | ||||||||||||
|
Segment
operating income
|
$ | 1,871 | $ | 3,240 | $ | 3,203 | $ | 8,314 | ||||||||
|
Year
Ended December 31, 2006
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theater rental and ancillary income
|
$ | 3,667 | $ | -- | $ | -- | $ | 3,667 | ||||||||
|
Property
rental income
|
1,720 | 6,334 | 5,564 | 13,618 | ||||||||||||
|
Total
revenues
|
5,387 | 6,334 | 5,564 | 17,285 | ||||||||||||
|
Live
theater costs
|
2,193 | -- | -- | 2,193 | ||||||||||||
|
Property
rental cost
|
1,164 | 2,658 | 1,350 | 5,172 | ||||||||||||
|
Total
operating expense
|
3,357 | 2,658 | 1,350 | 7,365 | ||||||||||||
|
Depreciation
and amortization
|
427 | 2,129 | 1,524 | 4,080 | ||||||||||||
|
General
& administrative expense
|
-- | 782 | -- | 782 | ||||||||||||
|
Segment
operating income
|
$ | 1,603 | $ | 765 | $ | 2,690 | $ | 5,058 | ||||||||
|
Year
Ended December 31, 2005
|
United
States
|
Australia
|
New
Zealand
|
Total
|
||||||||||||
|
Live
theater rental and ancillary income
|
$ | 5,199 | $ | -- | $ | -- | $ | 5,199 | ||||||||
|
Property
rental income
|
1,118 | 4,266 | 5,940 | 11,324 | ||||||||||||
|
Total
revenues
|
6,317 | 4,266 | 5,940 | 16,523 | ||||||||||||
|
Live
theater costs
|
2,925 | -- | -- | 2,925 | ||||||||||||
|
Property
rental cost
|
692 | 2,118 | 1,624 | 4,434 | ||||||||||||
|
Total
operating expense
|
3,617 | 2,118 | 1,624 | 7,359 | ||||||||||||
|
Depreciation
and amortization
|
296 | 1,588 | 1,790 | 3,674 | ||||||||||||
|
General
& administrative expense
|
29 | 298 | 1 | 328 | ||||||||||||
|
Segment
operating income
|
$ | 2,375 | $ | 262 | $ | 2,525 | $ | 5,162 | ||||||||
Real Estate Results for 2007
Compared to 2006
For 2007,
we achieved the following results in our real estate segment:
|
|
·
|
revenue
increased by $4.6 million or 26.6% when compared 2006. The
increase was primarily related to an enhanced rental stream from our
Australia Newmarket shopping center, opened in 2006, and our New Zealand
properties. This increase in rents was offset in part by
decreased rents from our domestic live theatres due to fewer shows in 2007
compared to 2006.
|
|
|
·
|
operating
expense increased by $959,000 or 13.0% when compared to
2006. This increase in expense was primarily due to higher
operating costs related to our recently opened Australia Newmarket
shopping center.
|
|
|
·
|
depreciation
expense increased by $338,000 or 8.3% when compared to
2006. The majority of this increase was attributed to the
Newmarket shopping center assets in Australia which were put into service
during the first quarter 2006.
|
|
|
·
|
general
and administrative expense increased by $49,000 when compared to 2006
primarily due to increased property activities related to our acquisitions
in New Zealand.
|
|
|
·
|
the
Australia and New Zealand annual average exchange rates have changed by
11.4% and 13.5%, respectively, since 2006, which had an impact on the
individual components of the income statement. However, the
overall effect of the foreign currency change on operating income was
minimal.
|
|
|
·
|
real
estate segment operating income increased by $3.3 million when compared to
2006 mostly related to an increase in revenues in Australia from our
Newmarket shopping centre offset by a decrease in domestic live theater
income.
|
Real Estate Results for 2006
Compared to 2005
For 2006,
we achieved the following results in our real estate segment:
|
|
·
|
revenue
increased by $762,000 or 4.6% when compared 2005. Of this
increase, approximately $2.1 million was primarily attributable to an
increase in rent from our Newmarket shopping centre that opened early
2006. This increase in rents was offset in part by decreased
rents from our domestic live theatres due to fewer shows in 2006 compared
to 2005.
|
|
|
·
|
operating
expense increased by $6,000 or 0.1% when compared to 2005. This
decrease primarily relates to a decrease in costs associated with our live
theater facilities offset in part by increased costs from our newly opened
Newmarket shopping centre.
|
|
|
·
|
depreciation
expense increased by $406,000 or 11.1% when compared to
2005. The majority of this increase was attributable to our
newly opened Newmarket shopping centre in
Australia.
|
|
|
·
|
general
and administrative expense increased by $454,000 when compared to 2005
primarily due to increased property activities related to our Australia
properties.
|
|
|
·
|
real
estate segment operating income decreased by $104,000 when compared to
2005 mostly related to an increase in revenues in Australia from our
Newmarket shopping centre offset by a decrease in domestic live theater
income.
|
Non-Segment
Activity
2007 Compared to
2006
Non-segment
expense/income includes expense and/or income that is not directly attributable
to our other operating segments.
During
2007, the increase of $3.5 million in corporate General and Administrative
expense was primarily made up of:
|
·
|
$320,000
in increased corporate compensation expense related to the granting of
70,000 fully vested options to our directors coupled with an $85,000
increase in director fees;
|
|
·
|
$437,000
in increased corporate compensation expense related to the
granting of 844,255 options that are vesting over a 24 month
period;
|
|
·
|
$413,000
of compensation for our Chief Operating Officer appointed in February
2007;
|
|
·
|
$840,000
of legal and professional fees associated principally with our real estate
acquisition and investment activities;
and
|
|
·
|
$342,000
related to our newly adopted Supplemental Executive Retirement
Plan.
|
During
2007:
|
·
|
our
net interest expense increased by $1.6 million primarily related to a
higher outstanding loan balances in 2007 compared to
2006;
|
|
·
|
our
other expense decreased by $1.5 million primarily due to lower
mark-to-market charges relating to an option liability held by Sutton Hill
Capital LLC to acquire a 25% non-managing membership interest in our
Cinemas 1, 2 & 3 property which option they exercised in July
2007;
|
|
·
|
our
minority interest expense increased by $331,000 compared to 2006 due to an
improvement in cinema admission sales particularly in our Australia, joint
venture cinemas and an increased activity in Landplan Property
Partners;
|
|
·
|
the
recording of a deferred gain on the sale of a discontinued operation upon
the fulfillment of our commitment of $1.9 million associated with a
previously sold property;
|
|
·
|
income
tax expense decreased by $232,000 primarily related less tax expense
incurred for our equity earnings from our investment in 205-209 East 57th Street
Associates, LLC;
|
|
·
|
equity
earnings from unconsolidated joint ventures and entities decreased by $7.0
million primarily due to lower earnings from our investment in 205-209 East 57th Street
Associates, LLC, that has completed most of the development of a
residential condominium complex in midtown Manhattan, called Place
57. The joint venture closed on the sale of 59
condominiums during 2006, resulting in gross sales of $117.7 million and
equity earnings from unconsolidated joint ventures and entities to us of
$8.3 million compared to eight condominiums during the year ended December
31, 2007 resulting in gross sales of $25.4 million and net equity earnings
from this unconsolidated joint venture of $1.3 million. All of
the residential condominiums have been sold and only the retail
condominium is still available for sale;
and
|
|
·
|
in
addition to the aforementioned equity earnings, we recorded a gain on sale
of an unconsolidated joint venture of $3.4 million (NZ$5.4 million) during
2006 which was not repeated in 2007, from the sale of our 50% interest in
the cinemas at Whangaparaoa, Takapuna and Mission Bay, New
Zealand.
|
2006 Compared to
2005
Non-segment
expense/income includes expense and/or income that is not directly attributable
to our other operating segments.
During
2006, the decrease of $1.6 million in corporate General and Administrative
expense was primarily made up of:
|
·
|
$1.1
million from an additional bonus accrual for our Chief Executive Officer’s
new employment contract in 2005 not reoccurring in 2006;
and
|
|
·
|
$565,000
decrease in Australia legal fees in part related to fewer fees for our
Whitehorse lawsuit.
|
During
2006:
|
·
|
our
net interest expense increased by $2.1 million primarily related to a
higher outstanding loan balance in Australia and due to the effective
completion of construction of our Newmarket Shopping Centre in early 2006
which decreased the amount of interest being capitalized. This
interest increase was offset by a decrease in interest expense related to
the mark-to-market adjustment of our interest rate swaps compared to the
adjustment in 2005;
|
|
·
|
our
other expense increased by $2.0 million primarily due to a $1.6 million
mark-to-market charge relating to an option liability held by Sutton Hill
Capital LLC to acquire a 25% non-managing membership interest in our
Cinemas 1, 2 & 3 property;
|
|
·
|
our
minority interest expense increased by $93,000 compared to 2005 due to an
improvement in cinema admission sales particularly in our Australia
cinemas;
|
|
·
|
income
tax expense increased by $1.1 million primarily related to the tax expense
incurred for our equity earnings from our investment in 205-209 East 57th Street
Associates, LLC;
|
|
·
|
equity
earnings from unconsolidated joint ventures and entities increased by $8.2
million primarily from our investment in 205-209 East 57th Street
Associates, LLC, that has been developing a residential condominium
complex in midtown Manhattan, called Place
57. The joint venture closed on the sale of 59
condominiums during 2006, resulting in gross sales of $117.7 million and
equity earnings from unconsolidated joint ventures and entities to us of
$8.3 million; and
|
|
·
|
in
addition to the aforementioned equity earnings, we recorded a gain on sale
of an unconsolidated joint venture of $3.4 million (NZ$5.4 million), from
the sale of our 50% interest in the cinemas at Whangaparaoa, Takapuna and
Mission Bay, New Zealand.
|
Income
taxes
We are
subject to income taxation in several jurisdictions throughout the
world. Our effective tax rate and income tax liabilities will be
affected by a number of factors, such as:
|
·
|
the
amount of taxable income in particular
jurisdictions;
|
|
·
|
the
tax rates in particular
jurisdictions;
|
|
·
|
tax
treaties between jurisdictions;
|
|
·
|
the
extent to which income is repatriated;
and
|
|
·
|
future
changes in law.
|
Generally,
we file consolidated or combined tax returns in jurisdictions that permit or
require such filings. For jurisdictions which do not permit such a
filing, we may owe income, franchise, or capital taxes even though, on an
overall basis, we may have incurred a net loss for the tax year.
Consolidated net income
(loss)
For the
year ending 2007, our consolidated business unit produced a net loss of $2.1
million. For 2006 and 2005, we achieved net income of $3.9 million
and $989,000, respectively. For the years prior to 2005, we
consistently experienced net losses. However, as explained in the
Cinema and Real Estate segment sections above, we have noted improvements in our
operating income such that we have a positive operating income for 2007 and 2006
which in years past has typically been negative. Although we cannot
assure that this trend will continue, we are committed to the overall
improvement of earnings through good fiscal management.
Business Plan, Liquidity and
Capital Resources of the Company
Business
Plan
Our business plan has evolved from a
belief that while cinema exhibition is not a growth business at this time, we do
believe it to be a business that will likely continue to generate fairly
consistent cash flows in the years ahead. 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. Since we believe the
cinema exhibition business to be a mature business with most markets either
adequately screened or over-screened, we see our future asset growth coming more
from our real estate development activities rather than from the development of
new cinemas. While we intend to be opportunistic in adding to our
existing cinema portfolio, especially in strategic geographic areas, we believe
it likely that, going forward, we will be reinvesting our free cash flow more in
our general real estate development activities than in the acquisition or
development of additional cinemas. Over time, we anticipate that our
cinema operations will become increasingly a source of cash flow to support our
real estate oriented activities, rather than a focus of growth, and that our
real estate activities will become the principal thrust of our
business.
In short, while we do have operating
company attributes, we see ourselves principally as a hard asset company and
intend to add to shareholder value by building the value of our portfolio of
tangible assets. Therefore, while we intend to maintain our
entertainment focus, we may from time to time acquire interests in
non-entertainment real estate.
In
February 2006, we completed the process of rezoning our 50.6-acre site in
suburban Melbourne from an essentially industrial zone into a priority zone
permitting a wide variety of retail, entertainment, commercial and residential
uses. The full development of this property is currently anticipated
to require approximately 9 years and funding of approximately $500.0
million. Accordingly, this project is anticipated to be a major focus
of our efforts in the years to come. As the property was previously
operated by its prior owner as a brickworks, it will be necessary to remove the
contaminated soil that resulted from those operations before we can take
advantage of this new zoning. In late February 2007, it became
apparent that our cost estimates with respect to the Burwood site preparation
were low, as the extent of the contaminated soil present at the site – a former
brickworks – was greater than we had originally believed. Our
previous estimated cost of $500.0 million included approximately $1.4 million
(AUS$1.8 million) of estimated cost to remove the contaminated
soil. As we were not the source of this contamination, we are not
currently under any legal obligation to remove this contaminated soil from the
site. However, as a practical matter, we intend to address these
issues in connection with our planned redevelopment of this site as a mixed-use
retail, entertainment, commercial and residential complex. As of
December 31, 2007, we estimate that the total site preparation costs associated
with the removal of this contaminated soil will be $7.9 million (AUS$9.0
million) and as of that date we had incurred a total of $7.1 million (AUS$8.1
million) of these costs. In accordance with Emerging Issues Task
Force (“EITF”) 90-8 Capitalization of Costs to Treat
Environmental Contamination, contamination clean up costs that improve
the property from its original acquisition state are capitalized as part of the
property’s overall development costs.
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. We cannot separate
liquidity from capital resources in achieving our long-term goals or in order to
meet our debt servicing requirements.
Currently, our liquidity needs continue
to arise mainly from:
|
|
·
|
working
capital requirements;
|
|
|
·
|
capital
expenditures including the acquisition, holding and development of real
property assets; and
|
|
|
·
|
debt
servicing requirements.
|
With the
recent changes to the worldwide credit markets, the business community is
concerned that credit will be more difficult to obtain especially for
potentially risky ventures like business and asset
acquisitions. However, we believe that our acquisitions over the past
few years coupled with our strengthening operational cash flows demonstrate our
ability to improve our profitability. We believe that this business
model will help us to demonstrate to lending institutions our ability not only
to do new acquisitions but also to service the associated debt.
Discussion of Our Statement
of Cash Flows
The following discussion compares the
changes in our cash flows over the past three years.
Operating
Activities
2007 Compared to
2006. Cash provided by operations was $13.3 million in the
2007 compared to $11.9 million in 2006. The decrease in cash provided
by operations of $1.5 million was primarily related to
|
|
·
|
increased
cinema operational cash flow primarily from our Australia
operations;
|
|
|
·
|
increased
real estate operational cash flow predominately from our Australia
operations. This increase can be particularly attributed to our
Newmarket shopping center in Brisbane, Australia; offset
by
|
|
|
·
|
a
decrease in distributions from unconsolidated joint ventures and entities
of $1.8 million was predominately related to lower distributions from our
Place 57 joint venture.
|
2006 Compared to
2005. Cash provided by operations was $11.9 million in the
2006 compared to $2.6 million in 2005. The increase in cash provided
by operations of $9.3 million was primarily related to
|
|
·
|
cash
distributions from our investments in unconsolidated joint ventures and
entities of $6.6 million, including $5.9 million received as a return on
investment on our $3.0 million investment in Place
57;
|
|
|
·
|
increased
cinema operational cash flow from our Australia operations due primarily
to increased cinema admissions and improved operational costs;
and
|
|
|
·
|
improved
cash flow from our U.S. cinemas during 2006 resulting from the sale of our
formerly underperforming Puerto Rico operations in June
2005.
|
Investing
Activities
Cash used in investing activities for
2007 was $38.3 million compared to $23.4 million in 2006, and $36.8 million in
2005. The following summarizes our investing activities for each of
the three years ending December 31, 2007:
The $38.3 million cash used in 2007 was
primarily related to:
|
|
·
|
$15.7
million to purchase marketable
securities;
|
|
|
·
|
$22.6
million to purchase real estate assets
including
|
|
|
o
|
$20.1
million for real estate purchases in New
Zealand,
|
|
|
o
|
$100,000
for the purchase of the Cinemas 1, 2, & 3
building,
|
|
|
o
|
$2.0
million acquisition deposit for our acquisition of Consolidated Cinemas,
and
|
|
|
o
|
$493,000
for the purchase of the ground lease of our Tower Cinema in Sacramento,
California;
|
|
|
·
|
$2.8
million in property enhancements to our existing
properties;
|
|
|
·
|
$19.0
million in development costs associated with our properties under
development; and
|
|
|
·
|
$1.5
million in our investment in Reading International Trust I securities (the
issuer of our Trust Preferred
Securities);
|
offset
by
|
|
·
|
$19.9
million in cash provided by the sale of marketable
securities;
|
|
|
·
|
981,000
decrease in restricted cash related to settled claims by our credit card
companies; and
|
|
|
·
|
$2.4
million in distributions from our investment in joint
ventures.
|
The
$23.4 million cash used in 2006 was primarily related
to:
|
|
·
|
$8.1
million in acquisitions including:
|
|
|
o
|
$939,000
in cash used to purchase the Queenstown Cinema in New
Zealand,
|
|
|
o
|
$2.6
million in cash used to purchase the 50% share that we did not already own
of the Palms cinema located in Christchurch, New
Zealand,
|
|
|
o
|
$1.8
million for the Australia Indooroopilly property,
and
|
|
|
o
|
$2.5
million for the adjacent parcel to our Moonee Ponds
property;
|
|
|
·
|
$8.3
million in cash used to complete the Newmarket property and for property
enhancements to our Australia, New Zealand and U.S.
properties;
|
|
|
·
|
$2.7
million in cash used to invest in unconsolidated joint ventures and
entities including $1.8 million paid for Malulani Investments, Ltd. stock
and $876,000 additional cash invested in Rialto Cinemas used to pay off
their bank debt;
|
|
|
·
|
$844,000
increase in restricted cash related to potential claims by our credit card
companies; and
|
|
|
·
|
$8.1
million in cash used to purchase marketable
securities.
|
offset
by
|
|
·
|
$4.6
million cash received from the sale of our interest the cinemas at
Whangaparaoa, Takapuna and Mission Bay, New
Zealand.
|
The
$36.8 million cash used in 2005 was primarily related to:
|
|
·
|
$12.6
million in net proceeds from the sales of our Glendale office building and
Puerto Rico operations;
|
|
|
·
|
$1.0
million cash provided by a decrease in restricted cash;
and
|
|
|
·
|
$515,000
in cash proceeds from the sale of certain surplus properties used in
connection with our historic railroad
activities;
|
offset
by
|
|
·
|
$13.7
million paid for acquisitions including $11.8 million for the acquisition
of the fee interest lessor’s ground lease interest and lessee’s ground
lease interest of the Cinemas 1, 2 & 3 property in New York City and
$2.0 million (AUS$2.6 million) paid for our new Melbourne
office building;
|
|
|
·
|
$6.5
million primarily paid to invest in or add capital to our unconsolidated
joint ventures and entities including $4.8 million (NZ$6.9
million) to purchase 100% of the stock of Rialto Entertainment, $694,000
(NZ$1.0 million) to purchase a 1/3 interest in Rialto Distribution, and
$719,000 paid as additional capital contributions with respect to our
joint venture investment in Place
57;
|
|
|
·
|
$30.5
million in purchases of equipment and development of
property. In Australia, $28.4 million related primarily to the
construction work on our Newmarket development in a suburb of Brisbane and
the fit-out of our 8-screen Adelaide cinema which opened on October 20,
2005. $2.1 million in purchases of equipment primarily related
to the renovation of our U.S. and New Zealand cinemas;
and
|
|
|
·
|
$376,000
paid to purchase certain marketable
securities.
|
Financing
Activities
Cash provided by financing activities
for 2007 was $33.9 million compared to $13.9 million in 2006, and $30.4 million
in 2005. The following summarizes our financing activities for each
of the three years ending December 31, 2007:
The
$33.9 million cash used in 2007 was primarily related to:
|
|
·
|
$49.9
million of net proceeds from our new Trust Preferred
Securities;
|
|
|
·
|
$14.4
million of net proceeds from our new Euro-Hypo
loan;
|
|
|
·
|
$3.1
million of proceeds from our margin account on marketable securities;
and
|
|
|
·
|
$27.9
million of additional borrowing on our Australia and New Zealand credit
facilities;
|
offset
by
|
|
·
|
$57.6
million of cash used to retire bank indebtedness which primarily includes
$34.4 million (NZ$50.0 million) to pay off our New Zealand term debt, $5.8
million (AUS$7.4 million) to retire a portion of our bank indebtedness in
Australia, $3.1 million to pay off our margin account on marketable
securities, $12.1 million (NZ$15.7 million) to pay down our New Zealand
Westpac line of credit in August 2007, and $1.7 million for the final
balloon payment on the Royal George Theater Term Loan;
and
|
|
|
·
|
$3.9
million in distributions to minority
interests.
|
The
$13.9 million cash used in 2006 was primarily related to:
|
|
·
|
$19.1
million of net borrowings which includes $11.8 million from our existing
Australian Corporate Credit Facility and $7.3 million of net proceeds from
a renegotiated mortgage on our Union Square Property;
and
|
|
|
·
|
$3.0
million of a deposit received from Sutton Hill Capital, LLC for the option
to purchase a 25% non-managing membership interest in the limited
liability company that owns the Cinemas 1, 2 &
3;
|
offset
by
|
|
·
|
$6.2
million of cash used to pay down long-term debt which was primarily
related to the payoff of $3.2 million on the mortgage on our Union Square
Property as part of a renegotiation of the loan; the payoff of our
Movieland purchase note payable of approximately $512,000; the payoff of
the Palms – Christchurch Cinema bank debt of approximately $1.9 million;
and on the pay down of our Australian Corporate Credit Facility by
$280,000;
|
|
|
·
|
$791,000
of cash used to repurchase the Class A Nonvoting Common Stock (these
shares were previously issued to the Movieland sellers who exercised their
put option during 2006 to sell back to us the shares they had received in
partial consideration for the sale of the Movieland cinemas);
and
|
|
|
·
|
$1.2
million in distributions to minority
interests.
|
The $30.4 million cash used in 2005
was primarily related to:
|
|
·
|
borrowings
from our Australian Corporate Credit Facility of approximately $9.2
million (AUS$11.9 million) and our Newmarket Construction Loan of $22.5
million (AUS$29.6 million)
|
offset
by
· $944,000
of minority interest distributions; and
· $513,000
of scheduled loan principal payments.
Future Liquidity and Capital
Resources
We
believe that we have sufficient borrowing capacity to meet our short-term
working capital requirements (see discussion below regarding our Trust Preferred
Securities).
During
the past 24 months, we have put into place several measures that have already
had a positive effect on our overall liquidity, including:
|
|
·
|
on
June 28, 2007, Sutton Hill Properties LLC (“SHP”), one of our consolidated
subsidiaries, entered into a $15.0 million loan that is secured by SHP’s
interest in the Cinemas 1, 2, & 3 land and building. SHP is
owned 75% by Reading and 25% by Sutton Hill Capital, LLC (“SHC”), a joint
venture indirectly wholly owned by Mr. James J. Cotter, our Chairman and
Chief Executive Officer, and Mr. Michael
Forman.
|
|
|
·
|
in
February 5, 2007, we issued $51.5 million in Trust Preferred Securities
through our wholly owned trust subsidiary. This transaction
closed on February 5, 2007 and we used the funds principally to payoff our
bank indebtedness in New Zealand by $34.4 million (AUS$50.0 million) and
to pay down our indebtedness in Australia by $5.8 million (AUS$7.4
million).
|
|
|
·
|
on
December 15, 2006, our New Zealand Corporate Credit Facility with the
Westpac Banking Corporation was increased from $35.2 million (NZ$50.0
million) to $42.3 million (NZ$60.0 million) and the facility’s related
principal payments were deferred to begin until February
2009.
|
|
|
·
|
on
December 4, 2006, we renegotiated our loan agreement with a financial
institution secured by our Union Square Theatre in Manhattan from a $3.2
million loan to a $7.5 million
loan.
|
Potential
uses for funds during 2008 that would reduce our liquidity, other than those
relating to working capital needs and debt service requirements
include:
|
|
·
|
the
development of our currently held for development
projects;
|
|
|
·
|
the
acquisition of additional cinemas and/or real estate properties currently
under consideration; and
|
|
|
·
|
the
possible further investments in
securities.
|
Based
upon the current levels of the consolidated operations, further anticipated cost
savings and future growth, we believe our cash flow from operations, together
with both the existing and anticipated lines-of-credit and other sources of
liquidity (including future potential asset sales) will be adequate to meet our
anticipated requirements for interest payments and other debt service
obligations, working capital, capital expenditures and other operating
needs.
Estimated
at approximately $500.0 million (AUS$570.0 million), our development in Burwood,
Australia will clearly not be funded from normal working capital even in a
phased approach. We have approached several financing sources who
have already given a high-level, favorable response to this
funding. However, we continue to investigate all options available to
us including debt financing, equity financing, and joint venture partnering to
achieve the optimal financing structure for this most significant
development.
In late
February 2007, it became apparent that our cost estimates with respect to the
Burwood site preparation were low, as the extent of the contaminated soil
present at the site – a former brickworks – was greater than we had originally
believed. Our previous estimated cost of $500.0 million included
approximately $1.4 million (AUS$1.8 million) of estimated cost to remove the
contaminated soil. As we were not the source of this contamination,
we are not currently under any legal obligation to remove this contaminated soil
from the site. However, as a practical matter, we intend to address
these issues in connection with our planned redevelopment of this site as a
mixed-use retail, entertainment, commercial and residential
complex. As of December 31, 2007, we estimate that the total site
preparation costs associated with the removal of this contaminated soil will be
$7.9 million (AUS$9.0 million) and as of that date we had incurred a total of
$7.1 million (AUS$8.1 million) of these costs. In accordance with
EITF 90-8 Capitalization of Costs to Treat Environmental Contamination,
contamination clean up costs that improve the property from its original
acquisition state are capitalized as part of the property’s overall development
costs.
There can
be no assurance, however, that the business will continue to generate cash flow
at or above current levels or that estimated cost savings or growth can be
achieved. Future operating performance and our ability to service or
refinance existing indebtedness will be subject to future economic conditions
and to financial and other factors, such as access to first-run films, many of
which are beyond our control. If our cash flow from operations and/or
proceeds from anticipated borrowings should prove to be insufficient to meet our
funding needs, our current intention is either:
|
|
·
|
to
defer construction of projects currently slated for land presently owned
by us;
|
|
|
·
|
to
take on joint venture partners with respect to such development projects;
and/or
|
|
|
·
|
to
sell assets.
|
Contractual
Obligations
The
following table provides information with respect to the maturities and
scheduled principal repayments of our secured debt and lease obligations at
December 31, 2007 (in thousands):
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||||||
|
Long-term
debt
|
$ | 395 | $ | 88,470 | $ | 7,257 | $ | 176 | $ | 15,132 | $ | 218 | ||||||||||||
|
Long-term
debt to related parties
|
5,000 | -- | 9,000 | -- | -- | -- | ||||||||||||||||||
|
Subordinated
notes
|
-- | -- | -- | -- | -- | 51,547 | ||||||||||||||||||
|
Pension
liability
|
5 | 10 | 15 | 20 | 25 | 2,370 | ||||||||||||||||||
|
Lease
obligations
|
11,675 | 11,699 | 11,495 | 10,827 | 8,528 | 61,613 | ||||||||||||||||||
|
Interest
on long-term debt
|
13,880 | 6,940 | 6,400 | 5,619 | 5,114 | 66,083 | ||||||||||||||||||
|
Total
|
$ | 30,955 | $ | 107,119 | $ | 34,167 | $ | 16,642 | $ | 28,799 | $ | 181,831 | ||||||||||||
Estimated interest on long-term debt is
based on the anticipated loan balances for future periods calculated against
current fixed and variable interest rates.
We
adopted FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes on January 1, 2007. As of adoption, the total amount of
gross unrecognized tax benefits for uncertain tax positions was $12.5 million
increasing to $13.7 million as of December 31, 2007. We do not expect
a significant tax payment related to these obligations within the 12
months.
Unconsolidated Joint Venture
Debt
Total debt of unconsolidated joint
ventures was $4.2 million and $4.8 million as of December 31, 2007 and December
31, 2006, respectively. Our share of unconsolidated debt, based on
our ownership percentage, was $2.0 million and $2.2 million as of December 31,
2007 and December 31, 2006, respectively. Each loan is without
recourse to any assets other than our interests in the individual joint
venture.
Off-Balance Sheet
Arrangements
There are
no off-balance sheet transactions, arrangements or obligations (including
contingent obligations) that have, or are reasonably likely to have, a current
or future material effect on our financial condition, changes in the financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Financial Risk
Management
Our
internally developed risk management procedure, seeks to minimize the
potentially negative effects of changes in foreign exchange rates and interest
rates on the results of operations. Our primary exposure to
fluctuations in the financial markets is currently due to changes in foreign
exchange rates between U.S and Australia and New Zealand, and interest
rates.
In 2006, we determined that it would be
beneficial to have a layer of long-term fully subordinated debt financing to
help support our long-term real estate assets. On February 5, 2007 we
issued $51.5 million in 20-year fully subordinated notes, interest fixed for
five years at 9.22%, to a trust which we control, and which in turn issued $50.0
million in trust preferred securities in a private placement. There
are no principal payments until maturity in 2027 when the notes are paid in
full. The trust is essentially a pass through, and the transaction is
accounted for on our books as the issuance of fully subordinated
notes. The placement generated $48.4 million in net proceeds, which
were used principally to retire all of our bank indebtedness in New Zealand
$34.4 million (NZ$50.0 million) and to retire a portion of our bank indebtedness
in Australia $5.8 million (AUS$7.4 million).
If our
operational focus shifts more to Australia and New Zealand, unrealized foreign
currency translation gains and losses could materially affect our financial
position. Historically, we managed our currency exposure by creating
natural hedges in Australia and New Zealand. This involves local
country sourcing of goods and services as well as borrowing in local
currencies. However, by paying off our New Zealand debt and paying
down on our Australia debt with the proceeds of our Trust Preferred Securities,
we have added an increased element of currency risk to our
Company. We believe that this currency risk is mitigated by the
comparatively favorable interest rate and the long-term nature of the fully
subordinated notes.
Our
exposure to interest rate risk arises out of our long-term debt
obligations. Consistent with our internally developed guidelines, we
seek to reduce the negative effects of changes in interest rates by changing the
character of the interest rate on our long-term debt, converting a fixed rate
into a variable rate and vice versa. Our internal procedures allow us
to enter into derivative contracts on certain borrowing transactions to achieve
this goal. Our Australian Credit Facility provides for floating
interest rates based on the Bank Bill Swap Bid Rate (BBSY bid rate), but
requires that not less than 70% of the loan be swapped into fixed rate
obligations.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 133 -
Accounting for Derivative
Instruments and Hedging Activities, we marked our Australian interest
swap instruments to market on the consolidated balance sheet resulting in a
$320,000 (AUS$338,000) decrease to interest expense during 2007, an $845,000
(AUS$1.1 million) decrease to interest expense during 2006, and a $171,000
(AUS$180,000) increase to interest expense during 2005.
Inflation
We
continually monitor inflation and the effects of changing
prices. Inflation increases the cost of goods and services
used. Competitive conditions in many of our markets restrict our
ability to recover fully the higher costs of acquired goods and services through
price increases. We attempt to mitigate the impact of inflation by
implementing continuous process improvement solutions to enhance productivity
and efficiency and, as a result, lower costs and operating
expenses. In our opinion, the effects of inflation have been managed
appropriately and as a result, have not had a material impact on our operations
and the resulting financial position or liquidity.
Recent Accounting
Pronouncements
Statement of Financial
Accounting Standards No. 157
In
September 2006, the Financial Accounting Standards Board released SFAS No. 157,
Fair Value
Measurements, and is effective for fiscal years beginning after November
15, 2007, which is the year ending December 31, 2008 for the
Company. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. In November 2007, FASB agreed to a one-year deferral of
the effective date for non-financial assets and liabilities that are recognized
or disclosed at fair value on a non-recurring basis. We are currently
in the process of evaluating the impact on our financial results if any of the
adoption of this pronouncement.
Statement of Financial
Accounting Standards No. 159
In
February 2007, the Financial Accounting Standards Board released SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities, and is effective for fiscal
years beginning after November 15, 2007, which is the year ending December 31,
2008 for the Company. This Statement permits entities to choose to
measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. We are currently evaluating the
impact of the adoption of SFAS No. 159, if any, on our consolidated financial
position and results of operations.
Statement of Financial
Accounting Standards No. 141-R
In
December 2007, the Financial Accounting Standards Board released SFAS No. 141-R,
Business
Combinations. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, which
will include business combinations in the year ending December 31, 2009 for the
Company. The objective of this Statement is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business
combination. The Statement changes the requirements for an acquirer’s
recognition and measurement of the assets acquired and the liabilities assumed
in a business combination. We anticipate that this pronouncement will
only have an impact on our financial statements in so far as we will not be able
to capitalize indirect deal costs to our acquisitions.
Statement of Financial
Accounting Standards No. 160
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51 (Statement No.
160). SFAS 160 requires (i) that noncontrolling (minority)
interests be reported as a component of shareholders’ equity, (ii) that net
income attributable to the parent and to the noncontrolling interest be
separately identified in the consolidated statement of operations, (iii) that
changes in a parent’s ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, (iv) that any
retained noncontrolling equity investment upon the deconsolidation of a
subsidiary be initially measured at fair value, and (v) that sufficient
disclosures are provided that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective for annual periods beginning after December 15, 2008, which is the
year ending December 31, 2009 for the Company, and should be applied
prospectively. However, the presentation and disclosure requirements
of the statement shall be applied retrospectively for all periods
presented. The adoption of the provisions of SFAS 160 is not
anticipated to materially impact the company’s consolidated financial position
and results of operations. We are currently in the process of
evaluating the impact on our income statement and balance sheet from adopting
this pronouncement.
Forward-Looking
Statements
Our
statements in this annual report contain a variety of forward-looking statements
as defined by the Securities Litigation Reform Act of
1995. Forward-looking statements reflect only our expectations
regarding future events and operating performance and necessarily speak only as
of the date the information was prepared. No guarantees can be given
that our expectation will in fact be realized, in whole or in
part. You can recognize these statements by our use of words such as,
by way of example, “may,” “will,” “expect,” “believe,” and “anticipate” or other
similar terminology.
These
forward-looking statements reflect our expectation after having considered a
variety of risks and uncertainties. However, they are necessarily the
product of internal discussion and do not necessarily completely reflect the
views of individual members of our Board of Directors or of our management
team. Individual Board members and individual members of our
management team may have different view as to the risks and uncertainties
involved, and may have different views as to future events or our operating
performance.
Among the
factors that could cause actual results to differ materially from those
expressed in or underlying our forward-looking statements are the
following:
|
|
·
|
with
respect to our cinema operations:
|
|
|
o
|
the
number and attractiveness to movie goers of the films released in future
periods;
|
|
|
o
|
the
amount of money spent by film distributors to promote their motion
pictures;
|
|
|
o
|
the
licensing fees and terms required by film distributors from motion picture
exhibitors in order to exhibit their
films;
|
|
|
o
|
the
comparative attractiveness of motion pictures as a source of entertainment
and willingness and/or ability of consumers (i) to spend their dollars on
entertainment and (ii) to spend their entertainment dollars on movies in
an outside the home environment;
|
|
|
o
|
the
extent to which we encounter competition from other cinema exhibitors,
from other sources of outside of the home entertainment, and from inside
the home entertainment options, such as “home theaters” and competitive
film product distribution technology such as, by way of example, cable,
satellite broadcast, DVD and VHS rentals and sales, and so called “movies
on demand;” and
|
|
|
o
|
the
extent to and the efficiency with which, we are able to integrate
acquisitions of cinema circuits with our existing
operations.
|
|
|
·
|
with
respect to our real estate development and operation
activities:
|
|
|
o
|
the
rental rates and capitalization rates applicable to the markets in which
we operate and the quality of properties that we
own;
|
|
|
o
|
the
extent to which we can obtain on a timely basis the various land use
approvals and entitlements needed to develop our
properties;
|
|
|
o
|
the
risks and uncertainties associated with real estate
development;
|
|
|
o
|
the
availability and cost of labor and
materials;
|
|
|
o
|
competition
for development sites and tenants;
|
|
|
o
|
environmental
remediation issues; and
|
|
|
o
|
the
extent to which our cinemas can continue to serve as an anchor tenant who
will, in turn, be influenced by the same factors as will influence
generally the results of our cinema
operations.
|
|
|
·
|
with
respect to our operations generally as an international company involved
in both the development and operation of cinemas and the development and
operation of real estate; and previously engaged for many years in the
railroad business in the United
States:
|
|
|
o
|
our
ongoing access to borrowed funds and capital and the interest that must be
paid on that debt and the returns that must be paid on such
capital;
|
|
|
o
|
the
relative values of the currency used in the countries in which we
operate;
|
|
|
o
|
changes
in government regulation, including by way of example, the costs resulting
from the implementation of the requirements of
Sarbanes-Oxley;
|
|
|
o
|
our
labor relations and costs of labor (including future government
requirements with respect to pension liabilities, disability insurance and
health coverage, and vacations and
leave);
|
|
|
o
|
our
exposure from time to time to legal claims and to uninsurable risks such
as those related to our historic railroad operations, including potential
environmental claims and health related claims relating to alleged
exposure to asbestos or other substances now or in the future recognized
as being possible causes of cancer or other health related
problems;
|
|
|
o
|
changes
in future effective tax rates and the results of currently ongoing and
future potential audits by taxing authorities having jurisdiction over our
various companies; and
|
|
|
o
|
changes
in applicable accounting policies and
practices.
|
The above
list is not necessarily exhaustive, as business is by definition unpredictable
and risky, and subject to influence by numerous factors outside of our control
such as changes in government regulation or policy, competition, interest rates,
supply, technological innovation, changes in consumer taste and fancy, weather,
and the extent to which consumers in our markets have the economic wherewithal
to spend money on beyond-the-home entertainment.
Given the
variety and unpredictability of the factors that will ultimately influence our
businesses and our results of operation, it naturally follows that no guarantees
can be given that any of our forward-looking statements will ultimately prove to
be correct. Actual results will undoubtedly vary and there is no
guarantee as to how our securities will perform either when considered in
isolation or when compared to other securities or investment
opportunities.
Finally,
please understand that we undertake no obligation to update publicly or to
revise any of our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable law. Accordingly, you should always note the date to which
our forward-looking statements speak.
Additionally,
certain of the presentations included in this annual report may contain
“non-GAAP financial measures.” In such case, a reconciliation of this
information to our GAAP financial statements will be made available in
connection with such statements.
Item 7A –
Quantitative and Qualitative Disclosure about Market Risk
The
Securities and Exchange Commission requires that registrants include information
about potential effects of changes in currency exchange and interest rates in
their Form 10-K filings. Several alternatives, all with some
limitations, have been offered. The following discussion is based on
a sensitivity analysis, which models the effects of fluctuations in currency
exchange rates and interest rates. This analysis is constrained by
several factors, including the following:
|
|
·
|
it
is based on a single point in time.
|
|
|
·
|
it
does not include the effects of other complex market reactions that would
arise from the changes modeled.
|
Although
the results of such an analysis may be useful as a benchmark, they should not be
viewed as forecasts.
At December 31, 2007, approximately 51%
and 25% of our assets (determined by the book value of such assets) were
invested in assets denominated in Australian dollars (Reading Australia) and New
Zealand dollars (Reading New Zealand), respectively, including approximately
$10.3 million in cash and cash equivalents. Following the acquisition
of Consolidated Cinemas on February 22, 2008, these percentages decreased to 43%
and 21%, respectively. At December 31, 2006, approximately 49% and
23% of our assets were invested in assets denominated in Australian and New
Zealand dollars, respectively, including approximately $9.0 million in cash and
cash equivalents.
Our policy in Australia and New Zealand
is to match revenue and expenses, whenever possible, in local
currencies. As a result, a majority of our expenses in Australia and
New Zealand have been procured in local currencies. Due to the
developing nature of our operations in Australia and New Zealand, our revenue is
not yet significantly greater than our operating expense. The
resulting natural operating hedge has led to a negligible foreign currency
effect on our earnings. As we continue to progress our acquisition
and development activities in Australia and New Zealand, we cannot assure you
that the foreign currency effect on our earnings will be insignificant in the
future.
Historically,
our policy has been to borrow in local currencies to finance the development and
construction of our entertainment complexes in Australia and New Zealand
whenever possible. As a result, the borrowings in local currencies
have provided somewhat of a natural hedge against the foreign currency exchange
exposure. Even so, approximately 46% and 82% of our Australian and
New Zealand assets (based on book value), respectively, remain subject to such
exposure unless we elect to hedge our foreign currency exchange between the U.S.
and Australian and New Zealand dollars. If the foreign currency rates
were to fluctuate by 10% the resulting change in Australian and New Zealand
assets would be $8.1 million and $7.1 million, respectively, and the change in
annual net income would be $64,000 and $181,000, respectively. At the
present time, we have no plan to hedge such exposure. On February 5,
2007 we issued $51.5 million in 20-year fully subordinated notes and paid off
our bank indebtedness in New Zealand $34.4 million (NZ$50.0 million) and retired
a portion of our bank indebtedness in Australia $5.8 million (AUS$7.4
million). By paying off our New Zealand debt and paying down on our
Australia debt with the proceeds of our Trust Preferred Securities, we have
added an increased element of currency risk to our Company. We
believe that this currency risk is mitigated by the comparatively favorable
interest rate and the long-term nature of the fully subordinated
notes.
We record unrealized foreign currency
translation gains or losses which could materially affect our financial
position. We have accumulated unrealized foreign currency translation
gains of approximately $48.2 million and $33.4 million as of December 31, 2007
and 2006, respectively.
Historically,
we maintained most of our cash and cash equivalent balances in short-term money
market instruments with original maturities of six months or
less. Some of our money market investments may decline in value if
interest rates increase. Due to the short-term nature of such
investments, a change of 1% in short-term interest rates would not have a
material effect on our financial condition.
The
majority of our U.S. bank loans have fixed interest rates; however, one of our
domestic loans has a variable interest rate and a change of approximately 1% in
short-term interest rates would have resulted in approximately $50,000 increase
or decrease in our 2007 interest expense.
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
in short-term interest rates would have resulted in approximately $90,000
increase in 2007 Australian and New Zealand interest expense while a 1% decrease
in short-term interest rates would have resulted in approximately $93,000
decrease 2007 Australian and New Zealand interest expense.
Item 8 –
Financial Statements and Supplementary Data
TABLE OF
CONTENTS
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Report of Independent Registered Public
Accountants
To the
Board of Directors and Stockholders of
Reading
International, Inc.
Los
Angeles, California
We have
audited the accompanying consolidated balance sheets of Reading
International, Inc. (the "Company") as of December 31, 2007 and 2006,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2007. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reading International, Inc. at
December 31, 2007 and 2006, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As
discussed in Note 14 to the Consolidated Financial Statements, effective
January 1, 2007, the Company adopted Financial Accounting Standards Board,
or FASB, Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement
No. 109.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 28, 2008
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
Deloitte
& Touche LLP
Los
Angeles, California
March 28,
2008
Reading International, Inc. and Subsidiaries
Consolidated
Balance Sheets as of December 31, 2007 and 2006
(U.S.
dollars in thousands)
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 20,782 | $ | 11,008 | ||||
|
Receivables
|
5,671 | 6,612 | ||||||
|
Inventory
|
654 | 606 | ||||||
|
Investment
in marketable securities
|
4,533 | 8,436 | ||||||
|
Restricted
cash
|
59 | 1,040 | ||||||
|
Prepaid
and other current assets
|
3,800 | 2,589 | ||||||
|
Total
current assets
|
35,499 | 30,291 | ||||||
|
Land
held for sale
|
1,984 | -- | ||||||
|
Property
held for development
|
11,068 | 1,598 | ||||||
|
Property
under development
|
66,787 | 38,876 | ||||||
|
Property
& equipment, net
|
178,174 | 170,667 | ||||||
|
Investment
in unconsolidated joint ventures and entities
|
15,480 | 19,067 | ||||||
|
Investment
in Reading International Trust I
|
1,547 | -- | ||||||
|
Goodwill
|
19,100 | 17,919 | ||||||
|
Intangible
assets, net
|
8,448 | 7,954 | ||||||
|
Other
assets
|
7,984 | 2,859 | ||||||
|
Total
assets
|
$ | 346,071 | $ | 289,231 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 12,331 | $ | 13,539 | ||||
|
Film
rent payable
|
3,275 | 4,642 | ||||||
|
Notes
payable – current portion
|
395 | 2,237 | ||||||
|
Note
payable to related party – current portion
|
5,000 | 5,000 | ||||||
|
Taxes
payable
|
4,770 | 9,128 | ||||||
|
Deferred
current revenue
|
3,214 | 2,565 | ||||||
|
Other
current liabilities
|
169 | 177 | ||||||
|
Total
current liabilities
|
29,154 | 37,288 | ||||||
|
Notes
payable – long-term portion
|
111,253 | 113,975 | ||||||
|
Notes
payable to related party – long-term portion
|
9,000 | 9,000 | ||||||
|
Subordinated
debt
|
51,547 | -- | ||||||
|
Noncurrent
tax liabilities
|
5,418 | -- | ||||||
|
Deferred
non-current revenue
|
566 | 528 | ||||||
|
Other
liabilities
|
14,936 | 18,178 | ||||||
|
Total
liabilities
|
221,874 | 178,969 | ||||||
|
Commitments
and contingencies (Note 19)
|
||||||||
|
Minority
interest in consolidated affiliates
|
2,835 | 2,603 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Class
A Nonvoting Common Stock, par value $0.01, 100,000,000 shares authorized,
35,564,339 issued and 20,987,115 outstanding at December 31, 2007 and
35,558,089 issued and 20,980,865 outstanding at December 31,
2006
|
216 | 216 | ||||||
|
Class
B Voting Common Stock, par value $0.01, 20,000,000 shares authorized and
1,495,490 issued and outstanding at December 31, 2007 and at December 31,
2006
|
15 | 15 | ||||||
|
Nonvoting
Preferred Stock, par value $0.01, 12,000 shares authorized and no
outstanding shares at December 31, 2007 and 2006
|
-- | -- | ||||||
|
Additional
paid-in capital
|
131,930 | 128,399 | ||||||
|
Accumulated
deficit
|
(52,670 | ) | (50,058 | ) | ||||
|
Treasury
shares
|
(4,306 | ) | (4,306 | ) | ||||
|
Accumulated
other comprehensive income
|
46,177 | 33,393 | ||||||
|
Total
stockholders’ equity
|
121,362 | 107,659 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 346,071 | $ | 289,231 | ||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and
Subsidiaries
Consolidated
Statements of Operations for the Three Years Ended December 31,
2007
(U.S.
dollars in thousands, except per share amounts)
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Operating
revenue
|
||||||||||||
|
Cinema
|
$ | 103,467 | $ | 94,048 | $ | 86,760 | ||||||
|
Real estate
|
15,768 | 12,077 | 11,345 | |||||||||
|
Total operating
revenue
|
119,235 | 106,125 | 98,105 | |||||||||
|
Operating
expense
|
||||||||||||
|
Cinema
|
77,756 | 70,142 | 67,487 | |||||||||
|
Real estate
|
8,324 | 7,365 | 7,359 | |||||||||
|
Depreciation and
amortization
|
11,921 | 13,212 | 12,384 | |||||||||
|
General and
administrative
|
16,085 | 12,991 | 17,247 | |||||||||
|
Total operating
expense
|
114,086 | 103,710 | 104,477 | |||||||||
|
Operating
income (loss)
|
5,149 | 2,415 | (6,372 | ) | ||||||||
|
Non-operating
income (expense)
|
||||||||||||
|
Interest income
|
798 | 308 | 209 | |||||||||
|
Interest expense
|
(8,961 | ) | (6,916 | ) | (4,682 | ) | ||||||
|
Net loss on sale of
assets
|
(185 | ) | (45 | ) | (32 | ) | ||||||
|
Other income
(expense)
|
(320 | ) | (1,953 | ) | 51 | |||||||
|
Loss
before minority interest, discontinued operations, income tax
expense and equity earnings of
unconsolidated joint ventures and entities
|
(3,519 | ) | (6,191 | ) | (10,826 | ) | ||||||
|
Minority
interest
|
(1,003 | ) | (672 | ) | (579 | ) | ||||||
|
Loss
from continuing operations
|
(4,522 | ) | (6,863 | ) | (11,405 | ) | ||||||
|
Discontinued
operations:
|
||||||||||||
|
Gain on disposal of business
operations
|
1,912 | -- | 13,610 | |||||||||
|
Loss from discontinued operations,
net of tax
|
-- | -- | (1,379 | ) | ||||||||
|
Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
|
(2,610 | ) | (6,863 | ) | 826 | |||||||
|
Income
tax expense
|
(2,038 | ) | (2,270 | ) | (1,209 | ) | ||||||
|
Loss
before equity earnings of unconsolidated joint ventures and
entities
|
(4,648 | ) | (9,133 | ) | (383 | ) | ||||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
2,545 | 9,547 | 1,372 | |||||||||
|
Gain
on sale of unconsolidated joint venture
|
-- | 3,442 | -- | |||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | |||||
|
Earnings
(loss) per common share – basic:
|
||||||||||||
|
Earnings
(loss) from continuing operations
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | ||||
|
Earnings
from discontinued operations, net
|
0.09 | -- | 0.55 | |||||||||
|
Basic
earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | |||||
|
Weighted
average number of shares outstanding – basic
|
22,478,145 | 22,425,941 | 22,249,967 | |||||||||
|
Earnings
(loss) per common share – diluted:
|
||||||||||||
|
Earnings
(loss) from continuing operations
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | ||||
|
Earnings
from discontinued operations, net
|
0.09 | -- | 0.55 | |||||||||
|
Diluted
earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | |||||
|
Weighted
average number of shares outstanding – diluted
|
22,478,145 | 22,674,818 | 22,249,967 | |||||||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and
Subsidiaries
Consolidated
Statements of Stockholders’ Equity for the Three Years Ended December 31,
2007
(U.S.
dollars in thousands)
|
Common
Stock
|
||||||||||||||||||||||||||||||||||||
|
Class
A Shares
|
Class
A Par Value
|
Class
B Shares
|
Class
B
Par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income/(Loss)
|
Total
Stockholders’
Equity
|
||||||||||||||||||||||||||||
|
At
January 1, 2005
|
20,453 | $ | 205 | 1,545 | $ | 15 | $ | 124,307 | $ | -- | $ | (54,903 | ) | $ | 32,386 | $ | 102,010 | |||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | -- | -- | 989 | -- | 989 | |||||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||
|
Cumulative
foreign exchange rate adjustment
|
-- | -- | -- | -- | -- | -- | -- | (3,822 | ) | (3,822 | ) | |||||||||||||||||||||||||
|
Unrealized
gain on securities
|
-- | -- | -- | -- | -- | -- | -- | 11 | 11 | |||||||||||||||||||||||||||
|
Total
comprehensive loss
|
-- | -- | -- | -- | -- | -- | -- | -- | (2,822 | ) | ||||||||||||||||||||||||||
|
Class
B common stock received from stockholder in exchange for Class A common
stock
|
50 | -- | (50 | ) | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||
|
Class
A common stock issued for stock options exercised in exchange for cash or
treasury shares
|
487 | 10 | -- | -- | 3,721 | (3,515 | ) | -- | -- | 216 | ||||||||||||||||||||||||||
|
At
December 31, 2005
|
20,990 | 215 | 1,495 | 15 | $ | 128,028 | (3,515 | ) | (53,914 | ) | 28,575 | 99,404 | ||||||||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | -- | -- | 3,856 | -- | 3,856 | |||||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||
|
Cumulative
foreign exchange rate adjustment
|
-- | -- | -- | -- | -- | -- | -- | 4,928 | 4,928 | |||||||||||||||||||||||||||
|
Unrealized
loss on securities
|
-- | -- | -- | -- | -- | -- | -- | (110 | ) | (110 | ) | |||||||||||||||||||||||||
|
Total
comprehensive income
|
-- | -- | -- | -- | -- | -- | -- | -- | 8,674 | |||||||||||||||||||||||||||
|
Stock
option and restricted stock compensation expense
|
16 | -- | -- | -- | 284 | -- | -- | -- | 284 | |||||||||||||||||||||||||||
|
Class
A common stock received upon exercise of put option
|
(99 | ) | -- | -- | -- | -- | (791 | ) | -- | -- | (791 | ) | ||||||||||||||||||||||||
|
Class
A common stock issued for stock options exercised
|
74 | 1 | -- | -- | 87 | - | -- | -- | 88 | |||||||||||||||||||||||||||
|
At
December 31, 2006
|
20,981 | 216 | 1,495 | 15 | $ | 128,399 | (4,306 | ) | (50,058 | ) | 33,393 | 107,659 | ||||||||||||||||||||||||
|
Net
loss
|
-- | -- | -- | -- | -- | -- | (2,103 | ) | -- | (2,103 | ) | |||||||||||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||||||||||||||||
|
Cumulative
foreign exchange rate adjustment
|
-- | -- | -- | -- | -- | -- | -- | 14,731 | 14,731 | |||||||||||||||||||||||||||
|
Accrued
pension service costs
|
-- | -- | -- | -- | -- | -- | -- | (2,063 | ) | (2,063 | ) | |||||||||||||||||||||||||
|
Unrealized
gain on securities
|
-- | -- | -- | -- | -- | -- | -- | 116 | 116 | |||||||||||||||||||||||||||
|
Total
comprehensive income
|
-- | -- | -- | -- | -- | -- | -- | -- | 10,681 | |||||||||||||||||||||||||||
|
Stock
option and restricted stock compensation expense
|
-- | -- | -- | -- | 994 | -- | -- | -- | 994 | |||||||||||||||||||||||||||
|
Adjustment
to accumulated deficit for adoption of FIN 48
|
-- | -- | -- | -- | -- | -- | (509 | ) | -- | (509 | ) | |||||||||||||||||||||||||
|
Exercise
of Sutton Hill Properties option
|
-- | -- | -- | -- | 2,512 | -- | -- | -- | 2,512 | |||||||||||||||||||||||||||
|
Class
A common stock issued for stock options exercised
|
6 | -- | -- | -- | 25 | - | -- | -- | 25 | |||||||||||||||||||||||||||
|
At
December 31, 2007
|
20,987 | $ | 216 | 1,495 | $ | 15 | $ | 131,930 | $ | (4,306 | ) | $ | (52,670 | ) | $ | 46,177 | $ | 121,362 | ||||||||||||||||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows for the Three Years Ended December 31,
2007
(U.S.
dollars in thousands)
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | |||||
|
Adjustments
to reconcile net income( loss) to net cash provided by operating
activities:
|
||||||||||||
|
Realized
(gain) loss on foreign currency translation
|
(131 | ) | 38 | (417 | ) | |||||||
|
Equity
earnings of unconsolidated joint ventures and entities
|
(2,545 | ) | (9,547 | ) | (1,372 | ) | ||||||
|
Distributions
of earnings from unconsolidated joint ventures and
entities
|
4,619 | 6,647 | 855 | |||||||||
|
Gain
on the sale of unconsolidated joint venture
|
-- | (3,442 | ) | -- | ||||||||
|
Gain
on sale of Puerto Rico
|
-- | -- | (1,597 | ) | ||||||||
|
Gain
on sale of Glendale Building
|
(1,912 | ) | -- | (12,013 | ) | |||||||
|
Gain
on sale of marketable securities
|
(773 | ) | -- | -- | ||||||||
|
Actuarial
gain on pension plan
|
385 | -- | -- | |||||||||
|
Loss
provision on marketable securities
|
779 | -- | -- | |||||||||
|
Loss
provision on impairment of asset
|
89 | -- | -- | |||||||||
|
Loss
on extinguishment of debt
|
99 | 167 | -- | |||||||||
|
Loss
on sale of assets, net
|
185 | 45 | 32 | |||||||||
|
Depreciation
and amortization
|
11,921 | 13,212 | 12,384 | |||||||||
|
Amortization
of prior service costs related to pension plan
|
253 | -- | -- | |||||||||
|
Stock
based compensation expense
|
994 | 284 | -- | |||||||||
|
Minority
interest
|
1,003 | 672 | 579 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
(Increase) decrease in
receivables
|
1,377 | (556 | ) | 1,559 | ||||||||
|
(Increase) decrease in prepaid
and other assets
|
(1,753 | ) | (1,914 | ) | 797 | |||||||
|
Increase in payable and accrued
liabilities
|
307 | 1,108 | 748 | |||||||||
|
Increase (decrease) in film rent
payable
|
(1,631 | ) | (103 | ) | 549 | |||||||
|
Increase (decrease) in deferred
revenues and other liabilities
|
2,121 | 1,442 | (506 | ) | ||||||||
|
Net
cash provided by operating activities
|
13,284 | 11,909 | 2,587 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Proceeds from sale of
unconsolidated joint venture
|
-- | 4,573 | -- | |||||||||
|
Proceeds from sale of Puerto
Rico
|
-- | -- | 2,335 | |||||||||
|
Proceeds from sale of Glendale
Building
|
-- | -- | 10,300 | |||||||||
|
Acquisitions of real estate and
leasehold interests
|
(20,633 | ) | (8,087 | ) | (13,693 | ) | ||||||
|
Acquisition
deposit
|
(2,000 | ) | -- | -- | ||||||||
|
Purchases of and additions to
property and equipment
|
(21,781 | ) | (8,302 | ) | (30,461 | ) | ||||||
|
Investment in Reading
International Trust I
|
(1,547 | ) | -- | -- | ||||||||
|
Distributions of investment in
unconsolidated joint ventures and entities
|
2,445 | -- | -- | |||||||||
|
Investment in unconsolidated
joint ventures and entities
|
-- | (2,676 | ) | (6,468 | ) | |||||||
|
(Increase) decrease in
restricted cash
|
981 | (844 | ) | 1,011 | ||||||||
|
Purchases of marketable
securities
|
(15,651 | ) | (8,109 | ) | (376 | ) | ||||||
|
Sale of marketable
securities
|
19,900 | -- | -- | |||||||||
|
Proceeds from disposal of
assets, net
|
-- | -- | 515 | |||||||||
|
Net
cash used in investing activities
|
(38,286 | ) | (23,445 | ) | (36,837 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Repayment of long-term
borrowings
|
(57,560 | ) | (6,242 | ) | (513 | ) | ||||||
|
Proceeds from
borrowings
|
97,632 | 19,274 | 31,666 | |||||||||
|
Capitalized borrowing
costs
|
(2,334 | ) | (223 | ) | -- | |||||||
|
Option deposit
received
|
-- | 3,000 | -- | |||||||||
|
Proceeds from exercise of stock
options
|
25 | 88 | 161 | |||||||||
|
Repurchase of Class A Nonvoting
Common Stock
|
-- | (791 | ) | -- | ||||||||
|
Proceeds from contributions to
minority interest
|
50 | -- | -- | |||||||||
|
Minority interest
distributions
|
(3,870 | ) | (1,167 | ) | (944 | ) | ||||||
|
Net
cash provided by financing activities
|
33,943 | 13,939 | 30,370 | |||||||||
|
Effect
of exchange rate on cash
|
833 | 57 | 136 | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
9,774 | 2,460 | (3,744 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
11,008 | 8,548 | 12,292 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 20,782 | $ | 11,008 | $ | 8,548 | ||||||
|
Supplemental
Disclosures
|
||||||||||||
|
Cash paid during the period
for:
|
||||||||||||
|
Interest
on borrowings
|
$ | 12,389 | $ | 8,731 | $ | 6,188 | ||||||
|
Income
taxes
|
$ | 282 | $ | 585 | $ | 328 | ||||||
|
Non-Cash
Transactions
|
||||||||||||
|
Increase
in cost basis of Cinemas 1, 2, & 3 related to the purchase price
adjustment of the call option liability to a related party
|
(2,100 | ) | 1,087 | -- | ||||||||
|
Debt
issued to purchase Cinemas 1, 2, 3 (Note 8)
|
-- | -- | 9,000 | |||||||||
|
Deposit
applied to Cinemas 1, 2, 3 (Note 8)
|
-- | -- | 800 | |||||||||
|
Property
addition from purchase option asset (Note 8)
|
-- | -- | 1,337 | |||||||||
|
Buyer
assumption of note payable on Glendale Building (Note 9)
|
-- | -- | (10,103 | ) | ||||||||
|
Common
stock issued for note receivable (Note 21)
|
-- | -- | 55 | |||||||||
|
Treasury
shares received (Note 21)
|
-- | -- | (3,515 | ) | ||||||||
|
Stock
options exercised in exchange for treasury shares received (Note
21)
|
-- | -- | 3,515 | |||||||||
|
Adjustment to retained earnings
related to adoption of FIN 48 (Note 10)
|
509 | -- | -- | |||||||||
|
Decrease in deposit payable and
increase in minority interest liability related to the exercise of the
Cinemas 1, 2 & 3 call option by a related party (Note
15)
|
(3,000 | ) | -- | -- | ||||||||
|
Decrease in call option liability
and increase in additional paid in capital related to the exercise of the
Cinemas 1, 2 & 3 call option by a related party (Note
15)
|
(2,512 | ) | -- | -- | ||||||||
|
Accrued
addition to property and equipment
|
385 | -- | -- | |||||||||
See
accompanying notes to consolidated financial statements.
Reading International, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2007
Note 1 – Nature of
Business
Reading International, Inc., a Nevada
corporation (“RDI” and collectively with our consolidated subsidiaries and
corporate predecessors, the “Company,” “Reading” and “we,” “us,” or “our”), was
incorporated in 1999 and, following the consummation of a consolidation
transaction on December 31, 2001 (the “Consolidation”), is now the owner of the
consolidated businesses and assets of Reading Entertainment, Inc. (“RDGE”),
Craig Corporation (“CRG”), and Citadel Holding Corporation
(“CDL”). Our businesses consist primarily of:
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the
development, ownership and operation of multiplex cinemas in the United
States, Australia, and New Zealand;
and
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the
development, ownership, and operation of retail and commercial real estate
in Australia, New Zealand, and the United States, including
entertainment-themed retail centers (“ETRC”) in Australia and New Zealand
and live theater assets in Manhattan and Chicago in the United
States.
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Note 2 – Summary of
Significant Accounting Policies
Basis of
Consolidation
The consolidated financial statements
of RDI and its subsidiaries include the accounts of CDL, RDGE and
CRG. Also consolidated are Angelika Film Center LLC (“AFC”), in which
we own a 50% controlling membership interest and whose only asset is the
Angelika Film Center in Manhattan; Australia Country Cinemas Pty, Limited
(“ACC”), a company in which we own a 75% interest, and whose only assets are our
leasehold cinemas in Townsville and Dubbo, Australia; and the Elsternwick
Classic, an unincorporated joint venture in which we own a 66.6% interest and
whose only asset is the Elsternwick Classic cinema in Melbourne,
Australia.
With the
exception of one other investment, we have concluded that all other investment
interests are appropriately accounted for unconsolidated joint ventures and
entities, and accordingly, our unconsolidated joint ventures and entities in 20%
to 50% owned companies are accounted
for on the equity method. These investment interests include
our
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33.3%
undivided interest in the unincorporated joint venture that owns the Mt.
Gravatt cinema in a suburb of Brisbane, Australia;
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our
50% undivided interest in the unincorporated joint venture that owns a
cinema in the greater Auckland area of New Zealand;
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our
25% undivided interest in the unincorporated joint venture that owns
205-209 East 57th
Street Associates, LLC (Place 57) a limited
liability company formed to redevelop our former cinema site at 205 East
57th
Street in Manhattan;
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our
33.3% undivided interest in Rialto Distribution, an unincorporated joint
venture engaged in the business of distributing art film in New Zealand
and Australia; and
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our
50% undivided interest in the unincorporated joint venture that owns
Rialto Cinemas.
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We also
have an 18.4% undivided interest in a private real estate company with holdings
principally in California, Texas and Hawaii, including the Guenoc Winery and
other land located in Northern California. We have been in contact
with the controlling shareholder of Malulani Investments, Ltd. (“MIL”) and
requested quarterly or annual operating financials. To date, he has
not responded to our request for relevant financial information (see Note 19 –
Commitments and
Contingencies). Based on this situation, we do not believe
that we can assert significant influence over the dealings of this
entity. As such and in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. 35 – Criteria for Applying the Equity
Method of Accounting for Investments in Common Stock – an Interpretation of APB
Opinion No. 18, we are treating this investment on a cost basis by
recognizing earnings as they are distributed to us.
Accounting
Principles
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).
Cash and Cash
Equivalents
We
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Receivables
Our
receivables balance is composed primarily of credit card receivables,
representing the purchase price of tickets or coupon books sold at our various
businesses. Sales charged on customer credit cards are collected when
the credit card transactions are processed. The remaining receivables
balance is primarily made up of the goods and services tax (“GST”) refund
receivable from our Australian taxing authorities and the management fee
receivable from the managed cinemas. We have no history of
significant bad debt losses and we establish an allowance for accounts that we
deem uncollectible.
Inventory
Inventory
is composed of concession goods used in theater operations and is stated at the
lower of cost (first-in, first-out method) or net realizable value.
Investment in Marketable
Securities
We
account for investments in marketable debt and equity securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (SFAS No. 115). Our
investment in Marketable Securities includes equity instruments which are
classified as available for sale and are recorded at market using the specific
identification method. In accordance with SFAS No. 115,
available for sale securities are carried at their fair market value and any
difference between cost and market value is recorded as unrealized gain or loss,
net of income taxes, and is reported as accumulated other comprehensive income
in the consolidated statement of stockholders’ equity. Premiums and discounts of
debt instruments are recognized in interest income using the effective interest
method. Realized gains and losses and declines in value expected to
be other-than-temporary on available for sale securities are included in other
expense. During 2007, we realized a loss of $779,000 on certain
marketable securities due to an other than temporary decline in market
price. There were no unrealized gains or losses at December 31,
2007. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available
for sale are included in interest income.
Restricted
Cash
We
classify restricted cash as those cash accounts for which the use of funds is
restricted by contract or bank covenant. At December 31, 2006, our
restricted cash balance was $1.0 million made up of deposits transferred to
restricted cash accounts under our name by, and in accordance with, our
agreement with our domestic credit card processing bank. The deposits
were transferred to cover any potential loss suffered by the bank in relation to
the use by third parties of counterfeit credit cards and related credit card
company fines. During 2007, the majority of the credit card claims
and penalties were assessed and resulted in paid claims of $429,000 and $160,000
for the years ending December 31, 2007 and 2006, respectively, and returned
restricted cash of $551,000 during 2007. This activity resulted in a
restricted cash balance at December 31, 2007 of $59,000 due to the remaining
unresolved credit card claims.
Fair Value of Financial
Instruments
The
carrying amounts of our cash and cash equivalents, restricted cash and accounts
payable approximate fair value due to their short-term
maturities. The carrying amounts of our variable-rate secured debt
approximate fair value since the interest rates on these instruments are
equivalent to rates currently offered to us. See Note 16 – Fair Value of Financial
Instruments.
Derivative
Financial Instruments
In
accordance with SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities, as subsequently amended by SFAS No.
138 - Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of SFAS No.
133, we carry all derivative financial instruments on our Consolidated
Balance Sheets at fair value. Derivatives are generally executed for
interest rate management purposes but are not designated as hedges in accordance
with SFAS No. 133 and SFAS No. 138. Therefore, changes in market
values are recognized in current earnings.
Property Held for
Development
Property
held for development consists of land (including land acquisition costs)
initially acquired for the potential development of multiplex cinemas and/or
ETRC’s. Property held for development is carried at
cost. At the time construction of the related multiplex cinema, ETRC,
or other development commences, the property is transferred to “property under
development.”
Property Under
Development
Property
under development consists of land, new buildings and improvements under
development, and their associated capitalized interest and other development
costs. These building and improvement costs are directly associated
with the development of potential cinemas (whether for sale or lease), the
development of ETRC locations, or other improvements to real
property. Start-up costs (such as pre-opening cinema advertising and
training expense) and other costs not directly related to the acquisition and
development of long-term assets are expensed as incurred.
Incident
to the development of our Burwood property, in late 2006, we began various fill
and earth moving operations. In late February 2007, it became
apparent that our cost estimates with respect to site preparation were low, as
the extent of the contaminated soil present at the site – a former brickworks –
was greater than we had originally believed. Our previous estimated
cost of $500.0 million included approximately $1.4 million (AUS$1.8 million) of
estimated cost to remove the contaminated soil. As we were not the
source of this contamination, we are not currently under any legal obligation to
remove this contaminated soil from the site. However, as a practical
matter, we intend to address these issues in connection with our planned
redevelopment of the site as a mixed-use retail, entertainment, commercial and
residential complex. As of December 31, 2007, we estimate that the
total site preparation costs associated with the removal of this contaminated
soil will be $7.9 million (AUS$9.0 million) and as of that date we had incurred
a total of $7.1 million (AUS$8.1 million) of these costs. In
accordance with EITF 90-8, Capitalization of Costs to Treat
Environmental Contamination, contamination clean up costs that improve
the property from its original acquisition state are capitalized as part of the
property’s overall development costs.
Property and
Equipment
Property
and equipment consists of land, buildings and improvements, leasehold
improvements, fixtures and equipment. With the exception of land,
property and equipment is carried at cost and depreciated over the useful lives
of the related assets. In accordance with US GAAP, land is not
depreciated.
Construction-in-Progress
Costs
Construction-in-progress
includes costs associated with already existing buildings, property, furniture
and fixtures for which we are in the process of improving the site or its
associated business assets.
Accounting for the
Impairment of Long Lived Assets
We assess
whether there has been an impairment in the value of our long-lived assets
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and
used is then measured by a comparison of the carrying amount to the future net
cash flows, undiscounted and without interest, expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less costs to
sell. At December 31, 2007, no impairment in the net carrying values
of our investments in real estate and cinema leasehold interests or in
unconsolidated real estate entities had occurred for the periods
presented.
Goodwill and Intangible
Assets
We use
the purchase method of accounting for all business
combinations. Goodwill and intangible assets with indefinite useful
lives are not amortized, but instead, tested for impairment at least
annually. Prior to conducting our goodwill impairment analysis, we
assess long-lived assets for impairment in accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-lived Assets. We then perform the impairment
analysis at the reporting unit level (one level below the operating segment
level) (see Note 10 – Goodwill
and Intangibles) as defined by SFAS 142. This analysis
requires management to make a series of critical assumptions to: (1) evaluate
whether any impairment exists; and (2) measure the amount of
impairment. We estimate the fair value of our reporting units as
compared with their estimated book value. If the estimated fair value
of a reporting unit is less than the book value, then impairment is deemed to
have occurred. In estimating the fair value of our reporting units,
we primarily use the income approach (which uses forecasted, discounted cash
flows to estimate the fair value of the reporting unit).
Revenue
Recognition
Revenue
from cinema ticket sales and concession sales are recognized when
sold. Revenue from gift certificate sales is deferred and recognized
when the certificates are redeemed. Rental revenue is recognized on a
straight-line basis in accordance with SFAS No. 13 – Accounting for
Leases.
Deferred Leasing/Financing
Costs
Direct
costs incurred in connection with obtaining tenants and/or financing are
amortized over the respective term of the lease or loan on a straight-line
basis.
General and Administrative
Expenses
For the years ended December 31, 2007,
2006 and 2005, we booked gains on the settlement of litigation of $523,000,
$900,000, and $494,000, respectively, as a recovery of legal expenses included
in general and administrative expenses.
Depreciation and
Amortization
Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are generally
as follows:
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Building
and improvements
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15-40
years
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Leasehold
improvement
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Shorter
of the life of the lease or useful life of the
improvement
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Theater
equipment
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7
years
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Furniture
and fixtures
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5 –
10 years
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Translation of Non-U.S.
Currency Amounts
The
financial statements and transactions of our Australian and New Zealand cinema
and real estate operations are reported in their functional currencies, namely
Australian and New Zealand dollars, respectively, and are then translated into
U.S. dollars. Assets and liabilities of these operations are
denominated in their functional currencies and are then translated at exchange
rates in effect at the balance sheet date. Revenues and expenses are
translated at the average exchange rate for the reporting
period. Translation adjustments are reported in “Accumulated Other
Comprehensive Income,” a component of Stockholders’ Equity.
The carrying value of our Australian
and New Zealand assets fluctuates due to changes in the exchange rate between
the U.S. dollar and the Australian and New Zealand dollars. The
exchange rates of the U.S. dollar to the Australian dollar were $0.8776 and
$0.7884 as of December 31, 2007 and 2006, respectively. The exchange
rates of the U.S. dollar to the New Zealand dollar were $0.7678 and $0.7046 as
of December 31, 2007 and 2006, respectively.
Earnings Per
Share
Basic
earnings per share is calculated using the weighted average number of shares of
Class A and Class B Stock outstanding during the years ended December 31, 2007,
2006, and 2005, respectively. Diluted earnings per share is
calculated by dividing net earnings available to common stockholders by the
weighted average common shares
outstanding
plus the dilutive effect of stock options. Stock options to purchase
577,850, 514,100, and 521,100 shares of Class A Common Stock were outstanding at
December 31, 2007, 2006, and 2005, respectively, at a weighted average exercise
price of $5.60, $5.21, and $5.00 per share, respectively. Stock
options to purchase 185,100 shares of Class B Common Stock were outstanding at
each of the years ended December 31, 2007, 2006, and 2005 at a weighted average
exercise price of $9.90 per share. In accordance with SFAS 128 –
Earnings Per Share, as
we had recorded an operating loss before discontinued operations for the years
ended December 31, 2007 and 2005, the effect of the stock options was
anti-dilutive and accordingly excluded from the earnings per share
computation.
Real Estate Purchase Price
Allocation
We
allocate the purchase price to tangible assets of an acquired property (which
includes land, building and tenant improvements) based on the estimated fair
values of those tangible assets assuming the building was
vacant. Estimates of fair value for land are based on factors such as
comparisons to other properties sold in the same geographic area adjusted for
unique characteristics. Estimates of fair values of buildings and
tenant improvements are based on present values determined based upon the
application of hypothetical leases with market rates and terms.
We record
above-market and below-market in-place lease values for acquired properties
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii)
management’s estimate of fair market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease. We amortize any capitalized above-market lease values as a
reduction of rental income over the remaining non-cancelable terms of the
respective leases. We amortize any capitalized below-market lease
values as an increase to rental income over the initial term and any fixed-rate
renewal periods in the respective leases.
We
measure the aggregate value of other intangible assets acquired based on the
difference between (i) the property valued with existing in-place leases
adjusted to market rental rates and (ii) the property valued as if
vacant. Management’s estimates of value are made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis include
an estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions, and costs to execute similar
leases. We also consider information obtained about each property as
a result of our pre-acquisition due diligence, marketing, and leasing activities
in estimating the fair value of the tangible and intangible assets
acquired. In estimating carrying costs, management includes real
estate taxes, insurance and other operating expenses and estimates of lost
rentals at market rates during the expected lease-up
periods. Management also estimates costs to execute similar leases
including leasing commissions, legal, and other related expenses to the extent
that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
The total
amount of other intangible assets acquired is further allocated to in-place
lease values and customer relationship intangible values based on management’s
evaluation of the specific characteristics of each tenant’s lease and our
overall relationship with that respective tenant. Characteristics
considered by management in allocating these values include the nature and
extent of our existing business relationships with the tenant, growth prospects
for developing new business with the tenant, the tenant’s credit quality and
expectations of lease renewals (including those existing under the terms of the
lease agreement), among other factors.
We
amortize the value of in-place leases to expense over the initial term of the
respective leases. The value of customer relationship intangibles is
amortized to expense over the initial term and any renewal periods in the
respective leases, but in no event may the amortization period for intangible
assets exceed the remaining depreciable life of the building. Should
a tenant terminate its lease, the unamortized portion of the in-place lease
value and customer relationship intangibles would be charged to
expense.
These
assessments have a direct impact on net income and revenues. If we
assign more fair value to the in-place leases versus buildings and tenant
improvements, assigned costs would generally be depreciated over a shorter
period, resulting in more depreciation expense and a lower net income on an
annual basis. Likewise, if we estimate that more of our leases
in-place at acquisition are on terms believed to be above the current market
rates for similar properties, the calculated present value of the amount above
market would be amortized monthly as a direct reduction to rental revenues and
ultimately reduce the amount of net income.
Business
Acquisition Valuations Under FAS 141
The
assets and liabilities of businesses acquired are recorded at their respective
preliminary fair values as of the acquisition date in accordance with SFAS 141 -
Business
Combinations. We obtain third-party valuations of material
property, plant and equipment, intangible assets, debt and certain other assets
and liabilities acquired. We also perform valuations and physical
counts of property, plant and equipment, valuations of investments and the
involuntary termination of employees, as necessary. Costs in excess
of the net fair values of assets and liabilities acquired is recorded as
goodwill.
We record
and amortize above-market and below-market operating leases assumed in the
acquisition of a business in the same way as those under real estate
acquisitions.
The fair
values of any other intangible assets acquired are based on the expected
discounted cash flows of the identified intangible
assets. Finite-lived intangible assets are amortized using the
straight-line method of amortization over the expected period in which those
assets are expected to contribute to our future cash flows. We do not
amortize indefinite lived intangibles and goodwill.
Recent Accounting
Pronouncements
Statement of Financial
Accounting Standards No. 157
In
September 2006, the Financial Accounting Standards Board released SFAS No. 157,
Fair Value
Measurements, and is effective for fiscal years beginning after November
15, 2007, which is the year ending December 31, 2008 for the Company. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. In November 2007,
FASB agreed to a one-year deferral of the effective date for non-financial
assets and liabilities that are recognized or disclosed at fair value on a
non-recurring basis. We are currently in the process of evaluating
the impact on our financial results if any of the adoption of this
pronouncement.
Statement of Financial
Accounting Standards No. 159
In
February 2007, the Financial Accounting Standards Board released SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities, and is effective for fiscal
years beginning after November 15, 2007, which is the year ending December 31,
2008 for the Company. SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. We are currently evaluating the
impact of the adoption of SFAS No. 159, if any, on our consolidated financial
position and results of operations.
Statement of Financial
Accounting Standards No. 141-R
In
December 2007, the Financial Accounting Standards Board released SFAS No. 141-R,
Business
Combinations. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, which
will include business combinations in the year ending December 31, 2009 for the
Company. The objective of this Statement is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business
combination. SFAS No. 141-R changes the requirements for an
acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. We anticipate that
this pronouncement will only have an impact on our financial statements in so
far as we will not be able to capitalize indirect deal costs to our
acquisitions.
Statement of Financial
Accounting Standards No. 160
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No.
51. SFAS 160 requires (i) that noncontrolling (minority)
interests be reported as a component of shareholders’ equity, (ii) that net
income attributable to the parent and to the noncontrolling interest be
separately identified in the consolidated statement of operations, (iii) that
changes in a parent’s ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, (iv) that any
retained noncontrolling equity investment upon the deconsolidation of a
subsidiary be initially measured at fair value, and (v) that sufficient
disclosures are provided that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective for annual periods beginning after December 15,
2008,
which is
the year ending December 31, 2009 for the Company, and should be applied
prospectively. However, the presentation and disclosure requirements
of the statement shall be applied retrospectively for all periods
presented. The adoption of the provisions of SFAS 160 is not
anticipated to materially impact the company’s consolidated financial position
and results of operations.
Use of
Estimates
The
preparation of financial statements in conformity with US GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Note 3 – Stock Based
Compensation and Employee Stock Option Plan
Stock Based
Compensation
As part
of his compensation package, Mr. James J. Cotter, our Chairman of the Board and
Chief Executive Officer, was granted $250,000 of restricted Class A Non-Voting
Common Stock for each of the years ending December 31, 2006 and 2005 and
$350,000 for the year ending December 31, 2007. These stock grants
each have a vesting period of two years, a stock grant price of $7.79, $8.26,
$9.99, respectively; and a total unrealized gain in market value at December 31,
2007 of $26,000. At December 31, 2007, in recognition of the vesting
of one-half of his 2006 and one-half of his 2005 stock grants, we issued to Mr.
Cotter 15,133 and 16,047 shares, respectively, of Class A Non-Voting Common
Stock which had a stock grant price of $8.26 and $7.79 per share and fair market
values of $151,000 and $160,000, respectively. At December 31, 2006,
in recognition of the vesting of one-half of the 2005 stock grant, we issued to
Mr. Cotter 16,047 shares of Class A Non-Voting Common Stock which had a stock
grant price of $7.79 per share and a fair market value of $133,000.
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,
2007. This stock grant has a vesting period of two years, a stock
grant exercise price of $8.63, and a total unrealized gain in market value at
December 31, 2007 of $8,000.
During
the year ended December 31, 2007 and 2006, we recorded compensation expense of
$238,000 and $188,000, respectively, for the vesting of restricted stock
grants. The following table details the grants and vesting of
restricted stock to our employees (dollars in thousands):
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Non-Vested
Restricted Stock
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Weighted
Average Fair Value at Grant Date
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Outstanding
– January 1, 2005
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-- | $ | -- | |||||
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Granted
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32,094 | 250 | ||||||
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Outstanding
– December 31, 2005
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32,094 | 250 | ||||||
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Granted
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30,266 | 250 | ||||||
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Vested
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(16,047 | ) | (188 | ) | ||||
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Outstanding
– December 31, 2006
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46,313 | 312 | ||||||
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Granted
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46,623 | 450 | ||||||
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Vested
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(31,180 | ) | (238 | ) | ||||
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Outstanding
– December 31, 2007
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61,756 | $ | 524 | |||||
In 2006,
we formed Landplan Property Partners, Ltd (“LPP”), to identify, acquire and
develop or redevelop properties on an opportunistic basis. In
connection with the formation of Landplan, we entered into an agreement with Mr.
Doug Osborne pursuant to which (i) Mr. Osborne will serve as the chief executive
officer of Landplan and (ii) Mr. Osborne’s affiliate, Landplan Property Group,
Ltd (“LPG”), will perform certain property management services for
Landplan. The agreement provides for Mr. Osborne to hold an equity
interest in the entities formed to hold these properties; such equity interest
to be (i) subordinate to our right to an 11% compounded return on investment and
(ii) subject to adjustment depending upon various factors including the term of
the investment and the amount invested. In general, this equity
interest will range from 27.5% to 15%.
During
2006, Landplan acquired one property in Indooroopilly, Brisbane, Australia and,
during 2007, Landplan acquired two properties in New Zealand; the first called
the Lake Taupo Motel and the other is a parcel of land referred to as the
Manukau property. With the purchase of these properties, based on
SFAS 123(R), we calculated the fair value of Mr. Osborne’s equity interest in
their various trusts to be $482,000 and $77,000 at December 31, 2007 and 2006,
respectively. Based on SFAS 123(R), we have calculated the fair value
of Mr. Osborne’s interest at $77,000 for the Indooroopilly property, $171,000
for the Lake Taupo Motel and $234,000 for the Manukau
property. During the years ended December 31, 2007 and 2006, we
expensed $215,000 and $14,000, respectively, associated with Mr. Osborne’s
interests. At December 31, 2007, the total unrecognized compensation
expense related to the LPP equity awards was $231,000, which is expected to be
recognized over the remaining weighted average period of approximately 91
months.
Employee Stock Option
Plan
We have a
long-term incentive stock option plan that provides for the grant to eligible
employees and non-employee directors of incentive stock options and
non-qualified stock options to purchase shares of the Company’s Class A
Nonvoting Common Stock. For the stock options exercised during the
year ending December 31, 2007, we issued for cash to an employee of the
corporation under this stock based compensation plan, 6,250 shares of Class A
Nonvoting Common Stock at an exercise price of $4.01, and, for the stock options
exercised during the year ending December 31, 2006, 12,000 shares and 15,000
shares of Class A Nonvoting Common Stock were issued at exercise prices of $3.80
and $2.76 per share, respectively. During the year ending December
31, 2005, we did not issue any shares under this stock based compensation
plan.
Prior to
January 1, 2006, we accounted for stock-based employee compensation under the
intrinsic value method as outlined in the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations while disclosing pro-forma net
income and pro-forma net income per share as if the fair value method had been
applied in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. Under the intrinsic value method, we did not
recognize any compensation expense when the exercise price of the stock options
equaled or exceeded the market price of the underlying stock on the date of
grant. We issued all stock option grants with exercise prices equal
to, or greater than, the market value of the common stock on the date of
grant. No stock compensation expense was recognized in the
consolidated statements of operations through December 31, 2005.
Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (SFAS
123(R)) which replaces SFAS No. 123 and supersedes APB Opinion No.
25. SFAS 123(R) requires that all stock-based compensation be
recognized as an expense in the financial statements and that such costs be
measured at the fair value of the award. This statement was adopted
using the modified prospective method, which requires that we recognize
compensation expense on a prospective basis for all newly granted options and
any modifications or cancellations of previously granted
awards. Therefore, prior period consolidated financial statements
have not been restated. Under this method, in addition to reflecting
compensation expense for new share-based payment awards, modifications to
awards, and cancellations of awards, expense is also recognized to reflect the
remaining vesting period of awards that had been included in pro-forma
disclosures in prior periods. We estimate the valuation of stock
based compensation using a Black-Scholes option pricing formula.
When our
tax deduction from an option exercise exceeds the compensation cost resulting
from the option, a tax benefit is created. SFAS 123(R) requires that
excess tax benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows. Had we previously
adopted SFAS 123(R), there would have been no impact on our presentation of the
consolidated statement of cash flows because there were no recognized tax
benefits relating to the years ended December 31, 2005. For the years
ended December 31, 2007 and 2006, there was also no impact to the consolidated
statements of cash flows because there were no recognized tax benefits during
these periods.
SFAS No.
123(R) requires companies to estimate forfeitures. Based on our
historical experience, we did not estimate any forfeitures for the granted
options during the years ended December 31, 2007 and 2006.
In
November 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards. The
Company has elected to adopt the alternative transition method provided in this
FASB Staff Position for calculating the tax effects of share-based compensation
pursuant to SFAS No. 123(R). The alternative transition method
includes a simplified method to establish the beginning balance of
the
additional
paid-in capital pool or APIC pool related to the tax effects of employee
share-based compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123(R).
In
accordance with SFAS No. 123(R), we estimate the fair value of our options using
the Black-Scholes option-pricing model, which takes into account assumptions
such as the dividend yield, the risk-free interest rate, the expected stock
price volatility, and the expected life of the options. The dividend
yield is excluded from the calculation, as it is our present intention to retain
all earnings. We estimated the expected stock price volatility based
on our historical price volatility measured using daily share prices back to the
inception of the Company in its current form beginning on December 31,
2001. We estimate the expected option life based on our historical
share option exercise experience during this same period. We expense
the estimated grant date fair values of options issued on a straight-line basis
over the vesting period.
There
were 7,500 options granted during the year ended December 31,
2005. In accordance with APB 25, we used the intrinsic value method
and did not recognize any compensation expense when the exercise price of the
stock options equaled or exceeded the market price of the underlying stock on
the date of grant. For the 301,250 and 20,000 options granted during
2007 and 2006, respectively, we estimated the fair value of these options at the
date of grant using a Black-Scholes option-pricing model with the following
weighted average assumptions:
|
2007
|
2006
|
|
|
Stock
option exercise price
|
$8.35
– $10.30
|
$
8.10
|
|
Risk-free
interest rate
|
4.636
– 4.824%
|
4.22%
|
|
Expected
dividend yield
|
--
|
--
|
|
Expected
option life
|
9.60
– 9.96 yrs
|
5.97
yrs
|
|
Expected
volatility
|
33.64
– 45.47%
|
34.70%
|
|
Weighted
average fair value
|
$
4.42 – $4.82
|
$
4.33
|
Using the
above assumptions and in accordance with the SFAS No. 123(R) modified
prospective method, we recorded $756,000 and $98,000 in compensation expense for
the total estimated grant date fair value of stock options that vested during
the years ended December 31, 2007 and 2006, respectively. The effect
on earnings per share of the compensation charge was $0.03 per share in 2007 and
less than $0.01 in 2006. At December 31, 2007 and 2006, the total
unrecognized estimated compensation cost related to non-vested stock options
granted was $876,000 and $90,000, respectively, which is expected to be
recognized over a weighted average vesting period of 1.27 and 2.09 years,
respectively. The total realized value of stock options exercised
during the years ended December 31, 2007, 2006, and 2005 was $37,000, $136,000,
and $102,000, respectively. The grant date fair value of options that
vested during the year ending December 31, 2007 was $55,000 and for each of the
years ending December 31, 2006 and 2005 was $199,000. We recorded
cash received from stock options exercised of $25,000, $88,000, and $161,000
during the years ended December 31, 2007, 2006, and 2005,
respectively. The intrinsic, unrealized value of all options
outstanding, vested and expected to vest, at December 31, 2007 and 2006 was $2.5
million and $1.6 million, respectively, of which 98.7% and 99.9%, respectively,
were currently exercisable.
All stock
options granted have a contractual life of 10 years at the grant
date. The aggregate total number of shares of Class A Nonvoting
Common Stock and Class B Voting Common Stock authorized for issuance under our
1999 Stock Option Plan is 1,287,150. At the time that options are
exercised, at the discretion of management, we will either issue treasury shares
or make a new issuance of shares to the employee or board
member. Dependent on the grant letter to the employee or board
member, the required service period for option vesting is between zero and four
years.
We had
the following stock options outstanding and exercisable:
|
Common Stock Options
Outstanding
|
Weighted Average Exercise
Price of Options
Outstanding
|
Common Stock Exercisable
Options
|
Weighted Average
Price of Exercisable
Options
|
|||||||||||||||||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||||||||||||||
|
Outstanding-
January 1, 2005
|
1,488,200 | 185,100 | $ | 4.19 | $ | 9.90 | 1,377,700 | 185,100 | $ | 4.80 | $ | 9.90 | ||||||||||||||||||||
|
Granted
|
7,500 | -- | $ | 7.86 | $ | -- | ||||||||||||||||||||||||||
|
Exercised
|
(974,600 | ) | -- | $ | 3.78 | $ | -- | |||||||||||||||||||||||||
|
Outstanding-December
31, 2005
|
521,100 | 185,100 | $ | 5.00 | $ | 9.90 | 474,600 | 185,100 | $ | 5.04 | $ | 9.90 | ||||||||||||||||||||
|
Granted
|
20,000 | -- | $ | 8.10 | $ | -- | ||||||||||||||||||||||||||
|
Exercised
|
(27,000 | ) | -- | $ | 3.22 | $ | -- | |||||||||||||||||||||||||
|
Outstanding-December
31, 2006
|
514,100 | 185,100 | $ | 5.21 | $ | 9.90 | 488,475 | 185,100 | $ | 5.06 | $ | 9.90 | ||||||||||||||||||||
|
Granted
|
151,250 | 150,000 | $ | 9.37 | $ | 10.24 | ||||||||||||||||||||||||||
|
Exercised
|
(6,250 | ) | -- | $ | 4.01 | $ | -- | |||||||||||||||||||||||||
|
Expired
|
(81,250 | ) | (150,000 | ) | $ | 10.25 | $ | 10.24 | ||||||||||||||||||||||||
|
Outstanding-December
31, 2007
|
577,850 | 185,100 | $ | 5.60 | $ | 9.90 | 477,850 | 35,100 | $ | 4.72 | $ | 8.47 | ||||||||||||||||||||
The
weighted average remaining contractual life of all options outstanding, vested
and expected to vest, at December 31, 2007 and 2006 were approximately 6.22 and
3.60 years, respectively. The weighted average remaining contractual
life of the exercisable options outstanding at December 31, 2007 and 2006 was
approximately 4.74 and 3.39, respectively.
The
following table illustrates the effect on net income per common share for the
year ended December 31, 2005 as if we had consistently measured the compensation
cost for stock option programs under the fair value method adopted on January 1,
2006 (dollars in thousands):
|
Pro
forma net income (loss):
|
2005
|
|||
|
Net
income (loss)
|
$ | 989 | ||
|
Add:
Stock-based compensation costs included in reported net
loss
|
-- | |||
|
Deduct:
Stock-based compensation costs under SFAS 123
|
83 | |||
|
Proforma
net income (loss)
|
$ | 906 | ||
|
Pro
forma basic net earnings (loss) per common share:
|
||||
|
Pro
forma net earnings (loss) per common share-basic and
diluted
|
$ | 0.04 | ||
|
Reported
net earnings (loss) per common share-basic and diluted
|
$ | 0.04 | ||
Note 4 – Earnings (Loss) Per
Share
For the three years ended December 31,
2007, we calculated the following earnings (loss) per share (dollars in
thousands, except per share amounts):
|
2007
|
2006
|
2005
|
||||||||||
|
Income
(loss) from continuing operations
|
$ | (4,015 | ) | $ | 3,856 | $ | (11,242 | ) | ||||
|
Income
from discontinued operations
|
1,912 | -- | 12,231 | |||||||||
|
Net
income (loss)
|
(2,103 | ) | 3,856 | 989 | ||||||||
|
Weighted
average shares of common stock – basic
|
22,478,145 | 22,425,941 | 22,249,967 | |||||||||
|
Weighted
average shares of common stock – diluted
|
22,478,145 | 22,674,818 | 22,249,967 | |||||||||
|
Earnings
(loss) per share:
|
||||||||||||
|
Earnings (loss) from continuing
operations – basic and diluted
|
$ | (0.18 | ) | $ | 0.17 | $ | (0.51 | ) | ||||
|
Earnings (loss) from
discontinued operations – basic and diluted
|
$ | 0.09 | $ | -- | $ | 0.55 | ||||||
|
Earnings (loss) per share –
basic and diluted
|
$ | (0.09 | ) | $ | 0.17 | $ | 0.04 | |||||
Note 5 – Prepaid and Other
Assets
Prepaid
and other assets are summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Prepaid
and other current assets
|
||||||||
|
Prepaid
expenses
|
$ | 569 | $ | 1,214 | ||||
|
Prepaid taxes
|
602 | 552 | ||||||
|
Deposits
|
2,097 | 534 | ||||||
|
Other
|
532 | 289 | ||||||
|
Total prepaid and other current
assets
|
$ | 3,800 | $ | 2,589 | ||||
|
Other
non-current assets
|
||||||||
|
Other non-cinema and non-rental
real estate assets
|
$ | 1,270 | $ | 1,270 | ||||
|
Deferred financing costs,
net
|
2,805 | 898 | ||||||
|
Interest rate
swap
|
526 | 206 | ||||||
|
Other
receivables
|
1,648 | -- | ||||||
|
Pre-acquisition
costs
|
948 | -- | ||||||
|
Other
|
787 | 485 | ||||||
|
Total non-current
assets
|
$ | 7,984 | $ | 2,859 | ||||
Note 6 – Property Under
Development
Property
under development is summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
Property
Under Development
|
2007
|
2006
|
||||||
|
Land
|
$ | 36,994 | $ | 30,296 | ||||
|
Construction-in-progress
(including capitalized interest)
|
29,793 | 8,580 | ||||||
|
Property
Under Development
|
$ | 66,787 | $ | 38,876 | ||||
The amount of capitalized interest for
our properties under development was $4.4 million, $1.8 million, and $2.6
million for the three years ending December 31, 2007, 2006 and 2005,
respectively.
Note 7 – Property and
Equipment
Property
and equipment is summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
Property
and Equipment
|
2007
|
2006
|
||||||
|
Land
|
$ | 58,757 | $ | 56,830 | ||||
|
Building
and improvements
|
112,818 | 99,285 | ||||||
|
Leasehold
interests
|
12,430 | 11,138 | ||||||
|
Construction-in-progress
|
1,318 | 425 | ||||||
|
Fixtures
and equipment
|
64,648 | 58,164 | ||||||
|
Total cost
|
249,971 | 225,842 | ||||||
|
Less
accumulated depreciation
|
(71,797 | ) | (55,175 | ) | ||||
|
Property
and equipment, net
|
$ | 178,174 | $ | 170,667 | ||||
Depreciation expense for property and
equipment was $11.1 million, $12.3 million, and $9.6 million, for the three
years ending December 31, 2007, 2006 and 2005, respectively.
Note 8 – Acquisitions and
Property Development
2007 Acquisitions and
Property Development
Acquisition of Consolidated
Cinemas
On
October 8, 2007, we entered into agreements to acquire leasehold interests in 15
cinemas then owned by Pacific Theatres Exhibition Corp. and its
affiliates. The cinemas, which are located in the United States,
contain 181 screens. The aggregate purchase price of the cinemas and
related assets is $69.3 million.
We subsequently closed on this
acquisition on February 22, 2008 (see Note 27 - Subsequent
Events). The acquisition was made through a wholly owned
subsidiary of RDI and was financed principally by a combination of debt
financing and seller financing.
New Zealand Property
Acquisitions
On July
27, 2007, we purchased through a Landplan Property Partners property trust a
64.0 acre parcel of undeveloped agricultural real estate for approximately $9.3
million (NZ$12.1 million). We intend to rezone the property from its
current agricultural use to commercial use, and thereafter to redevelop the
property in accordance with its new zoning. No assurances can be
given that such rezoning will be achieved, or if achieved, that it will occur in
the near term.
On June
29, 2007, we acquired a commercial property for $5.9 million (NZ$7.6 million),
rented to an unrelated third party, to be held for current income and long-term
appreciation. We have completed our purchase price allocation for
this property and the related acquired operating lease in accordance with SFAS
141 – Business
Combinations. The initial purchase price allocation was based
on the assets acquired from the seller. The purchase price allocation
for this acquisition is $1.2 million (NZ$1.6 million) allocated to land and $4.7
million (NZ$6.1 million) allocated to building.
On
February 14, 2007, we acquired, through a Landplan Property Partners property
trust, a 1.0 acre parcel of commercial real estate for approximately $4.9
million (NZ$6.9 million). The property was improved with a motel, but
we are currently renovating the property’s units to be
condominiums. A portion of this property includes unimproved land
that we do not intend to develop. This land was determined to have a
fair value of $1.8 million (NZ$2.6 million) at the time of purchase and is
included on our balance sheet as land held for sale. The remaining
property and its cost basis of $3.1 million (NZ$4.3 million) was included in
property under development. The operating activities of the motel are
not material. We have completed our purchase price allocation for
this property in accordance with SFAS 141 - Business
Combinations.
Cinemas 1, 2, & 3
Building
On June
28, 2007, we purchased the building associated with our Cinemas 1, 2, & 3
for $100,000 from Sutton Hill Capital (“SHC”). Our option to purchase
that building has been previously disclosed, and was granted to us by SHC at the
time that we acquired the underlying ground lease from SHC on June 1,
2005. As SHC is a related party to our corporation, our Board’s Audit
and Conflicts Committee, comprised entirely of outside independent directors,
and subsequently our entire Board of Directors unanimously approved the purchase
of the property. The Cinemas 1, 2 & 3 is located on 3rd Avenue
between 59th and 60th Streets in New York City.
Tower Ground
Lease
On February 8, 2007, we purchased the
tenant’s interest in the ground lease underlying the building lease for one of
our domestic cinemas. The purchase price of $493,000 was paid in two
installments; $243,000 was paid on February 8, 2007 and $250,000 was paid on
June 28, 2007. The purchase price for the ground lease is being
amortized to rent expense over the remaining ground lease term.
2006 Acquisitions and
Property Development
Indooroopilly
Land
On September 18, 2006, we purchased a
0.3 acre property for $1.8 million (AUS$2.3 million) as part of our newly
established Landplan Property Partners arrangement with Mr. Doug
Osborne. We have obtained approval to develop the property to be a
28,000 square foot grade A commercial office building comprising six floors of
office space and two basement levels of parking with 33 parking
spaces. We expect to spend US$8 million (AUS$9.4 million) in
development costs. We plan to complete the project in December
2008.
In July 2006, we entered into an
agreement with Mr. Doug Osborne pursuant to which (i) Mr. Osborne will serve as
the chief executive officer of our newly formed Australian subsidiary Landplan
Property Partners, Ltd (“LPP”) and (ii) Mr. Osborne’s affiliate, Landplan
Property Group, Ltd (“LPG”), will perform certain property management services
for LPP. LPP was formed to identify, acquire, develop, and operate
properties in Australia and New Zealand offering redevelopment possibilities
and, ultimately, to sell the resultant redeveloped properties. The
agreement provides for a base salary and an equity interest to Mr. Osborne in
these properties. Mr. Osborne’s ownership interest in these
properties, however, is subordinate to our right to an 11% compounded return on
investment and is subject to adjustment
depending upon his length of service and the amounts we invest. In
general, his ownership interest will range from 27.5% to 15% based on meeting
the defined service requirements and depending on our level of
investment. At December 31, 2006, Landplan had acquired one property
in Indooroopilly, Brisbane, Australia. With the purchase of the
Indooroopilly property, based on SFAS 123(R), we calculated the fair value of
Mr. Osborne’s equity interest in the Indooroopilly Trust at the grant date as
$77,000 (AUS$98,000) and we have expensed $49,000 (AUS$59,000) and $13,000
(AUS$17,000) of this value during the years ended December 31, 2007 and 2006,
respectively.
Moonee Ponds
Land
On September 1, 2006, we purchased two
parcels of land aggregating 0.4 acres adjacent to our Moonee Ponds property for
$2.5 million (AUS$3.3 million). This acquisition increases our
holdings at Moonee Ponds to 3.3 acres and gives us frontage facing the principal
transit station servicing the area. We are now in the planning
process of developing this property.
Berkeley
Cinemas
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6
million). This 8-screen, leasehold cinema had previously been
included in our Berkeley Cinemas Joint Venture investment and was not previously
consolidated for accounting purposes. We drew down $4.8 million
(AUS$6.3 million) on our Australian Corporate Credit Facility to purchase the
Palms cinema and to payoff its bank debt of $2.0 million (NZ$3.1
million). We have finalized the purchase price allocation of this
acquisition, which resulted in a 50% step up in basis of assets acquired and
liabilities assumed, in accordance with SFAS No. 141 - Business
Combinations. A summary of the increased assets and
liabilities relating to this acquisition as recorded at estimated fair values is
as follows (dollars in thousands):
|
Palms
Cinema
|
||||
|
Assets
|
||||
|
Accounts
receivable
|
$ | 31 | ||
|
Inventory
|
11 | |||
|
Other
assets
|
8 | |||
|
Property
and equipment
|
1,430 | |||
|
Goodwill
|
2,310 | |||
|
Total assets
|
3,790 | |||
|
Liabilities
|
||||
|
Accounts
payable and accrued liabilities
|
178 | |||
|
Note
payable
|
987 | |||
|
Other
liabilities
|
12 | |||
|
Total
liabilities
|
1,177 | |||
|
Total
net assets
|
$ | 2,613 | ||
As a
result of these transactions, the only cinema held in the Berkeley Joint Venture
at December 31, 2006 was the Botany Downs cinema in suburban
Auckland.
Malulani Investments,
Ltd.
On June
26, 2006, we acquired for $1.8 million, an 18.4% interest in a private real
estate company with holdings principally in California, Texas and Hawaii,
including the Guenoc Winery and other land located in Northern
California.
Queenstown
Cinema
Effective
February 23, 2006, we purchased a 3-screen leasehold cinema in Queenstown, New
Zealand for $939,000 (NZ$1.4 million). Of this purchase price,
$647,000 (NZ$977,000) was allocated to the acquired fixed assets and $297,000
(NZ$448,000) was allocated to goodwill. We funded this acquisition
through internal sources.
Newmarket
ETRC
During the first quarter of 2006, we
completed the development and opened the remaining retail portion of an ETRC on
our 177,497 square foot parcel in Newmarket, a suburb of Brisbane, in
Queensland, Australia. The total construction costs for the site were
$26.7 million (AUS$34.2 million) including $1.4 million (AUS$1.9 million) of
capitalized interest. This project was primarily funded through our
$78.8 million (AUS$100.0 million) Australian Corporate Credit Facility with the
Bank of Western Australia, Ltd. As of December 31, 2007, this
property was 99% leased.
2005 Acquisitions and
Property Development
Newmarket
ETRC
During 2005, we developed and partially
opened the retail portion of an ETRC on our 177,497 square foot parcel in
Newmarket, a suburb of Brisbane, in Queensland, Australia. At
December 31, 2005, the remaining tenants were scheduled to take occupancy by
April 2006. Through December 31, 2005, the construction costs of the
site were $24.2 million (AUS$32.5 million) including $1.4 million (AUS$1.9
million) of capitalized interest. Most of this project was funded by a $23.8
million (AUS$32.7 million) construction loan with the Bank of Western Australia,
Ltd. As of December 31, 2005, the balance on this loan was $21.7
million (AUS$29.6 million) related to the construction on this
property.
Elizabeth
Cinema
During 2005, we developed the leasehold
interest in an 8-screen cinema in Adelaide, Australia. The cost to us
of the leasehold development was $2.2 million (AUS$2.9 million) and was funded
from internal sources.
Rialto
Cinemas
Effective
October 1, 2005, we purchased, indirectly, a beneficial ownership of 100% in the
stock of Rialto Entertainment for $4.8 million (NZ$6.9
million). Rialto Entertainment is a 50% joint venture partner with
Village Roadshow Ltd (“Village”) and SkyCity Leisure Ltd (“Sky”) in Rialto
Cinemas the largest art cinema circuit in New Zealand. The joint
venture owns or manages five cinemas with 22 screens in the New Zealand cities
of Auckland, Christchurch, Wellington, Dunedin and Hamilton.
Rialto
Distribution
Effective
October 1, 2005, we purchased for $694,000 (NZ$1.0 million) a 1/3 interest in
Rialto Distribution which we funded from internal sources. Rialto
Distribution, an unincorporated joint venture, is engaged in the business of
distributing art film in New Zealand and Australia.
Melbourne Office
Building
On
September 29, 2005, we purchased an office building in Melbourne, Australia for
$2.0 million (AUS$2.6 million) to serve as our Australia
headquarters. We fully financed this property by drawing on our
Australian Corporate Credit Facility.
Cinemas 1, 2 & 3 Ground
Lease
On
September 19, 2005, we acquired the tenant’s interest in the ground lease estate
that is currently between (i) our fee ownership of the underlying land and (ii)
our current possessory interest as the tenant in the building and improvements
constituting the Cinemas 1, 2 & 3 in Manhattan. This tenant’s
ground lease interest was purchased from Sutton Hill Capital LLC (“SHC”) for a
$9.0 million promissory note, bearing interest at a fixed rate of 8.25% and
maturing on December 31, 2010. As SHC is a related party to our
corporation, our Board’s Audit and Conflicts Committee, comprised entirely of
outside independent directors, and subsequently our entire Board of Directors
unanimously approved the purchase of the property (see Note 25 – Related Parties and
Transactions). The Cinemas 1, 2 & 3 is located on 3rd Avenue
between 59th and
60th
Streets.
The
acquisition of the tenant’s ground lease interest finalized the acquisition side
of a tax deferred exchange under Section 1031 of the Internal Revenue Code
designed to exchange our interest in our only non-entertainment oriented fee
property in the United States for the fee interest underlying our leasehold
estate in the Cinemas 1, 2 & 3. The acquisition of this tenant’s
ground lease interest and the Cinemas 1, 2, 3 Fee Interest described below have
resulted in a book value of approximately $23.9 million and a tax basis of $10.4
million (which includes $1.3 million of option fees paid in 2000 as part of the
City Cinemas Master Lease Agreement, see Note 10 – Goodwill and Intangible
Assets).
Cinemas 1, 2 & 3 Fee
Interest
On June
1, 2005, we acquired for $12.6 million the fee interest and the landlord’s
ground lease interest underlying our Cinemas 1, 2 & 3 property in Manhattan,
as a part of a tax deferred exchange under Section 1031 of the Internal Revenue
Code. The funds used for the acquisition came primarily from the sale
proceeds of our Glendale, California office building. As a result of
the acquisition of this fee interest, the landlord’s interest in the ground
lease and the tenant’s interest in the ground lease, our effective rental
expense with respect to the Cinemas 1, 2 & 3 and the Village East cinema has
decreased by approximately $1.0 million annually beginning September 30,
2005.
As part
of the purchase of this ground lease interest, we agreed in principal, as a part
of our negotiations to acquire the land and the SHC interests in the Cinemas 1,
2 & 3, to grant an option to Sutton Hill Capital, LLC, a limited liability
company beneficially owned in equal 50/50 shares by Messrs. James J. Cotter and
Michael Forman (see Note 25 – Related Parties and
Transactions) to acquire, at cost, up to a 25% non-managing membership
interest in the limited liability company that we formed to acquire these
interests. In relation to this option, we recorded $3.7 million and $1.0 million
as call option liabilities in our other liabilities at December 31, 2006 and
2005, respectively. In accordance with SFAS No. 141 – Business Combinations, the
purchase price allocation was finalized in the first quarter of
2006.
Note 9 – Discontinued
Operations and Disposals
2007
Transactions
In June
2007, upon the fulfillment of our commitment, we recorded the release of a
deferred gain on the sale of a discontinued operation of $1.9 million associated
with a previously sold property.
2006
Transactions
Berkeley Cinema
Group. On August 28, 2006, we sold to our joint venture
partner our interest in the cinemas at Whangaparaoa, Takapuna and Mission Bay,
New Zealand for $4.6 million (NZ$7.2 million) in cash and the assumption of $1.6
million (NZ$2.5 million) in debt. The sale resulted in a gain on sale
of unconsolidated joint venture for the year ended December 31, 2006 of $3.4
million (NZ$5.4 million).
2005
Transactions
Railroad
Properties
On
September 26, 2005, we sold certain surplus properties used in connection with
our historic railroad activities for cash totaling $515,000 resulting in a
nominal loss on sale.
Glendale
Building
On May 17, 2005, we
sold our Glendale office building in Glendale, California for $10.3 million cash
and $10.1 million of assumed debt resulting in a $12.0 million
gain. All the cash proceeds from the sale were used in the purchase
for $12.6 million of the Cinemas 1, 2 & 3 fee interest and of the landlord’s
interest in the ground lease, encumbering that land, as part of a tax-deferred
exchange under Section 1031 of the Internal Revenue Code.
For the
year ended December 31, 2005, we recorded the following results for the Glendale
building discontinued operations:
|
2005
|
||||
|
Revenue
|
$ | 1,103 | ||
|
Operating
expense
|
355 | |||
|
Depreciation
& amortization expense
|
51 | |||
|
General
& administrative expense
|
-- | |||
|
Operating
income
|
697 | |||
|
Interest
income
|
2 | |||
|
Interest
expense
|
312 | |||
|
Income
from discontinued operations before gain on sale
|
387 | |||
|
Gain
on sale
|
12,013 | |||
|
Total
income from discontinued operations
|
$ | 12,400 | ||
Puerto Rico Cinema
Operations
On June
8, 2005, we sold our assets and certain liabilities associated with our Puerto
Rico cinema operations for $2.3 million resulting in a $1.6 million
gain.
For the
year ended December 31, 2005, we recorded the following results for the Puerto
Rico discontinued operations:
|
2005
|
||||
|
Revenue
|
$ | 4,575 | ||
|
Operating
expense
|
5,752 | |||
|
Depreciation
& amortization expense
|
206 | |||
|
General
& administrative expense
|
383 | |||
|
Loss
from discontinued operations before gain on sale
|
(1,766 | ) | ||
|
Gain
on sale
|
1,597 | |||
|
Total
loss from discontinued operations
|
$ | (169 | ) | |
Note 10 – Goodwill and
Intangible Assets
Goodwill associated with our asset
acquisitions is tested for impairment in the third quarter with continued
evaluation through the fourth quarter of every year. Based on the
projected profits and cash flows of the related assets, it was determined that
there is no indication of impairment to our goodwill as of December 31, 2007 or
2006. Goodwill increased during the period primarily due to 2006
acquisitions discussed in Note 8 – Acquisitions and Property
Development. At December 31, 2007 and 2006, our goodwill
consisted of the following (dollars in thousands):
|
2007
|
Cinema
|
Real
Estate
|
Total
|
|||||||||
|
Balance
as of January 1, 2007
|
$ | 12,713 | $ | 5,206 | $ | 17,919 | ||||||
|
Foreign
currency translation adjustment
|
1,114 | 67 | 1,181 | |||||||||
|
Balance
at December 31, 2007
|
$ | 13,827 | $ | 5,273 | $ | 19,100 | ||||||
|
2006
|
Cinema
|
Real
Estate
|
Total
|
|||||||||
|
Balance
as of January 1, 2006
|
$ | 9,489 | $ | 5,164 | $ | 14,653 | ||||||
|
Goodwill
acquired during 2006
|
2,849 | -- | 2,849 | |||||||||
|
Foreign
currency translation adjustment
|
375 | 42 | 417 | |||||||||
|
Balance
at December 31, 2006
|
$ | 12,713 | $ | 5,206 | $ | 17,919 | ||||||
We have intangible assets subject to
amortization consisting of the following (dollars in thousands):
|
As
of December 31, 2007
|
Beneficial
Lease
|
Option
Fee
|
Other
Intangibles
|
Total
|
||||||||||||
|
Gross
carrying amount
|
$ | 12,295 | $ | 2,773 | $ | 238 | $ | 15,306 | ||||||||
|
Less:
Accumulated amortization
|
4,311 | 2,521 | 26 | 6,858 | ||||||||||||
|
Total, net
|
$ | 7,984 | $ | 252 | $ | 212 | $ | 8,448 | ||||||||
|
As
of December 31, 2006
|
Beneficial
Lease
|
Option
Fee
|
Other
Intangibles
|
Total
|
||||||||||||
|
Gross
carrying amount
|
$ | 10,984 | $ | 2,773 | $ | 219 | $ | 13,976 | ||||||||
|
Less:
Accumulated amortization
|
3,577 | 2,426 | 19 | 6,022 | ||||||||||||
|
Total, net
|
$ | 7,407 | $ | 347 | $ | 200 | $ | 7,954 | ||||||||
We
amortize our beneficial leases over the lease terms of up to twenty years and
our option fees over 10 years. For the years ended December 31, 2007,
2006 and 2005, our amortization expense totaled $836,000, $868,000, and $1.1
million, per year, respectively. The estimated amortization expense
in the five succeeding years and thereafter is as follows (dollars in
thousands):
|
Year
Ending December 31,
|
||||
|
2008
|
$ | 1,057 | ||
|
2009
|
1,057 | |||
|
2010
|
1,025 | |||
|
2011
|
962 | |||
|
2012
|
770 | |||
|
Thereafter
|
3,577 | |||
|
Total
future amortization expense
|
$ | 8,448 | ||
Note 11 – Investments in and
Advances to Unconsolidated Joint Ventures and Entities
Investments
in and advances to unconsolidated joint ventures and entities are accounted for
under the equity method of accounting except for Malulani Investments, Ltd. as
described below. As of December 31, 2007 and 2006, these investments
in and advances to unconsolidated joint ventures and entities include the
following (dollars in thousands):
|
December 31,
|
||||||||||||
|
Interest
|
2007
|
2006
|
||||||||||
|
Malulani
Investments
|
18.4 | % | $ | 1,800 | $ | 1,800 | ||||||
|
Rialto
Distribution
|
33.3 | % | 1,029 | 782 | ||||||||
|
Rialto
Cinemas
|
50.0 | % | 5,717 | 5,608 | ||||||||
|
205-209
East 57th
Street Associates, LLC
|
25.0 | % | 1,059 | 5,557 | ||||||||
|
Mt.
Gravatt
|
33.3 | % | 5,159 | 4,713 | ||||||||
|
Berkeley
Cinema – Group
|
50.0 | % | -- | -- | ||||||||
|
Berkeley
Cinemas – Palms & Botany
|
50.0 | % | 716 | 607 | ||||||||
|
Total
|
$ | 15,480 | $ | 19,067 | ||||||||
For the
years ending December 31, 2007, 2006 and 2005, we recorded our share of equity
earnings (loss) from our unconsolidated joint ventures and entities as
follows:
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Rialto
Distribution
|
$ | 250 | $ | 25 | $ | 50 | ||||||
|
Rialto
Cinemas
|
(101) | (169 | ) | -- | ||||||||
|
205-209
East 57th
Street Associates, LLC
|
1,329 | 8,277 | (56 | ) | ||||||||
|
Mt.
Gravatt
|
793 | 648 | 501 | |||||||||
|
Berkeley
Cinema – Group
|
-- | 322 | 383 | |||||||||
|
Berkeley
Cinemas – Palms & Botany
|
274 | 444 | 494 | |||||||||
|
Total
|
$ | 2,545 | $ | 9,547 | $ | 1,372 | ||||||
Malulani Investments,
Ltd.
On June
26, 2006, we acquired for $1.8 million, an 18.4% interest in a private real
estate company with holdings principally in California, Texas and Hawaii,
including the Guenoc Winery and other land in Northern
California. This land and commercial real estate holdings are
encumbered by debt. We have been in contact with Malulani
Investments, Ltd. (“MIL”) and requested quarterly or annual operating
financials. To date, we have received no response to our request for
relevant financial information as described more fully in Note 19 – Commitments and
Contingencies. Based on this situation, we do not believe that
we can assert significant influence over the dealings of this
entity. As such and in accordance with FASB Interpretation No. 35 –
Criteria for Applying the
Equity Method of Accounting for Investments in Common Stock – an Interpretation
of APB Opinion No. 18, we are treating this investment on a cost basis by
recognizing earnings as they are distributed to us.
Rialto
Distribution
Effective
October 1, 2005, we purchased for $694,000 (NZ$1.0 million) a 1/3 interest in
Rialto Distribution. Rialto Distribution, an unincorporated joint
venture, is engaged in the business of distributing art film in New Zealand and
Australia. We own an undivided 1/3 interest in the assets and
liabilities of the joint venture and treat our interest as an equity method
interest in an unconsolidated joint venture.
Rialto
Cinemas
Effective
October 1, 2005, we purchased, indirectly, beneficial ownership of 100% of the
stock of Rialto Entertainment for $4.8 million (NZ$6.9
million). Rialto Entertainment is a 50% joint venture partner with
Village and Sky in Rialto Cinemas, the largest art cinema circuit in New
Zealand. We own an undivided 50% interest in the assets and
liabilities of the joint venture and treat our interest as an equity method
interest in an unconsolidated joint venture. The joint venture owns
or manages five cinemas with 22 screens in the New Zealand cities of Auckland,
Christchurch, Wellington, Dunedin and Hamilton.
As of
December 31, 2005, we were in dispute with our joint venture partner, which
precluded us from receiving timely financial reporting which required us to
treat our ownership of Rialto Cinemas on a cost basis. We resolved
the dispute and are receiving regular financial reporting on the results of the
cinemas. Also during the third quarter of 2006, we contributed an
additional $876,000 (NZ$1.4 million) to the partnership that was used to pay off
the bank loans owed by the cinemas.
205-209 East 57th Street Associates,
LLC
We own a
non-managing 25% membership interest in 205-209 East 57th Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th Street
in Manhattan. During the first quarter of 2005, we increased our
investment by $719,000 in the 205-209 East 57th Street Associates, LLC to
maintain our 25% equity ownership in the joint venture in light of increased
budgeted construction costs.
During
2005, the project was only in its development stage which resulted in an equity
loss from unconsolidated joint venture of $125,000. In 2006, the
joint venture was able to close on the sales of 59 condominiums resulting in
gross sales of $117.7 million and equity earnings from unconsolidated joint
venture to us of $8.3 million. During 2007, this joint venture sold
the remaining eight condominiums resulting in gross sales of $25.4 million and
net equity earnings from this unconsolidated joint venture of $1.3
million. Only the commercial unit is still available for
sale. The condensed balance sheet and statement of operations of
205-209 East 57th Street Associates, LLC are as follows:
205-209
East 57th Street
Associates, LLC Condensed Balance Sheet Information:
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
assets
|
$ | 2,306 | $ | 4,456 | ||||
|
Non
current assets
|
3,126 | 18,488 | ||||||
|
Current
liabilities
|
857 | 2,187 | ||||||
|
Non
current liabilities
|
320 | -- | ||||||
|
Members’
equity
|
4,255 | 20,757 | ||||||
205-209
East 57th Street
Associates, LLC Condensed Statements of Operations Information:
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Total
revenue
|
$ | 25,673 | $ | 117,708 | $ | -- | ||||||
|
Net
income
|
6,805 | 33,106 | (500 | ) | ||||||||
Mt.
Gravatt
We own an
undivided 1/3 interest in Mt. Gravatt, an unincorporated joint venture that owns
and operates a 16-screen multiplex cinema in Australia. The condensed
balance sheet and statement of operations of Mt. Gravatt are as
follows:
Mt.
Gravatt Condensed Balance Sheet Information:
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
assets
|
$ | 1,458 | $ | 1,195 | ||||
|
Non
current assets
|
3,421 | 3,228 | ||||||
|
Current
liabilities
|
825 | 550 | ||||||
|
Noncurrent
liabilities
|
49 | 40 | ||||||
|
Members’
equity
|
4,005 | 3,833 | ||||||
Mt.
Gravatt Condensed Statements of Operations Information:
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Total
revenue
|
$ | 10,603 | $ | 9,078 | $ | 8,739 | ||||||
|
Net
income
|
2,381 | 1,946 | 1,505 | |||||||||
Berkeley Cinemas - Group and
Berkeley Cinemas –Palms & Botany
We
previously had investments in three joint ventures with Everard Entertainment
Ltd in New Zealand (the “NZ JVs”). We entered into the first joint
venture in 1998, the second in 2003, and the third in 2004. These
joint ventures were unincorporated and as such, we own an undivided 50% interest
in the assets and liabilities of each of the joint ventures and treat our
interest as an equity method interest in an unconsolidated joint
venture.
On August
28, 2006, we sold to our joint venture partner our interest in the cinemas at
Whangaparaoa, Takapuna and Mission Bay, New Zealand, the Berkeley Cinema Group
for $4.6 million (NZ$7.2 million) in cash and the assumption of $1.6 million
(NZ$2.5 million) in debt. The sale resulted in a gain on sale of
unconsolidated joint venture for the year ending December 31, 2006 of $3.4
million (NZ$5.4 million). The condensed statement of operations for
the Berkeley Cinema Group is as follows (dollars in thousands):
Berkeley
Cinemas - Group Condensed Statements of Operations Information:
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Total
revenue
|
$ | -- | $ | 3,440 | $ | 5,292 | ||||||
|
Net
income
|
-- | 644 | 765 | |||||||||
Additionally,
effective April 1, 2006, we purchased from our Joint Venture partner the 50%
share that we did not already own of the Palms cinema located in Christchurch,
New Zealand for cash of $2.6 million (NZ$4.1 million) and the proportionate
share of assumed debt which amounted to $987,000 (NZ$1.6
million). This 8-screen, leasehold cinema had previously been
included in our Berkeley Cinemas – Palms & Botany investment and was not
previously consolidated for accounting purposes. Subsequent to April
1, 2006, we have consolidated this entity into our financial
statements. See Note 8 – Acquisitions and Property
Development.
As of
December 31, 2007, the only remaining cinema owned by this joint venture is the
Botany Downs cinema, located in suburban Auckland.
Combined Condensed Financial
Information
The
combined condensed financial information for all of the above unconsolidated
joint ventures and entities accounted for under the equity method is as follows;
therefore, this only excludes Malulani Investments (dollars in
thousands):
Condensed
Balance Sheet Information (Unaudited):
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
assets
|
$ | 11,005 | $ | 10,153 | ||||
|
Non
current assets
|
15,034 | 30,573 | ||||||
|
Current
liabilities
|
6,289 | 5,004 | ||||||
|
Non
current liabilities
|
3,550 | 4,109 | ||||||
|
Member’s
equity
|
16,200 | 31,613 | ||||||
Condensed
Statements of Operations Information (Unaudited):
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Total
revenue
|
$ | 53,440 | $ | 135,675 | $ | 34,156 | ||||||
|
Net
income
|
10,247 | 35,697 | 4,484 | |||||||||
Note 12 - Notes
Payable
Notes
payable are summarized as follows (dollars in thousands):
|
December 31,
|
December 31,
|
||||||||||||||||
|
Name
of Note Payable
|
2007
Interest
Rate
|
2006
Interest
Rate
|
Maturity
Date
|
2007
Balance
|
2006
Balance
|
||||||||||||
|
Australian
Corporate Credit Facility
|
7.75 | % | 7.33 | % |
January
1, 2009
|
$ | 85,772 | $ | 70,516 | ||||||||
|
Australian
Shopping Center Loans
|
-- | -- |
2007-2013
|
1,066 | 1,147 | ||||||||||||
|
Euro-Hypo
Loan
|
6.73 | % | -- |
July
1, 2012
|
15,000 | -- | |||||||||||
|
New
Zealand Corporate Credit Facility
|
10.10 | % | 9.15 | % |
November
23, 2010
|
2,488 | 35,230 | ||||||||||
|
Trust
Preferred Securities
|
9.22 | % | -- |
April
30, 2027
|
51,547 | -- | |||||||||||
|
US
Royal George Theatre Term Loan
|
-- | 7.86 | % |
November
29, 2007
|
-- | 1,819 | |||||||||||
|
US
Sutton Hill Capital Note 1 – Related Party
|
9.91 | % | 9.69 | % |
July
28, 2008
|
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
|
7,322 | 7,500 | ||||||||||
|
Total Notes
Payable
|
$ | 177,195 | $ | 130,212 | |||||||||||||
Australia
Australian Corporate Credit
Facility
As
prescribed by the credit agreement, during 2006, our Australian Corporate Credit
Facility with the Bank of Western Australia, Ltd through our Australian
subsidiary, Reading Entertainment Australia Pty Ltd (the “Australia Credit
Facility”) was combined with our Newmarket Construction Loan upon completion of
the retail portions of our Newmarket ETRC. In October 2007, we
negotiated an increase of our total borrowing limit of the Australia Corporate
Credit Facility from $87.8 million (AUS$100.0 million) to $96.5 million
(AUS$110.0 million). At December 31, 2007, we had drawn a total of
$85.8 million (AUS$97.7 million) against this facility and issued lease
guarantees as the lessee of $3.2 million (AUS$4.0 million) leaving an available,
undrawn balance of $7.2 million (AUS$8.3 million). Effective
September 30, 2006, we renegotiated the payment terms of this facility such that
it is unlikely that we will be required to make any further principal payments
on the loan until the facility comes to term on January 1, 2009. Interest
payments for this loan are required on a quarterly basis.
During
2006, we drew down $4.8 million (AUS$6.3 million) to purchase the Palms –
Christchurch Cinema and to payoff the Palms – Christchurch Cinema
bank debt (see Note 8 – Acquisitions and Property
Development), $2.2 million (AUS$3.0 million) to purchase a 0.4 acre
commercial site adjacent to our Moonee Ponds property in Melbourne, Australia,
$1.6 million (AUS$2.2 million) to purchase a commercial development in
Indooroopilly a suburb of Brisbane, Australia, and $1.1 million (AUS$1.4
million) to make capital improvements to our existing cinema
sites. Additionally, we drew down $2.3 million (AUS$3.1 million) on
our Newmarket Construction Loan used to finance the completion of the retail
portions of our Newmarket Shopping Centre development in Brisbane,
Australia.
This
credit facility is secured by substantially all of our cinema assets in
Australia, and is only guaranteed by several of our wholly owned Australian
subsidiaries. The credit facility includes a number of affirmative
and negative covenants designed to protect the Bank’s security
interests. The most restrictive covenant of the facility is a
limitation on the total amount that we are able to drawdown based on the total
assets that are securing the loan. Our Australian Credit Facility
provides for floating interest rates based on the Bank Bill Swap Bid Rate (BBSY
bid rate), but requires that not less than 70% of the loan be swapped into fixed
rate obligations. For further information regarding our swap
agreements, see Note 13 – Derivative
Instruments. All interest rates above include a 1.00% interest
rate margin.
Fair Value of Interest Rate
Swap Agreements
In
accordance with SFAS No. 133, we marked our Australian interest rate swap
instruments to market resulting in an $320,000 (AUS$338,000) decrease, an
$845,000 (AUS$1.1 million) decrease, and a $171,000 (AUS$180,000) increase to
interest expense during 2007, 2006 and 2005, respectively (See Note 13 – Derivative
Instruments).
Australian Shopping Center
Loans
As part
of the Anderson Circuit, in July 2004, we assumed the three loans on the
properties of Epping, Rhodes, and West Lakes. The total amount
assumed on the transaction date was $1.5 million (AUS$2.1 million) and the loans
carry no interest as long as we make timely principal payments of approximately
$280,000 (AUS$320,000) per year. The balance of these loans at
December 31, 2007 and 2006 was $1.1 million (AUS$1.2 million) and $1.1 million
(AUS$1.4 million), respectively. Early repayment is possible without
penalty. The only recourse on default of these loans is the security
on the properties. During 2007, we have not paid $88,000
(AUS$100,000) of principal
payments
on the West Lakes loan due to a dispute that we have with the
landlord. We are currently in the process of resolving this
dispute.
New
Zealand
Corporate Credit
Facility
On June
29, 2007, we finalized the renegotiation of our New Zealand Corporate Credit
Facility as a $46.4 million (NZ$60.0 million) line of credit. This
renegotiated agreement carries the same terms as the previous agreement except
that it is now a line of credit instead of term debt, the maturity date has been
extended by one year to November 23, 2010, the interest rate for the facility is
based on the 90-day Bank Bill Bid Rate (BBBR) plus a 1.00% margin, and a 0.20%
line charge will be incurred on the total line of credit of $46.4 million
(NZ$60.0 million). The agreement calls for principal payments to be
deferred until February 2009 after which we will be required to make quarterly
principal payments of $750,000 until the loan comes due in on November 23,
2010. The facility is secured by substantially all of our New Zealand
assets, but has not been guaranteed by any entity other than several of our New
Zealand subsidiaries. The facility includes various affirmative and
negative covenants designed to protect the bank’s security, limits capital
expenditures and the repatriation of funds out of New Zealand without the
approval of the bank. Also included in the restrictive covenants of
the facility is the restriction of transferring funds from subsidiary to
parent. Interest payments for this loan are required on a monthly
basis.
During the February 2007, we paid off
our term debt of this facility of $34.4 million (NZ$50.0 million) as a use of
the proceeds from our new Subordinated Notes from Reading International Trust
I. On June 29, 2007, we drew down on this line of credit by $5.2
million (NZ$6.7 million) to purchase a property in New Zealand and on July 29,
2007 we drew down an additional $9.4 million (NZ$12.2 million) to purchase the
Manukau property in New Zealand (see Note 8 – Acquisitions and
Dispositions). On August 2, 2007, we paid down this facility
by $12.0 million (NZ$15.7 million) from the proceeds of the sale of certain
marketable securities.
Movieland Note
Payable
On February 27, 2006, we paid off the
balance of our New Zealand Movieland Note Payable which we had issued in August
2004 in connection with the purchase of our Movieland Circuit. The
balance of the purchase money promissory note was paid in full for $520,000
(NZ$784,000) plus $14,000 (NZ$22,000) of accrued interest.
Domestic
Subordinated Notes – Reading
International Trust I
On
February 5, 2007, we issued $51.5 million in 20-year fully subordinated notes to
a trust which we control, and which in turn issued $51.5 million in
securities. Of the $51.5 million, $50.0 million in trust preferred
securities were issued to unrelated investors in a private placement and $1.5
million of common trust securities were issued by the trust to
Reading. This $1.5 million is shown on our balance sheet as
“Investment in Reading International Trust I.” The interest on the
notes and preferred dividends on the trust securities carry a fixed rate for
five years of 9.22% after which the interest will be based on an adjustable rate
of LIBOR plus 4.00% unless we exercise our right to refix the rate at the
current market rate at that time. There are no principal payments due
until maturity in 2027 when the notes and the trust securities are scheduled to
be paid in full. We may pay off the debt after the first five years
at 100.0% of the principal amount without any penalty. The trust is
essentially a pass through, and the transaction is accounted for on our books as
the issuance of fully subordinated notes. The credit facility
includes a number of affirmative and negative covenants designed to monitor our
ability to service the debt. Currently, the most restrictive covenant
of the facility requires that we must maintain a fixed charge coverage ratio at
a certain level. The placement generated $49.9 million in net
proceeds, which were used principally to make our investment in the common trust
securities of $1.5 million, to retire all of our bank indebtedness in New
Zealand of $34.4 million (NZ$50.0 million) and to retire a portion of our bank
indebtedness in Australia of $5.8 million (AUS$7.4 million). During
the year ended December 31, 2007, we paid $3.4 million in preferred dividends to
the unrelated investors which is included in interest expense. At
December 31, 2007, we had preferred dividends payable of $768,000. Interest
payments for this loan are required every three months.
Sutton Hill Capital Note 1 -
City Cinemas Standby Credit Facility
In
connection with the City Cinemas Transaction, we undertook to lend SHC up to
$28.0 million commencing in July 2007. With the release of the Murray
Hill cinema from the Operating Lease in February 2002, this
obligation
decreased
to $18.0 million. As more fully described in Note 26 – Related Parties and
Transactions, the City Cinemas Standby Credit Facility, in connection
with the sale of the Sutton Property, the Operating Lease was further reduced by
$5.0 million from $18.0 million to $13.0 million and the draw down date was
changed to the earlier of October 2005 or the payment of the Sutton Purchase
Money Note.
Prior to
the sale of the Sutton Property in 2003, our funding obligation under the City
Cinemas Standby Credit Facility was not recorded on our Consolidated Balance
Sheet. Instead, it was disclosed as an off balance sheet future loan
commitment. Following the October 2003 sale of the Sutton Property,
this loan commitment was recorded as an “other non-current liability” on our
Consolidated Balance Sheet. On September 14, 2004, the Sutton
Purchase Money Note was paid, and $13.0 million of the proceeds were called by
SHC as the final drawdown of the City Cinemas Standby Credit
Facility.
On
September 14, 2004, we issued a $5.0 million promissory note to SHC which
carries an interest rate at December 31, 2007 of 9.91% per annum with interest
only payments payable monthly and a balloon principal payment due on the loan
maturity date. The loan maturity date has been extended twice and is
currently July 28, 2008. We used the proceeds to in part invest in
205-209 East 57th Street
Associates, LLC a limited liability company formed to redevelop our former
cinema site at 205 East 57th Street
in Manhattan. Interest payments for this loan are required on a
monthly basis.
Royal George Theatre Term
Loan
On November 29, 2002, we entered into a
$2.5 million loan agreement with a financial institution, secured by our Royal
George Theatre in Chicago, Illinois. The loan was a 5-year term loan
that accrues a variable interest rate payable monthly in
arrears. Pursuant to the credit agreement, we paid off this loan
balance as a final balloon payment of $1.7 million in November
2007.
Sutton Hill Capital Note
2
On
September 19, 2005, we issued a $9.0 million promissory note, bearing interest
at a fixed rate of 8.25% with interest only payments payable monthly and a
balloon principal payment due on December 31, 2010, the loan maturity date, in
exchange for the tenant’s interest in the ground lease estate that is currently
between (i) our fee ownership of the underlying land and (ii) our current
possessory interest as the tenant in the building and improvements constituting
the Cinemas 1, 2 & 3 in Manhattan. This tenant’s ground lease
interest was purchased from Sutton Hill Capital LLC (“SHC”). As SHC
is a related party to our corporation, our Board’s Audit and Conflicts
Committee, comprised entirely of outside independent directors, and subsequently
our entire Board of Directors unanimously approved issuance of debt in
connection with the purchase of the property. The Cinemas 1, 2 &
3 is located on 3rd Avenue
between 59th and
60th
Streets. Interest payments for this loan are required on a monthly
basis.
Union Square Theatre Term
Loan
On December 4, 2006, we renegotiated
our loan agreement which is secured by our Union Square Theatre in
Manhattan. The new loan increased our borrowing amount from $3.2
million to $7.5 million and reduced our annual interest rate from 7.31% to
6.26%. This three-year term loan requires monthly scheduled principal
and interest payments. We owed $7.3 million and $7.5 million on this
term loan for the years ended December 31, 2007 and 2006,
respectively. While this loan is structured as a limited recourse
liability (the only collateral being our Union Square building and the tenant
leases with respect to that building), this limited recourse structure is
somewhat offset by our inter-company obligation under the lease of the live
theater portion of the building, which provides for an annual rent of
$546,000. Interest payments for this loan are required on a monthly
basis.
Euro-Hypo
Loan
On June
28, 2007, Sutton Hill Properties LLC (“SHP”), one of our consolidated
subsidiaries, entered into a $15.0 million loan that is secured by SHP’s
interest in the Cinemas 1, 2, & 3 land and building. SHP is owned
75% by Reading and 25% by Sutton Hill Capital, LLC (“SHC”), a joint venture
indirectly wholly owned by Mr. James J. Cotter, our Chairman and Chief Executive
Officer, and Mr. Michael Forman. Under the terms of the credit
agreement, this loan bears a fixed interest rate of 6.73% per annum payable
monthly. The loan matures on July 1, 2012. No principal
payments are due until maturity. SHP distributed the proceeds of the
loan to Reading and to SHC in the amount of $10.6 million and $3.5 million,
respectively. Because, the cash flows from SHP are currently
insufficient to cover its obligations, Reading and Sutton Hill Capital, LLC,
have agreed to contribute the capital required to service the
debt. Reading will be responsible for 75% and SHC will be responsible
for 25% of such capital payments. Interest payments for this loan are
required on a monthly basis.
UBS Financial Services Line
of Credit
In order to finance a portion of our
purchases of marketable securities, we had arranged a line of credit (a broker
margin account) with UBS Financial Services, Inc. which carried an interest rate
of 7.25%. The line of credit was secured by the marketable securities
which we purchased on the account. Under the line of credit, we were
able to borrow approximately 50% of the market value of our securities in our
UBS account. During the second quarter of 2007, we paid off this line
of credit in conjunction with our sale of the associated marketable
securities.
Summary of Notes
Payable
Our aggregate future principal loan
payments are as follows (dollars in thousands):
|
Year
Ending December 31,
|
||||
|
2008
|
$ | 5,395 | ||
|
2009
|
88,470 | |||
|
2010
|
16,257 | |||
|
2011
|
176 | |||
|
2012
|
15,132 | |||
|
Thereafter
|
51,765 | |||
|
Total
future principal loan payments
|
$ | 177,195 | ||
Since approximately $89.3 million of
our total debt of $177.2 million at December 31, 2007 consisted of debt
denominated in Australian and New Zealand dollars, the U.S dollar amounts of
these repayments will fluctuate in accordance with the relative values of these
currencies.
Note 13 – Derivative
Instruments
We are
exposed to interest rate changes from our outstanding floating rate
borrowings. We manage our fixed to floating rate debt mix to mitigate
the impact of adverse changes in interest rates on earnings and cash flows and
on the market value of our borrowings. From time to time, we may
enter into interest rate hedging contracts which effectively convert a portion
of our Australian dollar and/or New Zealand dollar denominated variable rate
debt to a fixed rate over the term of the interest rate swap. In the
case of our Australian borrowings, we are presently required to swap no less
than 70% of our drawdowns under our Australian Corporate Credit Facility into
fixed interest rate obligations.
The
following table sets forth the terms of our interest rate swap derivative
instruments at December 31, 2007:
|
Type of Instrument
|
Notional Amount
|
Pay Fixed Rate
|
Receive Variable Rate
|
Maturity Date
|
|||||||||
|
Interest
rate swap
|
$ | 15,138,000 | 6.4400 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 23,322,000 | 6.6800 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 10,685,000 | 5.5800 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 3,072,000 | 6.3600 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 3,072,000 | 6.9600 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 2,457,000 | 7.0000 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 1,220,000 | 7.1900 | % | 6.9350 | % |
January
1, 2009
|
||||||
|
Interest
rate swap
|
$ | 2,466,000 | 7.5900 | % | n/a |
January
1, 2009
|
|||||||
In
accordance with SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities, we marked our Australian interest
swap instruments to market on the consolidated balance sheet resulting in a
$320,000 (AUS$338,000) decrease to interest expense during 2007, an $845,000
(AUS$1.1 million) decrease to interest expense during 2006, and a $171,000
(AUS$180,000) increase to interest expense during 2005. At December
31, 2007 and 2006, we recorded the fair market value of our interest rate swaps
at $526,000 (AUS$600,000) and $206,000 (AUS$261,000) as an other long-term
asset. The swap with a notional amount of $2,466,000 does not have a
Receive Variable Rate because we had not drawn on the facility as of December
31, 2007. In accordance with SFAS No. 133, we have not designated any
of our current interest rate swap positions as financial reporting
hedges.
Note 14 - Income
Taxes
Income
(loss) before income tax expense includes the following (dollars in
thousands):
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
United
States
|
$ | 737 | $ | (4,460 | ) | $ | (1,863 | ) | ||||
|
Foreign
|
(3,347 | ) | (2,403 | ) | 2,689 | |||||||
|
Income
(loss) before income tax expense and equity earnings of unconsolidated
joint ventures and entities
|
$ | (2,610 | ) | $ | (6,863 | ) | $ | 826 | ||||
|
Equity earnings and gain on
sale of unconsolidated subsidiary:
|
||||||||||||
|
United
States
|
1,328 | 8,277 | (56 | ) | ||||||||
|
Foreign
|
1,217 | 4,712 | 1,428 | |||||||||
|
Income
(loss) before income tax expense
|
$ | (65 | ) | $ | 6,126 | $ | 2,198 | |||||
Significant
components of the provision for income taxes are as follows (dollars in
thousands):
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current
income tax expense
|
||||||||||||
|
Federal
|
$ | 510 | $ | 688 | $ | 444 | ||||||
|
State
|
511 | 409 | 186 | |||||||||
|
Foreign
|
1,017 | 1,173 | 579 | |||||||||
|
Total
|
2,038 | 2,270 | 1,209 | |||||||||
|
Deferred
income tax expense
|
||||||||||||
|
Federal
|
-- | -- | -- | |||||||||
|
State
|
-- | -- | -- | |||||||||
|
Foreign
|
-- | -- | -- | |||||||||
|
Total
|
-- | -- | -- | |||||||||
|
Total
income tax expense
|
$ | 2,038 | $ | 2,270 | $ | 1,209 | ||||||
Deferred
income taxes reflect the net tax effect of “temporary differences” between the
financial statement carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
components of the deferred tax liabilities and assets are as follows (dollars in
thousands):
|
December 31,
|
||||||||
|
Components
of Deferred Tax Assets and Liabilities
|
2007
|
2006
|
||||||
|
Deferred
Tax Assets:
|
||||||||
|
Net
operating loss carry forwards
|
$ | 43,215 | $ | 46,573 | ||||
|
Impairment
reserves
|
1,142 | 1,060 | ||||||
|
Alternative
minimum tax carry forwards
|
3,714 | 3,624 | ||||||
|
Installment
sale of cinema property
|
5,070 | 5,070 | ||||||
|
Other
|
10,477 | 6,781 | ||||||
|
Total Deferred Tax
Assets
|
63,618 | 63,108 | ||||||
|
Deferred
Tax Liabilities:
|
||||||||
|
Acquired
and option properties
|
6,408 | 6,890 | ||||||
|
Net
deferred tax assets before valuation allowance
|
57,210 | 56,218 | ||||||
|
Valuation
allowance
|
(57,210 | ) | (56,218 | ) | ||||
|
Net
deferred tax asset
|
$ | -- | $ | -- | ||||
In
accordance with SFAS 109, we record net deferred tax assets to the extent we
believe these assets will more likely than not be realized. In making
such determination, we consider all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies and
recent
financial performance. SFAS 109 presumes that a valuation allowance
is required when there is substantial negative evidence about realization of
deferred tax assets, such as a pattern of losses in recent years, coupled with
facts that suggest such losses may continue. Because of such negative
evidence available for the U.S. and other countries, as of December 31, 2007 we
recorded a full valuation allowance of $57.2 million.
As of
December 31, 2007, we had the following U.S. net operating loss carry forwards
(dollars in thousands):
|
Expiration
Date
|
Amount
|
|||
|
2018
|
$ | 4 | ||
|
2019
|
1,320 | |||
|
2021
|
2,718 | |||
|
2022
|
1,636 | |||
|
2025
|
28,345 | |||
|
Total
net operating loss carryforwards
|
$ | 34,023 | ||
In addition to the above net operating
loss carryforwards having expiration dates, we have the following carryforwards
that have no expiration date at December 31, 2007:
|
|
·
|
approximately
$3.7 million in alternative minimum tax credit
carryforwards;
|
|
|
·
|
approximately
$54.6 million in Australian loss carry forwards;
and
|
|
|
·
|
approximately
$1.2 million in New Zealand loss
carryforwards.
|
We disposed of our Puerto Rico
operations during 2005 and plan no further investment in Puerto Rico for the
foreseeable future. We have approximately $31.3 million in Puerto
Rico loss carry forwards expiring no later than 2014. No material
future tax benefits from Puerto Rico loss carry forwards can be recognized by
the Company unless it re-enters the Puerto Rico market.
We expect no other substantial
limitations on the future use of U.S. or foreign loss carry forwards except for
reductions in unused U.S. loss carry forwards that may occur in connection with
the 1996 Tax Audit described in Note 18 - Commitments and
Contingencies.
U.S.
income taxes have not been recognized on the temporary differences between book
value and tax basis of investment in foreign subsidiaries. These
differences become taxable upon a sale of the subsidiary or upon distribution of
assets from the subsidiary to U.S. shareholders. We expect neither of
these events will occur in the foreseeable future for any of our foreign
subsidiaries.
The
provision for income taxes is different from amounts computed by applying U.S.
statutory rates to consolidated losses before taxes. The significant
reason for these differences follows (dollars in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
tax provision (benefit)
|
$ | (23 | ) | $ | 2,149 | $ | 769 | |||||
|
Reduction
(increase) in taxes resulting from:
|
||||||||||||
|
Change in valuation
allowance
|
992 | (2,366 | ) | (596 | ) | |||||||
|
Foreign tax
provision
|
1,017 | 1,173 | 579 | |||||||||
|
Tax effect of foreign tax rates
on current income
|
(60 | ) | 425 | 740 | ||||||||
|
State and local tax
provision
|
511 | 409 | 186 | |||||||||
|
Other items
|
(399 | ) | 480 | (469 | ) | |||||||
|
Actual
tax provision
|
$ | 2,038 | $ | 2,270 | $ | 1,209 | ||||||
Pursuant
to APB No.23, Accounting for Income Taxes -
Special Areas, a provision should be made for the tax effect of earnings
of foreign subsidiaries which are not permanently invested outside the United
States. Our intent is that earnings of our foreign subsidiaries are
not permanently invested outside the United States. No current or
cumulative earnings were available for distribution in the Reading Australia
consolidated group of subsidiaries or in the Puerto Rico subsidiary as of
December 31, 2007. The Reading New Zealand consolidated group of
subsidiaries did not generate earnings in 2007, but has cumulative earnings
available for distribution. We have provided $280,000 in foreign
withholding taxes connected with these retained earnings.
We have
accrued $15.5 million in income tax liabilities as of December 31, 2007, of
which $10.0 million have been classified as income taxes payable and $5.5
million have been classified as other non-current liabilities. As
part of income taxes payable, we have accrued $4.5 million as a probable loss in
connection with the “Appeal of IRS Deficiency Notices” and we believe that the
possible total settlement amount will be between $4.5 million and $52.8 million
(see Note 19 – Commitments and
Contingencies). We believe these amounts represent an adequate
provision for our income tax exposures, including income tax contingencies
related to foreign withholding taxes described in Note 15 – Other
Liabilities.
The
following table is a summary of the activity related to unrecognized tax
benefits for the year ending December 31, 2007 (dollars in
thousands):
|
Year Ended December 31,
2007
|
||||
|
Unrecognized
tax benefits – beginning balance
|
$ | 10,857 | ||
|
Gross
increases – prior period tax provisions
|
47 | |||
|
Gross
decreases – prior period tax positions
|
-- | |||
|
Gross
increases – current period tax positions
|
513 | |||
|
Settlements
|
-- | |||
|
Statute
of limitations lapse
|
-- | |||
|
Unrecognized
tax benefits – ending balance
|
$ | 11,417 | ||
We
adopted FASB Interpretation (FIN) 48 on January 1, 2007. As a result,
we recognized a $509,000 cumulative increase to reserves for uncertain tax
positions, which was accounted for as an adjustment to the beginning balance of
accumulated deficit in 2007. As of that date, we also reclassified
approximately $4.0 million in reserves from current taxes liabilities to
noncurrent tax liabilities. Interest and/or penalties related to
income tax matters are recorded as part of income tax expense. We had
approximately $10.8 million of gross tax benefits and $1.7 million of tax
interest unrecognized on the financial statements as of the date of adoption,
mostly reflecting operating loss carry forwards and the IRS litigation matter
described below. Of the $12.5 million total gross unrecognized tax
benefits at January 1, 2007, $4.5 million would impact the effective tax rate if
recognized. The remaining balance consists of items that would not
impact the effective tax rate due to the existence of the valuation
allowance. We recorded an increase to our gross unrecognized tax
benefits of approximately $0.6 million and an increase to tax interest of
approximately $0.6 million during the period January 1, 2007 to December 31,
2007, and the total balance at December 31, 2007 was approximately
$13.7
million.
The
incremental effects of applying FIN 48 on line items in the accompanying
consolidated balance sheet at January 1, 2007 were as follows (dollars in
thousands):
|
Before
Application of FIN 48 on January 1, 2007
|
FIN
48 Adjustments as of January 1, 2007
|
After
Application of FIN 48 on January 1, 2007
|
||||||||||
|
Current
tax liabilities
|
$ | 9,128 | $ | (4,000 | ) | $ | 5,128 | |||||
|
Noncurrent
tax liabilities
|
$ | -- | $ | 4,509 | $ | 4,509 | ||||||
|
Accumulated
deficit
|
$ | (50,058 | ) | $ | (509 | ) | $ | (50,567 | ) | |||
Our
company and subsidiaries are subject to U.S. federal income tax, income tax in
various U.S. states, and income tax in Australia, New Zealand, and Puerto
Rico.
Generally,
changes to our federal and most state income tax returns for the calendar year
2003 and earlier are barred by statutes of limitations. Certain
domestic subsidiaries filed federal and state tax returns for periods before
these entities became consolidated with us. These subsidiaries were
examined by IRS for the years 1996 to 1999 and significant tax deficiencies were
assessed for those years. We are contesting these deficiencies in Tax
Court. Our income tax returns of Australia filed since inception in
1995 are open for examination. The income tax returns filed
in
New
Zealand and Puerto Rico for calendar year 2002 and afterward generally remain
open for examination as of December 31, 2007. The income tax returns
of certain New Zealand subsidiaries are under examination for years 2002 through
2004. We anticipate the results of this examination will have no
material effect on our financial reporting.
We do not
anticipate that within 12 months following December 31, 2007 our total
unrecognized tax benefits will change significantly because of settlement of
audits and expiration of statutes of limitations.
Note 15 – Other
Liabilities
Other
liabilities are summarized as follows (dollars in thousands):
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
liabilities
|
||||||||
|
Security deposit
payable
|
$ | 168 | $ | 177 | ||||
|
Other
|
1 | -- | ||||||
|
Other current
liabilities
|
$ | 169 | $ | 177 | ||||
|
Other
liabilities
|
||||||||
|
Foreign withholding
taxes
|
$ | 5,480 | $ | 5,212 | ||||
|
Straight-line rent
liability
|
3,783 | 3,693 | ||||||
|
Option
liability
|
-- | 3,681 | ||||||
|
Environmental
reserve
|
1,656 | 1,656 | ||||||
|
Accrued pension
|
2,626 | -- | ||||||
|
Option deposit
|
-- | 3,000 | ||||||
|
Other
|
1,391 | 936 | ||||||
|
Other
liabilities
|
$ | 14,936 | $ | 18,178 | ||||
Sutton Hill Capital –
Cinemas 1, 2, & 3 Purchase Option
As part of the purchase of the real
property underlying our leasehold interest in the Cinemas 1, 2, & 3 on June
1, 2005, we granted a purchase option to Sutton Hill Capital, LLC (“SHC”), a
limited liability company beneficially owned in equal 50/50 shares by Messrs.
James J. Cotter and Michael Forman, to acquire at the acquisition date cost
basis, up to a 25% non-managing membership interest in Sutton Hill Properties,
LLC (“SHP”). SHP is the limited liability company that we formed to
acquire these interests. In relation to this option, we estimated,
based on a June 2007 property appraisal, the fair value of the option had
increased for year ended December 31, 2007 by $950,000 which was expensed for
during the year. During 2006, the value of the option at December 31,
2006 increased to approximately $3.7 million, resulting in an expense for the
year ended December 31, 2006 of $1.6 million.
On June 28, 2007, SHC exercised this
option, paying the option exercise price through the application of their $3.0
million deposit plus the assumption of its proportionate share of SHP’s
liabilities giving it a 25% non-managing membership interest in
SHP. Upon exercise, the settlement of the previously capitalized
option liability of $4.6 million resulted in an increase in additional
paid-in-capital of $2.5 million as the transfer of the 25% non-managing
membership interest to SHC constituted a transfer of an equity interest between
entities under common control.
Union Pension
Withdrawal
During
the first quarter of 2006, the Motion Picture Projectionists, Video Technicians
and Allied Crafts Union (“Union”) asserted that due to the Company’s reduced
reliance on union labor in New York City, there was a partial withdrawal from
the union pension plan by the Company in 2003 resulting in a funding liability
on the part of the Company of approximately $342,000. We believe that
the estimated amount of our obligation to the Union for their pension plan is in
question and disputable. For this reason, we intend to discuss
further the matter with the Union. However, to reflect the Union’s
asserted assessment at this time, we have recorded a $264,000 liability in our
other liabilities and paid to the Union $78,000 at December 31,
2007.
Note 16 – Fair Value of
Financial Instruments
The
carrying amounts of our cash and cash equivalents, restricted cash and accounts
payable approximate fair value due to their short-term
maturities. Interest rate swap contracts are carried at fair value
and included in other liabilities on the consolidated balance
sheet. The carrying amounts of our variable-rate secured debt
approximate fair value since the interest rates on these instruments are
equivalent to rates currently offered us. The following table
summarizes our financial instruments and their calculated fair values (dollars
in thousands):
|
Book Value
|
Fair Value
|
|||||||||||||||
|
Financial
Instrument
|
2007
|
2006
|
2007
|
2006
|
||||||||||||
|
Cash
|
$ | 20,782 | $ | 11,008 | $ | 20,782 | $ | 11,008 | ||||||||
|
Accounts
receivable
|
$ | 5,671 | $ | 6,612 | $ | 5,671 | $ | 6,612 | ||||||||
|
Investment
in marketable securities
|
$ | 4,533 | $ | 8,436 | $ | 4,533 | $ | 8,436 | ||||||||
|
Restricted
cash
|
$ | 59 | $ | 1,040 | $ | 59 | $ | 1,040 | ||||||||
|
Accounts
and film rent payable
|
$ | 15,606 | $ | 18,181 | $ | 15,606 | $ | 18,181 | ||||||||
|
Notes
payable
|
$ | 111,648 | $ | 116,212 | $ | 112,344 | $ | 116,471 | ||||||||
|
Notes
payable to related party
|
$ | 14,000 | $ | 14,000 | $ | 13,942 | $ | 13,862 | ||||||||
|
Subordinated
debt
|
$ | 51,547 | $ | -- | $ | 45,356 | $ | -- | ||||||||
|
Interest
rate swaps asset
|
$ | 526 | $ | 206 | $ | 526 | $ | 206 | ||||||||
Note 17 – Lease
Agreements
Most of
our cinemas conduct their operations in leased facilities. Nine of
our thirteen operating multiplexes in Australia, three of our seven cinemas in
New Zealand and all but one of our cinemas in the United States are in leased
facilities. These cinema leases have remaining terms inclusive of
options of 10 to 50 years. Certain of our cinema leases provide for
contingent rentals based upon a specified percentage of theater revenues with a
guaranteed minimum. Substantially all of our leases require the
payment of property taxes, insurance and other costs applicable to the
property. We also lease office space and equipment under
non-cancelable operating leases. All of our leases are accounted for
as operating leases and accordingly, we have no leases of facilities which
require capitalization.
We
determine the annual base rent expense of our cinemas by amortizing total
minimum lease obligations on a straight-line basis over the lease
terms. Base rent expense and contingent rental expense under the
operating leases totaled approximately $11.9 million and $515,000 for 2007,
respectively; $10.8 million and $332,000 for 2006, respectively; and $9.8
million and $719,000 for 2005, respectively. Future minimum lease
payments by year and, in the aggregate, under non-cancelable operating leases
consisted of the following at December 31, 2007 (dollars in
thousands):
|
Minimum
Lease Payments
|
||||
|
2008
|
$ | 11,675 | ||
|
2009
|
11,699 | |||
|
2010
|
11,495 | |||
|
2011
|
10,827 | |||
|
2012
|
8,528 | |||
|
Thereafter
|
61,613 | |||
|
Total
minimum lease payments
|
$ | 115,837 | ||
Since approximately $85.1 million of
our total minimum lease payments of $115.8 million as of December 31, 2007
consisted of lease obligations denominated in Australian and New Zealand
dollars, the U.S dollar amounts of these obligations will fluctuate in
accordance with the relative values of these currencies.
Note 18 – Pension
Liabilities
In March 2007, the Board of Directors
of Reading International, Inc. (“Reading”) approved a Supplemental Executive
Retirement Plan (“SERP”) pursuant to which Reading has agreed to provide James
J. Cotter, its Chief Executive Officer and Chairman of the Board of Directors,
supplemental retirement benefits effective March 1, 2007. Under the
SERP, Mr. Cotter will receive a monthly payment of the greater of (i) 40% of the
average monthly earnings over the highest consecutive 36-month period of
earnings prior to Mr. Cotter’s separation from service with Reading or (ii)
$25,000 per month for the remainder of his life, with a guarantee of 180 monthly
payments following his separation from service with Reading or following his
death. The beneficiaries under the SERP may be designated by Mr.
Cotter or by his beneficiary following his or his beneficiary’s
death. The benefits under the SERP are fully vested as of March 1,
2007.
The SERP initially will be unfunded,
but Reading may choose to establish one or more grantor trusts from which to pay
the SERP benefits. As such, the SERP benefits are unsecured, general
obligations of Reading. The SERP is administered by the Compensation
Committee of the Board of Directors of Reading. In accordance with
SFAS 158 - Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R), the initial
pension benefit obligation of $2.7 million was included in our other liabilities
with a corresponding amount of unrecognized prior service cost included in
accumulated other comprehensive income on March 1, 2007 (see Note 24 – Comprehensive
Income). The initial benefit obligation was based on a
discount rate of 5.75% and a compensation increase rate of 3.5%. The
$2.7 million is being amortized as a prior service cost over the estimated
service period of 10 years combined with an annual interest cost. For
the year ended December 31, 2007, we recognized $129,000 of interest cost and
$253,000 of amortized prior service cost. The balance of the other
liability for this pension plan was $2.4 million at December 31, 2007 and the
accumulated other comprehensive income balance was $2.1 million at December 31,
2007. The December 31, 2007 value of the SERP is based on a discount
rate of 6.25% and an annual compensation growth rate of 3.50%.
In addition to the aforementioned SERP,
Mr. S. Craig Tompkins has a vested interest in the pension plan originally
established by Craig Corporation prior to its merger with our company of
$181,000 and $174,000 at December 31, 2007 and 2006,
respectively. The balance accrues interest at 30 day LIBOR and is
maintained as an unfunded Executive Pension Plan obligation included in other
liabilities.
The change in the SERP pension benefit
obligation and the funded status for the year ending December 31, 2007 is as
follows (dollars in thousands):
|
Change
in Benefit Obligation
|
For
the year ending December 31, 2007
|
|||
|
Benefit
obligation at March 1, 2007
|
$ | 2,701 | ||
|
Service
cost
|
-- | |||
|
Interest
cost
|
129 | |||
|
Actuarial
gain
|
(385 | ) | ||
|
Benefit
obligation at December 31, 2007
|
2,445 | |||
|
Plan
assets
|
-- | |||
|
Funded
status at December 31, 2007
|
$ | (2,445 | ) | |
The actuarial gain during 2007 was the
result of an increase in the discount rate from 5.75% at inception to 6.25% as
of the December 31, 2007 measurement date.
Amount recognized in balance sheet
consists of (dollars in thousands):
|
At
December 31, 2007
|
||||
|
Noncurrent
assets
|
$ | -- | ||
|
Current
liabilities
|
5 | |||
|
Noncurrent
liabilities
|
2,440 | |||
Items not yet recognized as a component
of net periodic pension cost consist of (dollars in thousands):
|
At
December 31, 2007
|
||||
|
Unamortized
actuarial gain
|
$ | (385 | ) | |
|
Prior
service costs
|
2,448 | |||
|
Accumulated
other comprehensive loss
|
2,063 | |||
The components of the net periodic
benefit cost and other amounts recognized in other comprehensive income are as
follows (dollars in thousands):
|
Net
periodic benefit cost
|
From
March 1, 2007 to December 31, 2007
|
|||
|
Service
cost
|
$ | -- | ||
|
Interest
cost
|
129 | |||
|
Expected
return on plan assets
|
-- | |||
|
Amortization
of prior service costs
|
253 | |||
|
Amortization
of net (gain) loss
|
-- | |||
|
Net
periodic benefit cost
|
$ | 382 | ||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income
|
||||
|
Net
gain
|
$ | (385 | ) | |
|
Prior
service cost
|
-- | |||
|
Amortization
of prior service cost
|
(253 | ) | ||
|
Amortization
of net gain (loss)
|
-- | |||
|
Total
recognized in other comprehensive income
|
$ | (638 | ) | |
|
Total
recognized in net periodic benefit cost and other comprehensive
income
|
$ | (256 | ) | |
The
estimated net gain and prior service cost for the defined benefit pension plan
that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next fiscal year are $18,000 and $304,000,
respectively.
The following weighted average
assumptions were used to determine the plan benefit obligations at December 31,
2007:
|
At
December 31, 2007
|
||||
|
Discount
rate
|
6.25 | % | ||
|
Rate
of compensation increase
|
3.50 | % | ||
The following weighted-average
assumptions were used to determine net periodic benefit cost for the year ended
December 31, 2007:
|
At
December 31, 2007
|
||||
|
Discount
rate
|
6.25 | % | ||
|
Expected
long-term return on plan assets
|
0.00 | % | ||
|
Rate
of compensation increase
|
3.50 | % | ||
The benefit payments, which reflect
expected future service, as appropriate, are expected to be paid over the
following periods (dollars in thousands):
|
Pension
Payments
|
||||
|
2008
|
$ | 5 | ||
|
2009
|
10 | |||
|
2010
|
15 | |||
|
2011
|
20 | |||
|
2012
|
25 | |||
|
Thereafter
|
2,370 | |||
|
Total
pension payments
|
$ | 2,445 | ||
Note 19 - Commitments and
Contingencies
Acquisition
of Consolidated Cinemas
On
October 8, 2007, we entered into agreements to acquire leasehold interests in 15
cinemas then owned by Pacific Theatres Exhibition Corp. and its
affiliates. The cinemas, which are located in the United States,
contain 181 screens. The aggregate purchase price of the cinemas and
related assets was $69.3 million. The acquisition was made through a
wholly owned subsidiary of RDI and was financed principally by a combination of
debt financing from GE Capital Corporation and seller financing. We
subsequently closed on this acquisition on February 22, 2008 (see Note 27 -
Subsequent
Events).
Taringa
Properties
As of December 31, 2007, we had entered
into agreements to acquire approximately 50,000 square foot of property in
Taringa, Australia, comprising three contiguous properties, which we intend to
develop. The aggregate purchase price of these properties is $10.6
million (AUS$12.1 million). We subsequently closed on the purchase of
two of these properties in January 2008 (see Note 27 - Subsequent
Events).
Unconsolidated
Joint Venture Loans
The following section describes the
loans associated with our investments in unconsolidated joint
ventures. As they are unconsolidated, their associated bank loans are
not reflected in our Consolidated Balance Sheet at December 31,
2007. Each loan is without recourse to any assets other than our
interests in the individual joint venture.
Rialto
Distribution
We are the 33.3% co-owners of the
assets of Rialto Distribution. At December 31, 2007 and 2006, the
total line of credit was $1.5 million (NZ$2.0 million) and $1.4 million (NZ$2.0
million), respectively, and had an outstanding balance of $801,000 (NZ$1.0
million) and $1.1 million (NZ$1.6 million), respectively. This loan is
without recourse to any assets other than our interest in the joint
venture.
Berkeley
Cinemas
We are the 50% co-owners with the
Everard Entertainment Ltd of the assets comprising an unincorporated joint
venture in New Zealand, referred to in these financial statements as the
Berkeley Cinemas Joint Venture. The balance of the bank loan at
December 31, 2007 and 2006 was $3.4 million (NZ$4.4 million) and $3.7 million
(NZ$5.2 million), respectively, which is secured by a first mortgage over the
land and building assets of the joint venture. This loan is without
recourse to any assets other than our interest in the joint
venture.
Tax
Audit/Litigation
The
Internal Revenue Service (the “IRS”) completed its audits of the tax return of
Reading Entertainment Inc. (RDGE) for its tax years ended December 31, 1996
through December 31, 1999 and the tax return of Craig Corporation (CRG) for its
tax year ended June 30, 1997. With respect to both of these
companies, the principal focus of these audits was the treatment of the
contribution by RDGE to our wholly owned subsidiary, Reading Australia, and
thereafter the subsequent repurchase by Stater Bros. Inc. from Reading Australia
of certain preferred stock in Stater Bros. Inc. (the “Stater Stock”) received by
RDGE from CRG as a part of a private placement of securities by RDGE which
closed in October 1996. A second issue involving equipment-leasing
transactions entered into by RDGE (discussed below) is also
involved.
By
letters dated November 9, 2001, the IRS issued reports of examination proposing
changes to the tax returns of RDGE and CRG for the years in question (the
“Examination Reports”). The Examination Report for each of RDGE and
CRG proposed that the gains on the disposition by RDGE of Stater Stock, reported
as taxable on the RDGE return, should be allocated to CRG. As
reported, the gain resulted in no additional tax to RDGE inasmuch as the gain
was entirely offset by a net operating loss carry forward of
RDGE. This proposed change would result in an additional tax
liability for CRG of approximately $20.9 million plus interest of approximately
$17.9 million as of December 31, 2007. In addition, this proposal
would result in California tax liability of approximately $5.4 million plus
interest of approximately $4.6 million as of December 31,
2007. Accordingly, this proposed change represented, as of December
31, 2007, an exposure of approximately $48.8 million.
Moreover,
California has “amnesty” provisions imposing additional liability on taxpayers
who are determined to have materially underreported their taxable
income. While these provisions have been criticized by a number of
corporate taxpayers to the extent that they apply to tax liabilities that are
being contested in good faith, no assurances can be given that these new
provisions will be applied in a manner that would mitigate the impact on such
taxpayers. Accordingly,
these provisions may cause an additional $4.0 million exposure to CRG, for a
total exposure of approximately $52.8 million. We have accrued $4.5
million as a probable loss in relation to this exposure and believe that the
possible total settlement amount will be between $4.0 million and $52.8
million.
In early
February 2005, we had a mediation conference with the IRS concerning this
proposed change. The mediation was conducted by two mediators, one of
whom was selected by the taxpayer from the private sector and one of whom was an
employee of the IRS. In connection with this mediation, we and the
IRS each prepared written submissions to the mediators setting forth our
respective cases. In its written submission, the IRS noted that it
had offered to settle its claims against us at 30% of the proposed change, and
reiterated this offer at the mediation. This offer constituted, in
effect, an offer to settle for a payment of $5.0 million federal tax, plus
interest, for an aggregate settlement amount of approximately $8.0
million. Based on advice of counsel given after reviewing the
materials submitted by the IRS to the mediation panel, and the oral presentation
made by the IRS to the mediation panel and the comments of the mediators
(including the IRS mediator), we determined not to accept this
offer.
Notices
of deficiency (“N/D”) dated June 29, 2006 were received with respect to each
of RDGE and CRG determining proposed deficiencies of $20.9 million
for CRG and a total of $349,000 for RDGE for the tax years 1997, 1998 and
1999.
We intend
to litigate aggressively these matters in the U.S. Tax Court and an appeal was
filed with the court on September 26, 2006. While there are always
risks in litigation, we believe that a settlement at the level currently offered
by the IRS would substantially understate the strength of our position and the
likelihood that we would prevail in a trial of these matters. We are
currently in the discovery process, and do not anticipate a trial of this issue
before 2010.
Since
these tax liabilities relate to time periods prior to the Consolidation of CDL,
RDGE, and CRG into Reading International, Inc. and since RDGE and CRG continue
to exist as wholly owned subsidiaries of RII, it is expected that any adverse
determination would be limited in recourse to the assets of RDGE or CRG, as the
case may be, and not to the general assets of RII. At the present
time, the assets of these subsidiaries are comprised principally of RII
securities. Accordingly, we do not anticipate, even if there were to
be an adverse judgment in favor of the IRS that the satisfaction of that
judgment would interfere with the internal operation or result in any levy upon
or loss of any of our material operating assets. The satisfaction of
any such adverse judgment would, however, result in a material dilution to
existing stockholder interests.
The N/D
issued to RDGE does not cover its tax year 1996 which will be held in abeyance
pending the resolution of the CRG case. An adjustment to 1996 taxable
income for RDGE would result in a refund of alternative minimum tax paid that
year. The N/D issued to RDGE eliminated the gains booked by RDGE in
1996 as a consequence of its acquisition certain computer equipment and sale of
the anticipated income stream from the lease of such equipment to third parties
and disallowed depreciation deductions that we took with respect to that
equipment in 1997, 1998 and 1999. Such disallowance has the effect of
decreasing net operating losses but did not result in any additional regular
federal income tax for such years. However, the depreciation
disallowance would increase RDGE state tax liability for those years by
approximately $170,000 plus interest. The only tax liability
reflected in the RDGE N/D is alternative minimum tax in the total amount of
approximately $349,000 plus interest. On September 26, 2006, we filed
an appeal on this N/D with the U.S. Tax Court.
Environmental
and Asbestos Claims
Certain
of our subsidiaries were historically involved in railroad operations, coal
mining and manufacturing. Also, certain of these subsidiaries appear
in the chain of title of properties which may suffer from
pollution. Accordingly, certain of these subsidiaries have, from time
to time, been named in and may in the future be named in various actions brought
under applicable environmental laws. Also, we are in the real estate
development business and may encounter from time to time unanticipated
environmental conditions at properties that we have acquired for
development. These environmental conditions can increase the cost of
such projects, and adversely affect the value and potential for profit of such
projects. We do not currently believe that our exposure under
applicable environmental laws is material in amount.
From time
to time, we have claims brought against us relating to the exposure of former
employees of our railroad operations to asbestos and coal dust. These
are generally covered by an insurance settlement reached in September 1990 with
our insurance carriers. However, this insurance settlement does not
cover litigation by people who were
not our employees and who may claim second hand exposure to asbestos, coal dust
and/or other chemicals or elements now recognized as potentially causing cancer
in humans.
Whitehorse
Center Litigation
On October 30, 2000, we commenced
litigation in the Supreme Court of Victoria at Melbourne, Commercial and Equity
Division, against our joint venture partner and the controlling stockholders of
our joint venture partner in the Whitehorse Shopping Center. That
action is entitled Reading Entertainment Australia Pty, Ltd vs. Burstone
Victoria Pty, Ltd and May Way Khor and David Frederick Burr, and was brought to
collect on a promissory note (the “K/B Promissory Note”) evidencing a loan that
we made to Ms. Khor and Mr. Burr and that was guaranteed by Burstone Victoria
Pty, Ltd (“Burstone” and collectively with Ms. Khor and Mr. Burr, the “Burstone
Parties”). This loan balance has been previously written off and is
no longer recorded on our books. The Burstone Parties asserted in
defense certain set-offs and counterclaims, alleging, in essence, that we had
breached our alleged obligations to proceed with the development of the
Whitehorse Shopping Center, causing the Burstone Parties damages. The
matter is currently on appeal. However, if the trial court is
ultimately sustained the result will be a payment from the Burstone Parties to
us of $1.1 million (AUS$1.2 million), as of December 31,
2007. That amount continues to accrue interest at the rate of
approximately 10%. The amount of these payments represent a
contingent gain; therefore, no amount has been recorded in our financial
statements through the year ended December 31, 2007.
Mackie
Litigation
On November 7, 2005, we were sued in
the Supreme Court of Victoria at Melbourne by a former construction contractor
with respect to the discontinued development of an ETRC at Frankston,
Victoria. The action is entitled Mackie Group Pty Ltd v. Reading
Properties Pty Ltd, and in it the former contractor seeks payment of a claimed
fee in the amount of $788,000 (AUS$1.0 million). We do not believe
that any such fee is owed, and are contesting the claim. Discovery
has now been completed by both parties. The next step in the
litigation is likely to be mediation.
In a hearing conducted on November 22
and 29, 2006, Reading successfully defended an application for summary judgment
brought by Mackie and was awarded costs for part of the preparation of its
defense to the application. A bill of costs has been prepared by a
cost consultant in the sum of $20,000 (AUS$25,000) (including
disbursements). On 27 April 2007, we received payment from Khor &
Burr for those costs in the sum of $18,646.60.
A
mediation was held in this matter on 12 July 2007, at which time the matter
failed to settle. Reading has subsequently made an offer of
compromise to Mackie Group in the sum of $150,000 plus party/party costs, which
has not been accepted. The matter has not yet been fixed for trial,
however orders have now been made for the preparation of material for trial and
we expect that the matter will be set down for trial before the end of the
year.
Malulani
Investments Litigation
In December 2006, we commenced a
lawsuit against certain officers and directors of Malulani Investments Limited
(“MIL”) alleging various direct and derivative claims for breach of fiduciary
duty and waste and seeking, among other things, access to various company books
and records. As certain of these claims were brought indirectly, MIL
was also named as a defendant in that litigation. That case is called
Magoon Acquisition &
Development, LLC; a California limited liability company, Reading International,
Inc.; a Nevada corporation, and James J. Cotter vs. Malulani Investments,
Limited, a Hawaii Corporation, Easton T. Mason; John R. Dwyer, Jr.; Philip Gray;
Kenwei Chong and is currently pending before Judge Chang in the circuit
Court of the First circuit State of Hawaii, in
Honolulu.
On July 26, 2007, the Court
granted TMG's motion to intervene in the Hawaii action. On March 24,
2008, MIL filed a counter claim against us, alleging that we are green
mailers, that our purpose in bringing the lawsuit was to harass and harm MIL,
and that we should be liable to MIL for the damage resulting from our
harassment, including the bringing of our lawsuit (the “MIL
Counterclaim”).
We do not believe that we have any
meaningful exposure with respect to the MIL Counterclaim, and intend to continue
to prosecute our claims against the Defendant Directors. We have
filed a counterclaim against TMG, alleging various breached of fiduciary duty on
its part, as the controlling shareholder of MIL, and are currently seeking
permission to amend our initial complaint to add additional allegations
principally growing out of the ongoing conduct by the Defendant Directors since
the filing of our initial complaint. The action is currently in its
discovery phase, with trail currently set for November of this
year.
Other
Claims – Credit Card Claims
During 2006, the bank, which
administers our credit card activities, asserted a claim of potential loss
suffered in relation to the use by third parties of counterfeit credit cards and
related credit card company fines. At the end of 2006, we expected
the associated claims from the bank and credit card companies for these losses
and fines to total approximately $1.2 million. For this reason, we
expensed $1.2 million during the year ending December 31,
2006. During 2007, the majority of the credit card claims and
penalties were assessed and paid resulting in realized losses of $429,000 and
$160,000 for the years ending December 31, 2007 and 2006, respectively, and
returned restricted cash of $551,000 during 2007 which resulted an expense
reversal of this amount during 2007. The restricted cash balance at
December 31, 2007 was $59,000 relating to the remaining unresolved credit card
claims.
Note 20 – Minority
Interest
The minority interests are comprised of
the following:
|
|
·
|
50%
of membership interest in AFC by a subsidiary of National Auto Credit,
Inc. (“NAC”)
|
|
|
·
|
25%
minority interest in Australian Country Cinemas by 21st
Century Pty, Ltd
|
|
|
·
|
33%
minority interest in the Elsternwick joint venture by Champion Pictures
Pty Ltd
|
|
|
·
|
15% to
27.5% minority interest in the Landplan Property Partners, Ltd by Landplan
Property Group, Ltd
|
|
|
·
|
25%
minority interest in the Sutton Hill Properties, LLC owned by Sutton Hill
Capital, LLC
|
|
|
·
|
20%
minority interest in Big 4 Farming LLC by Cecelia Packing
Corporation
|
The
components of minority interest are as follows (dollars in
thousands):
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
AFC
|
$ | 2,256 | $ | 2,264 | ||||
|
Australian
Country Cinemas
|
232 | 174 | ||||||
|
Elsternwick
unincorporated joint venture
|
109 | 151 | ||||||
|
Landplan
Property Partners
|
237 | 13 | ||||||
|
Other
|
1 | 1 | ||||||
|
Total
minority interest
|
$ | 2,835 | $ | 2,603 | ||||
The
components of minority interest expense are as follows (dollars in
thousands):
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
AFC
|
$ | 742 | $ | 624 | $ | 730 | ||||||
|
Australian
Country Cinemas
|
112 | 50 | 10 | |||||||||
|
Elsternwick
unincorporated joint venture
|
21 | (17 | ) | (161 | ) | |||||||
|
Landplan
Property Partners
|
214 | 14 | -- | |||||||||
|
Sutton
Hill Properties
|
(86 | ) | -- | -- | ||||||||
|
Other
|
-- | 1 | -- | |||||||||
|
Total
minority interest
|
$ | 1,003 | $ | 672 | $ | 579 | ||||||
Landplan Property Partners,
Ltd
In 2006,
we formed Landplan Property Partners, Ltd, to identify, acquire and develop or
redevelop properties on an opportunistic basis. In connection with
the formation of Landplan, we entered into an agreement with Mr. Doug Osborne
pursuant to which (i) Mr. Osborne will serve as the chief executive officer of
Landplan and (ii) Mr. Osborne’s affiliate, Landplan Property Group, Ltd (“LPG”),
will perform certain property management services for Landplan. The
agreement provides for Mr. Osborne to hold an equity interest in the entities
formed to hold these properties; such equity interest to be (i) subordinate to
our right to an 11% compounded return on investment and (ii) subject to
adjustment depending upon various factors including the term of the investment
and the amount invested. Generally speaking, this equity interest
will range from 27.5% to 15%. During 2006, Landplan acquired one
property in Indooroopilly, Brisbane, Australia and, during 2007, Landplan
acquired two properties in New Zealand; the first called the Lake Taupo Motel
and the other is a parcel of land called the Manukau property.
Note 21 - Common
Stock
Our
common stock trades on the American Stock Exchange under the symbols RDI and
RDI.B which are our Class A (non-voting) and Class B (voting) stock,
respectively. Our Class A (non-voting) has preference over our Class
B (voting) share upon liquidation. No dividends have ever been issued
for either share class.
At
December 31, 2007, in recognition of the vesting of one-half of his 2006 and
one-half of his 2005 stock grants, we issued to Mr. Cotter 15,133 and 16,047
shares, respectively, of Class A Non-Voting Common Stock which had a stock grant
price of $8.26 and $7.79 per share and fair market values of $151,000 and
$160,000, respectively. At December 31, 2006, in recognition of the
vesting of one-half of the 2006 stock grant, we issued to Mr. Cotter 16,047
shares of Class A Non-Voting Common Stock which had a stock grant price of $7.79
per share and a fair market value of $133,000.
For the
stock options exercised during the third
quarter of 2007, we issued for cash to an employee of the corporation under our
employee stock option plan 6,250 shares of Class A Nonvoting Common Stock at an
exercise price of $4.01 per share.
For the
stock options exercised during 2006, we
issued for cash to an employee of the corporation under our stock based
compensation plan 12,000 shares and 15,000 shares of Class A Nonvoting Common
Stock at exercise prices of $3.80 and $2.76 per share,
respectively. Additionally, in December 2006, we issued to Mr. James
J. Cotter, our Chairman of the Board and Chief Executive Officer, 16,047 shares
of Class A Non-Voting Common Stock at a market price of $7.79 per share as under
the normal vesting schedule of his 2005 restricted stock compensation (see Note
3 - Stock Based Compensation
and Employee Stock Option Plan.
On
February 27, 2006, we paid $791,000 (NZ$1.2 million) to the sellers of the
Movieland Circuit in exchange for 98,949 Class A Common Nonvoting Common
Stock. This transaction resulted from the exercise of their option to
put back to us at an exercise price of NZ$11.94 the shares they received as part
of the purchase price of the Movieland Circuit.
Note 22 – Business Segments
and Geographic Area Information
Effective the fourth quarter of
2006, we have changed the presentation of our segment reporting such that our
intersegment revenues and expenses are reported separately from our segments’
operating activity. The effect of this change is to include
intercompany rent revenues and rent expenses into their respective cinema and
real estate business segments. The revenues and expenses for 2005
have been adjusted to conform to the current year presentation. We
believe that this presentation portrays how our operating decision makers’ view
the operations, how they assess segment performance, and how they make decisions
about allocating resources to the segments.
The table below sets forth certain
information concerning our cinema operations and our real estate operations
(which includes information relating to both our real estate development, retail
rental and live theater rental activities) for the three years ended December
31, 2007 (dollars in thousands):
|
Year
Ended December 31, 2007
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 103,467 | $ | 21,887 | $ | (6,119 | ) | $ | 119,235 | |||||||
|
Operating
expense
|
83,875 | 8,324 | (6,119 | ) | 86,080 | |||||||||||
|
Depreciation
& amortization
|
6,942 | 4,418 | -- | 11,360 | ||||||||||||
|
General
& administrative expense
|
3,195 | 831 | -- | 4,026 | ||||||||||||
|
Segment
operating income
|
$ | 9,455 | $ | 8,314 | $ | -- | $ | 17,769 | ||||||||
|
Year
Ended December 31, 2006
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 94,048 | $ | 17,285 | $ | (5,208 | ) | $ | 106,125 | |||||||
|
Operating
expense
|
75,350 | 7,365 | (5,208 | ) | 77,507 | |||||||||||
|
Depreciation
& amortization
|
8,648 | 4,080 | -- | 12,728 | ||||||||||||
|
General
& administrative expense
|
3,658 | 782 | -- | 4,440 | ||||||||||||
|
Segment
operating income
|
$ | 6,392 | $ | 5,058 | $ | -- | $ | 11,450 | ||||||||
|
Year
Ended December 31, 2005
|
Cinema
|
Real
Estate
|
Intersegment
Eliminations
|
Total
|
||||||||||||
|
Revenue
|
$ | 86,760 | $ | 16,523 | $ | (5,178 | ) | $ | 98,105 | |||||||
|
Operating
expense
|
72,665 | 7,359 | (5,178 | ) | 74,846 | |||||||||||
|
Depreciation
& amortization
|
8,323 | 3,674 | -- | 11,997 | ||||||||||||
|
General
& administrative expense
|
6,802 | 328 | -- | 7,130 | ||||||||||||
|
Segment
operating income (loss)
|
$ | (1,030 | ) | $ | 5,162 | $ | -- | $ | 4,132 | |||||||
|
Reconciliation
to net income (loss):
|
2007
|
2006
|
2005
|
|||||||||
|
Total
segment operating income
|
$ | 17,769 | $ | 11,450 | $ | 4,132 | ||||||
|
Non-segment:
|
||||||||||||
|
Depreciation and amortization
expense
|
561 | 484 | 387 | |||||||||
|
General and administrative
expense
|
12,059 | 8,551 | 10,117 | |||||||||
|
Operating
income (loss)
|
5,149 | 2,415 | (6,372 | ) | ||||||||
|
Interest expense,
net
|
(8,163 | ) | (6,608 | ) | (4,473 | ) | ||||||
|
Other income
(expense)
|
(505 | ) | (1,998 | ) | 19 | |||||||
|
Minority
interest
|
(1,003 | ) | (672 | ) | (579 | ) | ||||||
|
Gain on disposal of discontinued
operations
|
1,912 | -- | 13,610 | 1 | ||||||||
|
Loss from discontinued
operations
|
-- | -- | (1,379 | ) | ||||||||
|
Income tax
expense
|
(2,038 | ) | (2,270 | ) | (1,209 | ) | ||||||
|
Equity earnings of
unconsolidated joint ventures and entities
|
2,545 | 9,547 | 1,372 | |||||||||
|
Gain on sale of unconsolidated
joint venture
|
-- | 3,442 | -- | |||||||||
|
Net
income (loss)
|
$ | (2,103 | ) | $ | 3,856 | $ | 989 | |||||
|
Segment
assets
|
$ | 315,582 | $ | 264,963 | ||||||||
|
Corporate
assets
|
30,489 | 24,268 | ||||||||||
|
Total
Assets
|
$ | 346,071 | $ | 289,231 | ||||||||
|
Segment
capital expenditures
|
$ | 42,244 | $ | 16,168 | $ | 51,649 | ||||||
|
Corporate
capital expenditures
|
170 | 221 | 2,305 | |||||||||
|
Total
capital expenditures
|
$ | 42,414 | $ | 16,389 | $ | 53,954 | ||||||
The cinema results shown above include
revenue and operating expense directly linked to our cinema
assets. The real estate results include rental income from our
properties and live theaters and operating expense directly linked to our
property assets.
The following table sets forth the book
value of our property and equipment by geographical area (dollars in
thousands):
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Australia
|
$ | 90,956 | $ | 86,317 | ||||
|
New
Zealand
|
44,030 | 38,772 | ||||||
|
United
States
|
43,188 | 45,578 | ||||||
|
Total
property and equipment
|
$ | 178,174 | $ | 170,667 | ||||
The
following table sets forth our revenues by geographical area (dollars in
thousands):
|
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Australia
|
$ | 63,657 | $ | 53,434 | $ | 47,181 | ||||||
|
New
Zealand
|
24,371 | 21,230 | 20,179 | |||||||||
|
United
States
|
31,207 | 31,461 | 30,745 | |||||||||
|
Total
Revenues
|
$ | 119,235 | $ | 106,125 | $ | 98,105 | ||||||
Note 23 – Unaudited
Quarterly Financial Information (dollars in thousands, except per share
amounts)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
2007
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
|
Revenue
|
$ | 27,975 | $ | 30,139 | $ | 32,559 | $ | 28,562 | ||||||||
|
Net
income (loss)
|
$ | (646 | ) | $ | 1,634 | $ | 870 | $ | (3,961 | ) | ||||||
|
Basic
earnings (loss) per share
|
$ | (0.03 | ) | $ | 0.07 | $ | 0.04 | $ | (0.17 | ) | ||||||
|
Diluted
earnings (loss) per share
|
$ | (0.03 | ) | $ | 0.07 | $ | 0.04 | $ | (0.17 | ) | ||||||
|
2006
|
||||||||||||||||
|
Revenue
|
$ | 25,230 | $ | 27,247 | $ | 24,319 | $ | 29,329 | ||||||||
|
Net
income (loss)
|
$ | (3,147 | ) | $ | (234 | ) | $ | 6,093 | $ | 1,144 | ||||||
|
Basic
earnings (loss) per share
|
$ | (0.14 | ) | $ | (0.01 | ) | $ | 0.27 | $ | 0.05 | ||||||
|
Diluted
earnings (loss) per share
|
$ | (0.14 | ) | $ | (0.01 | ) | $ | 0.27 | $ | 0.05 | ||||||
In our opinion, the quarterly financial
information presented above reflects all adjustments that are necessary for a
fair presentation of the results of the quarterly periods
presented.
Note 24 - Comprehensive
Income (Loss)
US GAAP requires us to classify
unrealized gains and losses on equity securities as well as our foreign currency
adjustments as comprehensive income. The following table sets forth
our comprehensive income for the periods indicated (in thousands):
|
Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
unrealized gains/(losses) on investments
|
||||||||||||
|
Reclassification of realized
gain on available for sale investments included in net income
(loss)
|
$ | (773 | ) | $ | -- | $ | -- | |||||
|
Unrealized gain/(loss) on
available for sale investments
|
889 | (110 | ) | 11 | ||||||||
|
Net unrealized gains/(losses)
on investments
|
116 | (110 | ) | 11 | ||||||||
|
Net
income (loss)
|
(2,103 | ) | 3,856 | 989 | ||||||||
|
Cumulative
foreign currency adjustment
|
14,731 | 4,928 | (3,822 | ) | ||||||||
|
Accrued
pension service costs
|
(2,063 | ) | -- | -- | ||||||||
|
Comprehensive
income (loss)
|
$ | 10,681 | $ | 8,674 | $ | (2,822 | ) | |||||
Note 25 - Future Minimum
Rental Income
Real estate revenue amounted to $15.8
million $12.1 million, and $11.3 million for the years ended December 31, 2007,
2006 and 2005, respectively. For the year ended December 31, 2007,
rental revenue includes the revenue from Courtenay Central, Invercargill,
Rotorua, and Napier in New Zealand; Auburn, Belmont, Bundaberg, Maitland,
Newmarket and Waurn Ponds in Australia; the Union Square Theatre, the Village
East Cinema in New York; and the Royal George Theatre in Chicago.
Future minimum rental income under all
contractual operating leases is summarized as follows (dollars in
thousands):
|
Year
Ending December 31,
|
||||
|
2008
|
$ | 7,354 | ||
|
2009
|
6,023 | |||
|
2010
|
5,481 | |||
|
2011
|
4,908 | |||
|
2012
|
3,961 | |||
|
Thereafter
|
30,967 | |||
|
Total future minimum rental
income
|
$ | 58,694 | ||
Note 26 – Related Parties
and Transactions
Sutton Hill
Transaction
In 2000,
we entered into a transaction with Sutton Hill Capital L.L.C. (“SHC”), a related
party, designed to give us (i) operating control, through an operating lease, of
the 4 cinema “City Cinemas” theater chain in Manhattan, and (ii) the right to
enjoy any appreciation in the underlying real estate assets, though a fixed
price option to purchase these cinemas on an all or nothing basis in
2010. Two of the cinemas included in that chain – the Murray Hill
Cinema and the Sutton Cinema – have now been sold for redevelopment, under terms
that we believe preserve this basic structure and which will, if we exercise our
purchase option, give us the future benefit of any appreciation realized in
those
assets during the time they were under our operation and control. In
addition, during 2005 we acquired as a part of a tax-deferred exchange pursuant
to Section 1031 of the Internal Revenue Code, (i) from a third party, the fee
interest underlying the third of the four cinemas (the Cinemas 1, 2
& 3) and (ii) from SHC its tenant’s interest in the ground lease underlying
the Cinemas 1, 2 & 3. Set out below is a more detailed discussion
of the City Cinemas Transaction, and the subsequent modifications of that
transaction to provide for the release of the Murray Hill Cinema, the Sutton
Cinema and the Cinemas 1, 2 & 3 properties.
In July
2000, we acquired from SHC the Manhattan based City Cinemas circuit in a
transaction structured as a 10 year operating lease (the “City Cinemas Operating
Lease”) with options either to extend the lease for an additional 10 year term
or, alternatively, to purchase the improvements and certain of the real estate
assets underlying that lease (the “City Cinemas Purchase Option”). We
paid an option fee of $5.0 million, which will be applied against the purchase
price if we elect to exercise the City Cinemas Purchase Option. The
aggregate exercise price of the City Cinemas Purchase Option was originally
$48.0 million, and rent was calculated to provide an 8.25% yield to SHC (subject
to an annual modified cost of living adjustment) on the difference between the
exercise price and the $5.0 million option fee. Incident to that
transaction, we agreed to lend to SHC (the “City Cinemas Standby Credit
Facility”) up to $28.0 million, beginning in July 2007, all due and payable in
December 2010 (the principal balance and accrued interest on any such loan was
likewise to be applied against the option exercise price, in the event the
option was exercised). The interest rate on the City Cinemas Standby
Credit Facility was also fixed at 8.25%, subject to the same modified cost of
living adjustment used to calculate rent under the City Cinemas Operating
Lease.
We have
no legal obligation to exercise either the option to extend the City Cinemas
Operating Lease or the City Cinemas Purchase Option. However, our
recourse against SHC on the City Cinemas Standby Credit Facility is limited to
the assets of SHC which consist of, generally speaking, only the assets subject
to the City Cinemas Purchase Option. In this annual report, we refer
to the transaction memorialized by the City Cinemas Operating Lease, City
Cinemas Purchase Option and City Cinemas Standby Credit Agreement as the City
Cinemas Transaction. Because the City Cinemas Operating Lease is an
operating lease and since the City Cinemas Standby Credit Facility was, in our
view, adequately secured, no asset or liability was established on our balance
sheet at the time of the City Cinemas Transaction other than the option fee,
which has been deferred and is being amortized over the 10 year period of the
lease.
SHC is
indirectly owned by Messrs. James J. Cotter and Michael Forman. Mr.
Cotter is our Chairman, Chief Executive Officer and controlling
stockholder. Mr. Forman is a major holder of our Class A
Stock. As the transaction was a related party transaction, it was
reviewed and approved by a committee of our Board of Directors comprised
entirely of independent directors.
Since we
entered into the City Cinemas Transaction, two of the cinema properties involved
in that transaction have been sold to third parties for redevelopment: the
Murray Hill Cinema and the Sutton Cinema. These purchasers paid $10.0
million and $18.0 million respectively for these two properties, which included
the cost of acquiring the fee interest in these properties held by Nationwide
Theatres (an affiliate of SHC), the leasehold interest held by SHC, and our
rights under the City Cinemas Operating Lease and the City Cinemas Purchase
Option. Since we believed that a sale of these properties at these
prices was more beneficial to us than continuing to operate them as cinemas, and
since the original City Cinemas Transaction did not contemplate a piece-meal
release of properties or give us the right to exercise our City Cinemas Purchase
Option either (i) on a piece-meal basis or (ii) prior to July 2010, we worked
with SHC to devise a transaction that would allow us to dispose of our
collective interests in these properties while preserving the fundamental
benefits of the transaction for ourselves and SHC. Included among the
benefits to be preserved by SHC was the deferral of any capital gains tax with
respect to the transfer of the remaining properties until 2010 and assurances
that the various properties involved in the City Cinemas Transaction would only
be acquired by us on an “all or nothing” basis. Included among the
benefits to be preserved for us was the right to get the benefit of 100% of any
appreciation in the properties underlying the City Cinemas Operating Lease
between the date of that lease (July 2000) and the date any such properties were
sold,
provided that we ultimately exercised our purchase rights under the City Cinemas
Purchase Option.
As a
result of these negotiations and the sale of these two properties, our rent
under the City Cinemas Operating Lease was reduced by approximately $1.9 million
per annum, the exercise price of the City Cinemas Purchase Option was reduced
from $48.0 million to $33.0 million, and our funding obligation under the City
Cinemas Standby Line of Credit was reduced from $28.0 million to $13.0
million. In addition, we received in consideration of the release of
our interest in the Murray Hill Cinema a cash payment of $500,000. In
consideration of the transfer of our interest in the Sutton Cinema we received
(i) a $13.0 million purchase money promissory note (the Sutton Purchase Money
Note”) secured by a first mortgage on the Sutton Cinema property (the “Sutton
Purchase Money Mortgage”), (ii) a right to acquire up to a 25% interest in the
special purpose entity formed to redevelop the Sutton Cinema property for a
prorated capital contribution (the “Sutton Reinvestment Option”) or to receive
instead an in lieu fee of $650,000, and (iii) the right to operate the Sutton
Cinema until such time as the Sutton Purchase Money Note was
paid. The Sutton Purchase Money Note was due and payable on October
21, 2005, and carried interest for the first year at 3.85%, increasing in the
second year to 8.25%. On September 14, 2004, the Sutton Purchase
Money Note was prepaid in full and we exercised our Sutton Reinvestment
Option.
In
keeping with the “all or nothing” nature of our rights under the City Cinemas
Purchase Option, we agreed to use the principal proceeds of the Sutton Purchase
Money Promissory Note to fund our remaining $13.0 million obligation under the
City Cinemas Standby Credit Facility. We have also agreed that the
principal amount of the City Cinemas Standby Credit Facility will be forgiven if
we do not exercise our purchase rights under the City Cinemas Purchase
Option. Accordingly, if we exercise our rights under the City Cinemas
Purchase Option to purchase the remaining City Cinemas assets, we will be
acquiring the remaining assets subject to the City Cinemas Operating Lease for
an additional cash payment of $15.0 million, (offsetting against the current
$33.0 million exercise price, the previously paid $5.0 million deposit and the
$13.0 million principal amount of the City Cinemas Standby Credit Facility) and
will receive, in essence, the benefit of 100% of the appreciation in all of the
properties initially subject to the City Cinemas Operating Lease between July
2000, and the date such properties were either disposed of or acquired by us
pursuant to the City Cinemas Purchase Option. If we do not exercise
our option to purchase, then the City Cinemas Credit Facility will be forgiven,
and we will not get the benefit of such appreciation. Immediately
following the sale of the Sutton Cinema, the remaining properties consisted of
(i) the Village East Cinema, which is located at the corner of 2nd Avenue
and 11th Street
in Manhattan, on a 27 year land lease, and (ii) the Cinemas 1, 2 & 3, which
is located on 3rd Avenue
between E. 59th and E.
60th
Streets in Manhattan and which was likewise at that time on a long term ground
lease.
Since the
Murray Hill Cinema sale transaction was structured as a release of our leasehold
interest in the Murray Hill Cinema, we did not recognize any gain or loss for
either book or tax purposes, other than the $500,000 in lieu fee, which was
recognized as non-operating income. We likewise did not book any gain
or loss on the disposition of the Sutton Cinema for book
purposes. However, we did recognize gain in the amount of
approximately $13.0 million for state and federal tax purposes, which gain was
offset against net operating losses. Notwithstanding this offset, we
were still liable for alternative minimum tax on the
transaction. That alternative minimum tax will, however, be offset
against our future tax liabilities. In the event that we decide not
to exercise our City Cinemas Purchase Option, we would at that time recognize a
$13.0 million loss for tax purposes.
Following
the release of our leasehold interest in the Murray Hill Cinema and disposition
of the Sutton Cinema in 2003, we decreased the value of the option fee in the
City Cinemas Purchase Option agreement by $890,000. In addition, in
October 2003 we recorded our loan commitment under the City Cinemas Standby
Credit Facility as a payable in our long-term debt on the Consolidated Balance
Sheet.
In
September 2004, simultaneous with the drawdown by SHC of the remaining $13.0
million under the Standby Credit Facility, SHC lent us $5.0
million. This amount was used principally to fund our purchase of the
25% membership interest in limited liability company that was developing the
Sutton Cinema site, and for working capital purposes. The loan bears
interest currently at 9.26%, payable monthly, with principal due and payable on
July 28, 2008.
On June
1, 2005, we acquired from a third party the fee interest and the landlord’s
interest in the ground lease underlying our leasehold estate in the Cinemas 1, 2
& 3. In consideration of the fact that there was some uncertainty
as to whether the opportunity to acquire this fee interest was an asset of SHC
(as the tenant of the ground lease estate and the owner of the improvements
located upon the land) or an asset of our Company, a compromise was reached
whereby we agreed to grant to SHC an option to acquire – at cost – up to a 25%
membership interest in the special purpose entity that we formed to acquire the
fee interest – Sutton Hill Properties, LLC.
On
September 19, 2005, we acquired from SHC its’ “tenant’s interest” in the ground
lease underlying our leasehold estate in the Cinemas 1, 2 &
3. The purchase price of the “tenant’s interest” was $9.0 million,
and was paid in the form of a 5-year unsecured purchase money promissory note,
bearing interest at 8.25%, interest payable monthly with principal payable
on December 31, 2010 (the “Purchase Money Promissory
Note”). This interest is also held by Sutton Hill Properties, LLC,
the same special purpose entity that acquired the fee interest in the
property. Accordingly, SHC’s option to buy into Sutton Hill
Properties, LLC, is, in essence, a right to buy-back into both the fee interest
acquired from the unrelated third party and the leasehold interest acquired from
SHC. Following the purchase of the “tenant’s interest,” we decreased
the value of the option fee in the City Cinemas Purchase Option agreement by
$1.3 million. In June 2007, we acquired the building and improvements
constituting the Cinemas 1, 2 & 3 from SHC for $100,000.
As a
result of the acquisition of SHC’s tenant’s interest in the ground lease, the
City Cinemas Operating Lease was amended to reduce the rent by an amount equal
to the interest payable under the Purchase Money Promissory Note, and the
exercise price on the City Cinemas Purchase Option was likewise reduced by $9.0
million. Consequently, an exercise of our option to purchase the
Village East Cinema would require a cash payment on our part of $6.0
million.
Each of
the above modification transactions involved was reviewed by a committee of the
independent directors of the Board of Directors. In each case, the
independent directors of the applicable committee have found the transaction to
be fair and in the best interests of our Company and our public
stockholders.
Reflecting
the disposition of the Murray Hill Cinema and the Sutton Cinema, the acquisition
of the fee, the landlord’s interest in the ground lease and the tenant’s
interest in the ground lease underlying the Cinemas 1, 2 & 3, and the
amendments to date with respect to the City Cinemas Transaction, which has
reduced our rent expense for this property to zero. For the years
ended December 31, 2007, 2006 and 2005, rent expense to SHC under the City
Cinemas Operating Lease was $491,000, $495,000, and $1.0 million,
respectively. We have funded our entire $13.0 million obligation
under the City Cinemas Standby Credit Facility. We also have the
option to purchase in July 2010 the remaining assets under the City Cinemas
Operating Agreement (SHC’s long-term leasehold interests in the Village East
Cinema and the improvements comprising this cinema) for an additional payment of
$6.0 million. As separate matters, we currently owe SHC $5.0 million
(due July 28, 2008) with respect to the borrowing used principally to finance
the acquisition of our interest in the limited liability company currently
developing the Sutton Cinema site and $9.0 million on the Purchase Money
Promissory Note (due December 31, 2010), for an aggregate liability of $14.0
million.
Reflecting
the release of the Murray Hill Cinema and the sale of our interest in the Sutton
Cinema, we expensed from the $5.0 million option fee for book purposes $890,000
related to such sales. In connection with the purchase of SHC’s
interest in the Cinemas 1, 2 & 3 property, we allocated $1.3 million of this
option amount to the purchase price of that interest. Accordingly, at
the present time, we carry only $441,000 of the original $5.0 million option fee
as a net asset on our balance sheet.
The
option granted to SHC to buy up to a 25% interest in Sutton Hill Properties, LLC
had been valued at $3.7 million at December 31, 2006 and is reflected in our
other liabilities on our balance sheet (see Note 15 - Other
Liabilities). On June 28, 2007, SHC exercised this option,
paying the option exercise price through the application of their $3.0 million
deposit plus the assumption of its proportionate share of SHP’s liabilities
giving it a 25% non-managing membership interest in SHP.
OBI Management
Agreement
Pursuant to a Theater Management
Agreement (the “Management Agreement”), our live theater operations are managed
by OBI LLC (“OBI Management”), which is wholly owned by Ms. Margaret Cotter who
is the daughter of James J. Cotter and a member of our Board of
Directors.
The
Management Agreement generally provides that we will pay OBI Management a
combination of fixed and incentive fees which historically have equated to
approximately 19% of the net cash flow received by us from our live theaters in
New York. Since the fixed fees are applicable only during such
periods as the New York theaters are booked, OBI Management receives no
compensation with respect to a theater at any time when it is not generating
revenues for us. This arrangement provides an incentive to OBI
Management to keep the theaters booked with the best available shows, and
mitigates the negative cash flow that would result from having an empty
theater. In addition, OBI Management manages our Royal George live
theater complex in Chicago on a fee basis based on theater cash
flow. In 2007, OBI Management earned $377,000 (including $39,000 for
managing the Royal George) which was 18.8% of net live theater cash flows for
the year. In 2006, OBI Management earned $470,000 (including $43,000
for managing the Royal George) which was 23.6% of net live theater cash flows
for the year. In 2005, OBI Management earned $533,000 (including
$74,000 for managing the Royal George) which was 20.7% of net live theater cash
flows for the year. In each year, we reimbursed travel related
expenses for OBI Management personnel with respect to travel between New York
City and Chicago in connection with the management of the Royal George
complex.
OBI
Management conducts its operations from our office facilities on a rent-free
basis, and we share the cost of one administrative employee of OBI
Management. Other than these
expenses and travel-related expenses for OBI Management personnel to travel to
Chicago as referred to above, OBI Management is responsible for all of its costs
and expenses related to the performance of its management
functions. The Management Agreement renews automatically each year
unless either party gives at least six months’ prior notice of its determination
to allow the Management Agreement to expire. In addition, we may
terminate the Management Agreement at any time for cause.
Live Theater Play
Investment
From time to time, our officers and
directors may invest in plays that lease our live theaters. During
2004, an affiliate of Mr. James J. Cotter and Michael Forman have a 25%
investment in the play, I Love
You, You’re Perfect, Now Change, playing in one of our auditoriums at our
Royal George Theatre. We similarly had a 25% investment in the
play. The play has earned for us $27,000, $25,000 and $35,000 during
the years ended December 31, 2007, 2006 and 2005, respectively. This
investment received board approval from our Conflicts Committee on August 12,
2002.
The play
STOMP has been playing in our Orpheum Theatre since prior to the time we
acquired the theater in 2001. Messrs. James J. Cotter and Michael
Forman own an approximately 5% interest in that play, an interest that they have
held since prior to our acquisition of the theater.
Note 27 – Subsequent
Events
Consolidated
Cinemas. On October 8, 2007, we entered into agreements to
acquire leasehold interests in 15 cinemas then owned by Pacific Theatres
Exhibition Corp. and its’ affiliates. The cinemas, which are located
in the United States, contain 181 screens with annual revenue of approximately
$78.0 million. The aggregate purchase price of the cinemas and
related assets is $69.3 million. The acquisition was made through a
wholly owned subsidiary of RDI and was financed principally by a combination of
debt financing from GE Capital Corporation and seller financing. This
acquisition closed on February 22, 2008.
Taringa
Properties. Since the close of 2007, we have acquired or
entered into agreements to acquire approximately 50,000 square foot of property
in Taringa, Australia, comprising four contiguous properties, which we intend to
develop. The aggregate purchase price of these properties is $11.3
million (AUS$12.9 million), of which $1.7 million (AUS$2.0 million) relates to
the three properties that have been acquired and $9.6 million (AUS$10.9 million)
relates to the one property that is still under contract which is subject to
certain rezoning conditions.
Schedule
II – Valuation and Qualifying Accounts
|
Description
|
Balance
at beginning of year
|
Additions
charged to costs and expenses
|
Deductions
|
Balance
at end of year
|
||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
Year-ended December 31, 2007 –
Allowance for doubtful accounts
|
$ | 473 | $ | 62 | $ | 153 | $ | 382 | ||||||||
|
Year-ended December 31, 2006 –
Allowance for doubtful accounts
|
$ | 416 | $ | 247 | $ | 190 | $ | 473 | ||||||||
|
Year-ended December 31, 2005 –
Allowance for doubtful accounts
|
$ | 319 | $ | 183 | $ | 86 | $ | 416 | ||||||||
|
Tax
valuation allowance
|
||||||||||||||||
|
Year-ended December 31, 2007 –
Tax valuation allowance
|
$ | 56,218 | $ | 992 | $ | -- | $ | 57,210 | ||||||||
|
Year-ended December 31, 2006 –
Tax valuation allowance
|
$ | 58,584 | $ | -- | $ | 2,366 | $ | 56,218 | ||||||||
|
Year-ended December 31, 2005 –
Tax valuation allowance
|
$ | 59,180 | $ | -- | $ | 596 | $ | 58,584 | ||||||||
|
Non-current
tax liability for the year ended December 31, 2007
|
$ | 4,509 | $ | 908 | $ | -- | $ | 5,417 | ||||||||
Regarding
the allowance for doubtful accounts, certain prior year amounts were
reclassified to conform to the current year presentation.
Item 9 –
Change in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A —
Controls and Procedures
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Securities Exchange
Act Rules 13a-15(f), including maintenance of (i) records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets, and (ii) policies and procedures that provide
reasonable assurance that (a) transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, (b) our
receipts and expenditures are being made only in accordance with authorizations
of management and our Board of Directors and (c) we will prevent or timely
detect unauthorized acquisition, use, or disposition of our assets that could
have a material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of the inherent limitations of any system
of internal control. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses of judgment and
breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper overriding of
controls. As a result of such limitations, there is risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
criteria established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission. Based on our
evaluation under the COSO framework, our management concluded that our internal
control over financial reporting was effective as of December 31,
2007. The effectiveness of internal
control over financial reporting as of December 31, 2007 has been audited
by Deloitte & Touche LLP, an independent registered public accounting
firm, as stated in their report which is included herein.
Disclosure
Controls and Procedures
We have
formally adopted a policy for disclosure controls and procedures that provides
guidance on the evaluation of disclosure controls and procedures and is designed
to ensure that all corporate disclosure is complete and accurate in all material
respects and that all information required to be disclosed in the periodic
reports submitted by us under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods and in the manner
specified in the Securities and Exchange Commission’s rules and forms. As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures. A Disclosure Committee consisting of the principal accounting
officer, general counsel, chief communication officer, senior officers of each
significant business line and other select employees assisted the Chief
Executive Officer and the Chief Financial Officer in this evaluation. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as required
by the Securities Exchange Act Rule 13a-15(c) as of the end of the period
covered by this report.
Changes
in Internal Controls Over Financial Reporting
No
changes in internal control over financial reporting occurred during the last
fiscal quarter that have materially affected, or are likely to materially
affect, our internal control over financial reporting.
-117-
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of Reading International,
Inc. Los Angeles, California
We have
audited the internal control over financial reporting of Reading International,
Inc. (the "Company") as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules as of and for the year ended December 31, 2007 of
the Company and our report dated March 28, 2008, expressed an unqualified
opinion on those financial statements and financial statement schedules and
included an explanatory paragraph regarding the Company's adoption of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109.
/s/ DELOITTE & TOUCHE LLP
Deloitte
& Touche LLP
Los
Angeles, California
March 28,
2008
PART
III
Items
10, 11, 12, 13 and 14
Information
required by Part II (Items 10, 11, 12, 13 and 14) of this From 10-K is herby
incorporated by reference from the Reading International, Inc.’s definitive
Proxy Statement for its 2007 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year.
PART
IV
Item 15 – Exhibits,
Financial Statement Schedules.
(a) The
following documents are filed as a part of this report:
1. Financial
Statements
The following financial statements are
filed as part of this report under Item 8 “Financial Statements and
Supplementary Data.”
|
Description
|
Page
|
|
2. Financial Statement Schedules for the years
ended December 31, 2007, 2006 and 2005
|
|
|
Page
|
|
|
(b) Exhibits
Required by Item 601 of Regulation S-K
|
|
|
See
Item (a)3. above.
|
|
|
(c) Financial
Statement Schedule
|
|
|
See
Item (a)2. above.
|
|
Following are consolidated financial statements and
notes of 205-209 EAST 57th STREET
ASSOCIATES, LLC for the periods indicated. We are required to include
in our Report on Form 10-K audited financial statements for the year ended
December 31, 2007 and 2006 and unaudited financial statements for the year ended
December 31, 2005.
205-209
East 57th Street
Associates, LLC
Balance
Sheets
December
31, 2007 and 2006
(U.S.
dollars in thousands)
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Real
Estate:
|
||||||||
|
Land
|
$ | 780 | $ | 5,230 | ||||
|
Construction
and development costs
|
1,641 | 12,950 | ||||||
|
Residential
manager’s apartment (net of depreciation)
|
659 | -- | ||||||
|
Negotiable
certificates – real estate tax abatements
|
46 | 308 | ||||||
|
Total
real estate
|
3,126 | 18,488 | ||||||
|
Other
Assets:
|
||||||||
|
Cash
and cash equivalents
|
1,933 | 4,449 | ||||||
|
Security
deposits
|
8 | 7 | ||||||
|
Prepaid
income taxes
|
347 | -- | ||||||
|
Other
assets
|
18 | -- | ||||||
|
Total
other assets
|
2,306 | 4,456 | ||||||
|
Total
assets
|
$ | 5,432 | $ | 22,944 | ||||
|
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 440 | $ | 340 | ||||
|
Due
to affiliate
|
417 | 236 | ||||||
|
Deferred
rent
|
320 | -- | ||||||
|
Income
taxes payable
|
-- | 860 | ||||||
|
Retainage
payable
|
-- | 751 | ||||||
|
Total liabilities
|
1,177 | 2,187 | ||||||
|
Commitments
and Contingencies (Note 12)
|
||||||||
|
Members’
Equity
|
4,255 | 20,757 | ||||||
|
Total
Liabilities And Members’ Equity
|
$ | 5,432 | $ | 22,944 | ||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Statements
of Operations
For
The Three Years Ended December 31, 2007, 2006 and 2005
(U.S.
dollars in thousands)
|
Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
(Unaudited)
|
||||||||||
|
Revenue:
|
||||||||||||
|
Sales
– condominium units
|
$ | 25,401 | $ | 117,329 | $ | -- | ||||||
|
Contract
termination income
|
-- | 239 | -- | |||||||||
|
Dividends
and interest
|
168 | 140 | -- | |||||||||
|
Rental
income
|
104 | -- | -- | |||||||||
|
Total revenue
|
25,673 | 117,708 | -- | |||||||||
|
Expenses:
|
||||||||||||
|
Costs
of sales of condominium units
|
16,987 | 75,382 | -- | |||||||||
|
Selling
costs
|
1,369 | 6,523 | -- | |||||||||
|
Marketing
and advertising
|
184 | 740 | 500 | |||||||||
|
Sponsor
common charges
|
70 | 421 | -- | |||||||||
|
Utilities
|
9 | 90 | -- | |||||||||
|
Contributions
|
- | 6 | -- | |||||||||
|
Depreciation
|
21 | -- | -- | |||||||||
|
Miscellaneous
|
46 | 5 | -- | |||||||||
|
New
York City unincorporated business tax
|
182 | 1,435 | -- | |||||||||
|
Total expenses
|
18,868 | 84,602 | 500 | |||||||||
|
Net
income (loss)
|
$ | 6,805 | $ | 33,106 | $ | (500 | ) | |||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Statements
of Changes in Members’ Equity
For
the Three Years Ended December 31, 2007, 2006 and 2005
(U.S.
dollars in thousands)
|
PGA
Clarett 1, LLC
|
PGA
Clarett 2, LLC
|
PGA
Clarett 3, LLC
|
PGA
Clarett 4, LP
|
Clarett
Partners, LLC
|
CC
Sutton Manager, LLC
|
Citadel
Cinemas, Inc.
|
Total
|
|||||||||||||||||||||||||
|
Members
equity – January 1, 2005 (Unaudited)
|
1,341 | 1,306 | 139 | 1,131 | 65 | 2,546 | 2,177 | 8,705 | ||||||||||||||||||||||||
|
Member
contributions
|
323 | 432 | 387 | 153 | 22 | 842 | 719 | 2,878 | ||||||||||||||||||||||||
|
Assignment
of interest
|
115 | -- | (325 | ) | 210 | -- | -- | -- | -- | |||||||||||||||||||||||
|
Net
loss
|
(72 | ) | (75 | ) | (23 | ) | (55 | ) | (4 | ) | (146 | ) | (125 | ) | (500 | ) | ||||||||||||||||
|
Members
equity – December 31, 2005 (Unaudited)
|
1,707 | 1,663 | 178 | 1,439 | 83 | 3,242 | 2,771 | 11,083 | ||||||||||||||||||||||||
|
Member
distributions
|
(2,813 | ) | (2,739 | ) | (293 | ) | (2,372 | ) | (2,503 | ) | (6,854 | ) | (5,858 | ) | (23,432 | ) | ||||||||||||||||
|
Net
income
|
1,355 | 1,319 | 141 | 1,143 | 11,188 | 9,684 | 8,276 | 33,106 | ||||||||||||||||||||||||
|
Members
equity – December 31, 2006 (Audited)
|
$ | 249 | $ | 243 | $ | 26 | $ | 210 | $ | 8,768 | $ | 6,072 | $ | 5,189 | $ | 20,757 | ||||||||||||||||
|
Member
distributions
|
(280 | ) | (272 | ) | (29 | ) | (236 | ) | (9,846 | ) | (6,817 | ) | (5,827 | ) | (23,307 | ) | ||||||||||||||||
|
Net
income
|
82 | 79 | 8 | 69 | 2,875 | 1,990 | 1,702 | 6,805 | ||||||||||||||||||||||||
|
Members
equity – December 31, 2007 (Audited)
|
$ | 51 | $ | 50 | $ | 5 | $ | 43 | $ | 1,797 | $ | 1,245 | $ | 1,064 | $ | 4,255 | ||||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Statements
of Cash Flows
For
the Three Years Ended December 31, 2007, 2006 and 2005
(U.S.
dollars in thousands)
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
(Unaudited)
|
||||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
income (loss)
|
$ | 6,805 | $ | 33,106 | $ | (500 | ) | |||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Costs
of sales of condominium units
|
16,987 | 75,382 | -- | |||||||||
|
Amortization
of deferred rent
|
(103 | ) | -- | -- | ||||||||
|
Depreciation
|
21 | -- | -- | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Acquisition of
land
|
-- | -- | (2,160 | ) | ||||||||
|
Additions to land, construction
and development costs
|
(1,223 | ) | (19,689 | ) | (38,446 | ) | ||||||
|
Inclusionary air
rights
|
-- | -- | (2,500 | ) | ||||||||
|
Acquisition of negotiable
certificates
|
-- | (643 | ) | (863 | ) | |||||||
|
Increase in prepaid
taxes
|
(347 | ) | -- | -- | ||||||||
|
Increase in other
assets
|
(17 | ) | -- | -- | ||||||||
|
Decrease (increase) in security
deposits
|
-- | 58 | (36 | ) | ||||||||
|
Increase (decrease) in accounts
payable and accrued expenses
|
100 | (2,734 | ) | 1,932 | ||||||||
|
(Decrease) increase in income
taxes payable
|
(860 | ) | 860 | -- | ||||||||
|
(Decrease) increase in retainage
payable
|
(751 | ) | (953 | ) | 1,675 | |||||||
|
Increase in due to
affiliates
|
179 | 263 | -- | |||||||||
|
Net
cash provided by (used in) operating activities
|
20,791 | 85,650 | (40,898 | ) | ||||||||
|
Cash
Flows from Financing Activities
|
||||||||||||
|
Proceeds from construction
loan
|
-- | 19,224 | 38,130 | |||||||||
|
Repayment of construction
loan
|
-- | (77,156 | ) | -- | ||||||||
|
Payment of mortgage loan
payable
|
-- | -- | -- | |||||||||
|
(Payments) proceeds from loan
payable Clarett Capital
|
-- | -- | (1 | ) | ||||||||
|
Member
distributions
|
(23,307 | ) | (23,432 | ) | -- | |||||||
|
Member
contributions
|
-- | -- | 2,877 | |||||||||
|
Net
cash (used in) provided by financing activities
|
(23,307 | ) | (81,364 | ) | 41,006 | |||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,516 | ) | 4,286 | 108 | ||||||||
|
Cash
and cash equivalents – beginning of year
|
4,449 | 163 | 55 | |||||||||
|
Cash
and cash equivalents – end of year
|
$ | 1,933 | $ | 4,449 | $ | 163 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid during the year
for:
|
||||||||||||
|
Interest
which was capitalized
|
$ | -- | $ | 4,244 | $ | 1,163 | ||||||
|
Income
taxes
|
$ | 1,390 | $ | 575 | $ | -- | ||||||
The
accompanying notes are an integral part of these financial
statements.
205-209
East 57th Street
Associates, LLC
Notes
to Financial Statements
December
31, 2007
Note 1 - Organization and
Business Purpose
205-209
East 57th Street
Associates, LLC (“the Company”) was formed as a limited liability company under
the laws of the State of Delaware. The Company was formed to acquire,
finance, develop, own, operate, lease and sell property located at 205-209 East
57th
Street, New York, New York. The Company completed construction of the
property, known as “Place 57”, a 143,000 square foot, thirty-six story building
comprised of 68 residential condominium units and one commercial condominium
unit.
From
September 3, 2003 (the “inception date”) through September 14, 2004 the Company
was a single member limited liability company with Clarett Capital, LLC
(“Clarett Capital”) as the sole member. Effective September 14, 2004,
the operating agreement (“the Agreement”) was amended and restated to provide
for the admission of the following new members: Citadel Cinemas, Inc.
(“Citadel”) 25%, CC Sutton Manager, LLC (“CC Sutton”) 29.25%, PGA
Clarett 1, LLC (“PGA 1”) 8.352%, PGA Clarett 2, LLC (“PGA 2”) 15%, PGA Clarett
3, LLC (“PGA 3”) 21.648% and Clarett Partners, LLC (“Clarett Partners”)
0.75%.
Effective
December 30, 2004 PGA Clarett 1, LLC assigned 28.820% of its percentage interest
and PGA 3, assigned 80.791% of its percentage interest to a new member, PGA
Clarett 4, LP (“PGA 4”).
Net
income or loss and distributions are allocated to the members in accordance with
the terms of the Company’s operating agreement. The members of a
limited liability company are generally not individually liable for the
obligations of the limited liability company.
Note 2 - Summary of
Significant Accounting Policies
(a) Income
Taxes
The
Company was formed as a limited liability company and has elected to be taxed as
a partnership. Components of the Company’s net income or loss are
taxable to the members. Accordingly, no provision for federal or
state income taxes is provided for in the accompanying financial
statements.
The
construction project is located in the City of New York where an entity level
income tax is imposed on unincorporated businesses, which, for the year ended
December 31, 2007 and 2006 amounted to $182,502 and $1,435,000,
respectively.
(b) Use
of Estimates in Financial Statement Presentation
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies, if any, at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates include the allocation of costs to
units sold, determination of remaining costs to complete, and estimated sales
prices of unsold units.
(c) Revenue
Recognition
Revenue
has been recognized upon the closing of each condominium unit.
(d) Marketing
and Advertising
Marketing
and promotion costs are charged to operations when incurred. The
Company expensed marketing and promotion costs of $184,122, $740,492, and
$500,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
(e) Capitalized
Costs
The
Company capitalizes all costs associated with the development
project. Capitalized costs include, but are not limited to,
construction and development costs, construction period interest, real estate
taxes and architect, development and professional fees.
(f) Costs
of Sales of Condominium Units
In
connection with the sale of condominium units during 2007 and 2006, land,
capitalized construction and development costs and negotiable certificates for
real estate tax abatements have been expensed based on the total costs incurred
and the estimated costs to complete, multiplied by the relative sales value of
units sold in 2007 and 2006, respectively. In addition, included in
costs of sales of condominium units for the year ended December 31, 2007 is the
imputed fair value for the rental of the residential manager unit of
$423,506.
(g) Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist
of an interest-bearing money fund account.
|
(h)
|
Depreciation
|
Depreciation
of the residential manager’s apartment is provided using the straight-line
method over the estimated useful life of forty years.
Note 3 -
Land
At
December 31, 2007 and 2006, land was comprised of the following (dollars in
thousands):
|
Year Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Direct
purchase cost
|
$ | 15,339 | $ | 15,339 | ||||
|
Air
rights
|
6,925 | 6,910 | ||||||
|
Mortgage
recording tax
|
1,953 | 1,953 | ||||||
|
Brokerage
fees
|
500 | 500 | ||||||
|
Demolition
costs
|
600 | 600 | ||||||
|
Title
insurance
|
256 | 256 | ||||||
|
Total
land
|
25,573 | 25,558 | ||||||
|
Less:
costs allocated to condominium units sold
|
24,611 | 20,328 | ||||||
|
Less:
cost allocated to residential manager’s apartment
|
182 | -- | ||||||
|
Net
land value
|
$ | 780 | $ | 5,230 | ||||
Note 4 - Construction and
Development Costs
Construction
and development costs include direct and indirect construction
costs. Direct construction costs (“Hard costs”) include those costs
directly related to the construction of the development
project. Indirect costs (“Soft costs”) include costs that have been
capitalized, such as construction period interest and financing costs, real
estate and recording taxes, insurance, development fees and architect
fees.
At
December 31, 2007 and 2006, construction and development costs are comprised of
the following (dollars in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
(Unaudited)
|
||||||||||
|
Hard
costs
|
$ | 49,426 | $ | 48,355 | $ | 34,597 | ||||||
|
Soft
costs
|
18,588 | 18,451 | 12,570 | |||||||||
|
Total
construction and development costs
|
68,014 | 66,806 | 47,167 | |||||||||
|
Less
: costs allocated to condominium units sold
|
65,887 | 53,856 | 47,167 | |||||||||
|
Less: cost
allocated to residential manager’s apartment
|
486 | -- | -- | |||||||||
|
Net
construction and development costs
|
$ | 1,641 | $ | 12,950 | $ | 47,167 | ||||||
Note 5 - Negotiable
Certificates
In
December 2003, the Company entered into an agreement to purchase 61 negotiable
certificates under Section 421a of the New York State Real Property tax law in
order to obtain real estate tax abatements. Section 421a provides that property
constructed north of 14th Street
in Manhattan, on vacant or underutilized land, is eligible for partial real
estate tax abatements. Abatements are for ten years and provide for
limited real estate tax reductions. The agreement contained an option
to purchase an additional seven certificates, which the Company exercised in
March 2004. The final purchase price was $863,083, which is equal to
the sum of $793,083 for the original 61 certificates plus $10,000 for each of
the seven additional certificates.
In
February 2006, the Company purchased an additional 17 negotiable 421a
certificates for $340,000.
In May
2006, the Company paid a Preliminary Certificate of Eligibility Fee to The City
of New York for $302,681, which is required to be paid in conjunction with these
negotiable certificates.
At
December 31, 2007 and 2006 negotiable certificates is comprised of the following
(dollars in thousands):
|
Year Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
421a
certificates
|
$ | 1,203 | $ | 1,203 | ||||
|
Preliminary
certificate of eligibility fee
|
303 | 303 | ||||||
|
Total
negotiable certificates
|
1,506 | 1,506 | ||||||
|
Less
: costs allocated to condominium units sold
|
1,449 | 1,198 | ||||||
|
Less: cost
allocated to residential manager’s apartment
|
11 | -- | ||||||
|
Net
negotiable certificates
|
$ | 46 | $ | 308 | ||||
Note 6 - Air
Rights
In 2003,
the Company purchased 25,550 square feet of inclusionary air rights in order to
generate an inclusionary building bonus (air rights) under The Inclusionary
Housing Program, as defined in the Zoning Resolution of the City of New
York. The purchase price was $2,499,750, which has been capitalized
and is included in land.
On July
21, 2004, the Company entered into an exchange agreement with Joseph E. Marx
Company, Inc. (“Marx”) to exchange like-kind property. The Company
exchanged previously acquired land located at 957 Third Avenue, New York, New
York, plus cash of $1,300,000, for excess floor area rights (“air rights”)
having an agreed value of $4,410,000. The value of the air rights has
been capitalized and is included in land.
127,391
square feet out of a total of 128,560 square feet of Inclusionary air rights
were utilized to build the condominium development project. The
Company estimates that the remaining 1,169 square feet of development air rights
will not be able to be sold separately and, accordingly, are included in costs
of sales of condominium units.
Note
7 - Construction Loan Payable
On
September 14, 2004, the Company obtained nonrecourse financing in the form of a
$80,602,000 construction loan facility (the “Construction Project Loan”) from
Corus Bank N.A. (“Construction Lender”) for the development of the property
located at 205-209 East 57th Street
and 957 Third Avenue, New York, New York.
The
Construction Project Loan was comprised of three separate facilities: a
$14,300,000 acquisition loan to retire the $13,000,000 existing mortgage with
Citadel and to finance the payment of $1,300,000 made in connection with the
acquisition of the air rights from Marx (Note 6), a $44,133,805 building loan
facility and a $22,168,195 soft cost loan facility.
Each loan
component was evidenced by a separate note (the “Notes”) and was secured by the
land, including improvements and equipment thereon, a security agreement and the
assignment of leases and rents. The loan was guaranteed by Clarett
Capital.
The
building loan facility was required to be used to pay for certain hard
construction costs incurred in connection with the construction, conversion and
completion of the condominium project. The soft cost facility was
required to be used for soft costs incurred in connection with the project, such
as interest, real estate taxes and certain other fees.
The
$14,300,000 acquisition loan was separated into two tranches each of which
accrued interest at different rates. Tranche A, in the amount of
$5,598,000, bore interest per annum at the greater of 5% or a defined
three-month LIBOR rate plus 3.5%. Tranche B, in the amount of
$8,702,000, bore interest at the rate of 12% per annum and could not be repaid
until the entire balance of the building loan facility, the Tranche A and
Tranche 1 (see below) loans had been paid. The building loan facility
bore interest per annum at the greater of 5% or a defined three-month LIBOR rate
plus 3.5%.
The soft
cost loan facility was comprised of two tranches, each of which accrued at
different interest rates. Tranche 1, in the amount of $20,092,195,
bore interest per annum at the greater of 5% or a defined three-month LIBOR rate
plus 3.5%. Tranche 2, in the amount of $2,076,000, bore interest at
the rate of 12% per annum and could not be repaid until the entire balance of
the building loan facility, the Tranche A and Tranche 1 loans had been
paid.
Construction
loan interest incurred by the Company for the years ended December 31, 2006 and
2005 amounted to $3,846,469 and $2,776,884,
respectively. Construction loan interest was capitalized as
construction and development costs throughout the construction
period.
The
Construction Project Loan agreement provided for the outstanding principal
balance of the loan to be paid to the Lender upon the closing of sale of each
residential condominium unit in an amount equal to the greater of 100% of the
Net Sales Proceeds from each unit, as defined, or 92% of the contract sales
price for the unit.
In the
event of the sale of any retail units, the Construction Project Loan principal
to be paid was to be the greater of 100% of the Net Sales Proceeds, as defined,
or $1,083 per square foot of the ground floor of the retail unit
sold.
During
the year ended December 31, 2006, the Company fully repaid the entire
outstanding principal balance of the Construction Loan, which amounted to
$77,156,151 using proceeds from the sale of the condominium units.
The
Company was obligated to pay an exit fee to the Construction Lender in the
amount of $403,010 (the “Exit Fee”). Portions of this fee were
required to be paid upon the closing of the sale of each condominium unit at a
rate of $15,000 per unit until the Exit Fee was paid in full. This
obligation was paid in full during 2006.
Note 8 - Retainage
Payable
The
construction agreement requires retainage of not less than ten percent of the
costs incurred to the contractor until fifty percent of the work is
completed. Thereafter, Bovis Lend Lease (“Construction manager”) has
the discretion to determine the retainage percentage on a
subcontractor-by-subcontractor basis. As of December 31, 2007
and 2006, the retainage payable amounted to $0 and $751,369,
respectively.
Note
9 - Condominium Sales
In 2004,
the Company initiated a condominium offering plan, which obtained the necessary
approvals in 2005 and 2006. The condominium consists of 68
residential units and one commercial unit. 67 residential units were
offered for sale.
One
residential unit is retained by the Company and leased to the condominium
association at one dollar per year for its residential manager. This
unit is leased for a five year period, which commenced with the date of the
first unit closing. The condominium association is responsible for
real estate taxes, common charges and other operating expenses for this
unit.
As of
December 31, 2007, all of the residential condominium units have been
sold. The commercial unit, which has an estimated sales value of
approximately $4,500,000, is still available for sale or lease.
Note 10 - Residential
Manager’s Apartment
At
December 31, 2007, the residential manager’s apartment is comprised of the
following (dollars in thousands):
|
Land
|
$ | 183 | ||
|
Hard
and soft construction costs
|
486 | |||
|
Negotiable
certificates
|
11 | |||
| 680 | ||||
|
Less:
accumulated depreciation
|
(21 | ) | ||
|
Total
cost
|
$ | 659 |
Note 11 - Deferred
Rent
The
Company recognized deferred rent on the below market lease of the residential
manager’s unit discussed in Note 9. The Company estimates the fair
value of the rent to be approximately $7,000 per month, which over the life of
the lease amounts to approximately $420,000. The Company amortized
approximately $104,000 into rental income for the year ended December 31,
2007.
Note 12 - Selling
Costs
At
December 31, 2007, selling costs are comprised of the following (dollars in
thousands):
|
2007
|
2006
|
|||||||
|
Broker
fees
|
$ | 755 | $ | 3,720 | ||||
|
Commissions
|
614 | 2,783 | ||||||
|
Title
recording
|
-- | 20 | ||||||
|
Total
selling costs
|
$ | 1,369 | $ | 6,523 | ||||
Note 13 - Related Party
Transactions
(a) Due
to Affiliate
At
December 31, 2007 and 2006, the Company owes $416,630 and $236,014,
respectively, to The Clarett Group (“Clarett Group”) for marketing commissions
and other reimbursable expenses paid on behalf of the
Company. Members of the Company are also members in Clarett
Group.
(b) Development
Fees
In
accordance with a development services agreement, the Company is to pay
development fees and expense reimbursements to CC Developer, LLC (“CC
Developer”). The members of CC Developer are also members of CC
Sutton and Clarett Partners. The development services agreement
provides for a total project development fee of $2,685,960. As of
December 31, 2006, this development fee had been fully paid, and for the year
ended December 31, 2006, charges from this affiliate for development fees and
expense reimbursements aggregated $381,773.
(c) Commissions
Clarett
Group had been designated as the exclusive sales agent for selling residential
units pursuant to a Sales Agreement. The Sales Agreement provides for
a commission equal to four percent of the gross sales price of each unit sold
and a sales commission of two percent when sales involve a third-party
broker. For the years ended December 31, 2007 and 2006, the Company
incurred $614,080 and $2,783,140, respectively, of commissions to Clarett
Group.
Note 14 - Commitments and
Contingencies
(a) Operating
Lease
The
Company leased a sales office in New York, New York under a two-year operating
lease, which expired in July 2006. The lease provided for monthly
rental payments of $15,000 plus escalation provisions. In connection
with obtaining the lease, the Company paid a $30,000 security deposit to the
landlord in 2004. $15,000 of the security deposit was returned to the
Company and the remaining $15,000 was used to pay the final month’s
rent. Rent expenditures for the sales office for the years ended
December 31, 2007, 2006 and 2005 amounted to $0, $120,000, and $180,000,
respectively.
(b) Sponsor
Common Charges
The
Company is the sponsor for the condominium and is obligated to pay all common
charges, special assessments and real estate taxes allocated to any unsold units
or commercial units in accordance with the provisions of the
By-Laws. During the years ended December 31, 2007 and 2006, the
Company incurred $69,779 and $420,949, respectively, of sponsor common charges,
which is reflected in the accompanying statement of operations.
(c) Estimated
Costs to Complete
At
December 31, 2007, the Company estimates the cost to complete the development
project to be approximately $462,000.
Note 15 - Construction
Manager Incentive
The
construction management agreement provides for an incentive fee to be paid to
the construction manager in the event that the total cost of construction, as
defined, is less than the guaranteed maximum price of
$49,217,811. Total project costs are expected to exceed the original
projected cost of construction. Accordingly, no construction manager
fee will be paid.
Note 16 - Concentration of
Risk
At
December 31, 2007 and 2006, the Company’s deposits with banks exceeded federal
deposit insurance coverage of $100,000.
The
Company and the constructed property are located in New York City and are
subject to local economic conditions.
The
Company contracted with a single company, Bovis Lend Lease, as the construction
manager for the project.
Report
of Independent Auditors
To the
Members of
205-209
East 57th Street
Associates, LLC:
In our
opinion, the accompanying balance sheets and the related statements of
operations, changes in members' equity, and cash flows present fairly, in all
material respects, the financial position of 205-209 East 57th Street
Associates, LLC (the "Company") at December 31, 2007 and 2006, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS
LLP
New York,
New York
February
11, 2008
Following are consolidated financial statements and
notes of Mt. Gravatt Cinemas Joint Venture for the periods
indicated. We are required to include in our Report on Form 10-K
audited financial statements for the year ended December 31, 2007 and unaudited
financial statements for the year ended December 31, 2006 and
2005.
Mt.
Gravatt Cinemas Joint Venture
Income
Statement
For
the Year Ended December 31, 2007
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
2005
(unaudited)
|
||||||||||||
|
Revenue
from rendering services
|
7 | $ | 9,095,218 | $ | 8,777,374 | $ | 8,423,526 | |||||||||
|
Revenue
from sale of concession
|
3,546,654 | 3,269,303 | 3,037,909 | |||||||||||||
|
Total
Revenue
|
$ | 12,641,872 | $ | 12,046,677 | $ | 11,461,435 | ||||||||||
|
Cost
of concession
|
(893,473 | ) | (814,500 | ) | (756,512 | ) | ||||||||||
|
Depreciation
and amortization expenses
|
10 | (653,342 | ) | (722,828 | ) | (774,111 | ) | |||||||||
|
Personnel
expenses
|
8 | (1,839,730 | ) | (1,684,754 | ) | (1,632,351 | ) | |||||||||
|
Film
expenses
|
(3,549,246 | ) | (3,390,265 | ) | (3,322,293 | ) | ||||||||||
|
Occupancy
expenses
|
(1,248,608 | ) | (1,280,726 | ) | (1,307,976 | ) | ||||||||||
|
House
expenses
|
(973,931 | ) | (796,373 | ) | (856,203 | ) | ||||||||||
|
Advertising
and marketing costs
|
(285,455 | ) | (283,183 | ) | (315,601 | ) | ||||||||||
|
Management
fees
|
(223,043 | ) | (216,396 | ) | (214,405 | ) | ||||||||||
|
Repairs
and maintenance expense
|
(167,877 | ) | (246,676 | ) | (209,708 | ) | ||||||||||
|
Results
for operating activities
|
$ | 2,807,167 | $ | 2,610,976 | $ | 2,072,275 | ||||||||||
|
Finance
income
|
44,340 | 50,874 | 23,390 | |||||||||||||
|
Finance
expense
|
-- | (82,494 | ) | (112,168 | ) | |||||||||||
|
Net
finance income(expense)
|
9 | $ | 44,340 | $ | (31,620 | ) | $ | (88,778 | ) | |||||||
|
Profit
for the period
|
$ | 2,851,507 | $ | 2,579,356 | $ | 1,983,497 | ||||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Statement
of Changes in Members’ Equity
For
the Year Ended December 31, 2007
|
In
AUS$
|
Reading
Exhibition Pty Ltd
|
Village
Roadshow Exhibition Pty Ltd
|
Birch
Carroll & Coyle Limited
|
Total
|
||||||||||||
|
Members’
Equity – January 1, 2005 (unaudited)
|
$ | 629,608 | $ | 629,608 | $ | 629,609 | $ | 1,888,825 | ||||||||
|
Member
distributions
|
(130,000 | ) | (130,000 | ) | (130,000 | ) | (390,000 | ) | ||||||||
|
Net
profit
|
661,166 | 661,166 | 661,165 | 1,983,497 | ||||||||||||
|
Members’
Equity – December 31, 2005 (Unaudited)
|
$ | 1,160,774 | $ | 1,160,774 | $ | 1,160,774 | $ | 3,482,322 | ||||||||
|
Member
distributions
|
(400,000 | ) | (400,000 | ) | (400,000 | ) | (1,200,000 | ) | ||||||||
|
Net
profit
|
859,785 | 859,785 | 859,786 | 2,579,356 | ||||||||||||
|
Members’
Equity – December 31, 2006 (Unaudited)
|
$ | 1,620,559 | $ | 1,620,559 | $ | 1,620,560 | $ | 4,861,678 | ||||||||
|
Member
distributions
|
(1,050,000 | ) | (1,050,000 | ) | (1,050,000 | ) | (3,150,000 | ) | ||||||||
|
Net
profit
|
950,502 | 950,502 | 950,503 | 2,851,507 | ||||||||||||
|
Members’
Equity – December 31, 2007
|
$ | 1,521,061 | $ | 1,521,061 | $ | 1,521,063 | $ | 4,563,185 | ||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Balance
Sheet
As
of December 31, 2007
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
|||||||||
|
ASSETS
|
||||||||||||
|
Current
Assets
|
||||||||||||
|
Cash
and cash equivalents
|
13 | $ | 1,474,386 | $ | 1,300,373 | |||||||
|
Trade
receivables
|
12 | 97,597 | 65,918 | |||||||||
|
Inventories
|
11 | 88,317 | 108,637 | |||||||||
|
Other
assets
|
12 | 534 | 40,727 | |||||||||
|
Total
current assets
|
$ | 1,660,834 | $ | 1,515,655 | ||||||||
|
Property,
plant and equipment
|
10 | 3,897,870 | 4,094,675 | |||||||||
|
Total
non-current assets
|
$ | 3,897,870 | $ | 4,094,675 | ||||||||
|
Total
assets
|
$ | 5,558,704 | $ | 5,610,330 | ||||||||
|
Current
Liabilities
|
||||||||||||
|
Payables
|
15 | 794,733 | 531,836 | |||||||||
|
Employee
benefits
|
14 | 67,745 | 68,667 | |||||||||
|
Deferred
revenue
|
16 | 77,645 | 97,056 | |||||||||
|
Total
current liabilities
|
$ | 940,123 | $ | 697,559 | ||||||||
|
Employee
benefits
|
14 | 55,396 | 51,093 | |||||||||
|
Total
non-current liabilities
|
$ | 55,396 | $ | 51,093 | ||||||||
|
Total
liabilities
|
$ | 995,519 | $ | 748,652 | ||||||||
|
Net
assets
|
$ | 4,563,185 | $ | 4,861,678 | ||||||||
|
Equity
|
||||||||||||
|
Contributed
equity
|
202,593 | 202,593 | ||||||||||
|
Retained
earnings
|
4,360,592 | 4,659,085 | ||||||||||
|
Total
equity
|
$ | 4,563,185 | $ | 4,861,678 | ||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Statement
of Cash Flows
For
the Year Ended December 31, 2007
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
2005
(unaudited)
|
||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Cash
receipts from customers
|
$ | 12,617,843 | $ | 12,184,040 | $ | 11,530,420 | ||||||||||
|
Cash
paid to suppliers and employees
|
(8,881,633 | ) | (9,195,814 | ) | (9,041,416 | ) | ||||||||||
|
Cash
generated from operations
|
$ | 3,736,210 | $ | 2,988,226 | $ | 2,489,004 | ||||||||||
|
Interest
received
|
9 | 44,340 | 50,874 | 23,390 | ||||||||||||
|
Interest
paid
|
9 | -- | (82,494 | ) | (112,168 | ) | ||||||||||
|
Net
cash from operating activities
|
20 | $ | 3,780,550 | $ | 2,956,606 | $ | 2,400,226 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Acquisition
of property, plant and equipment
|
10 | (456,537 | ) | (170,042 | ) | (756,402 | ) | |||||||||
|
Net
cash from investing activities
|
$ | (456,537 | ) | $ | (170,042 | ) | $ | (756,402 | ) | |||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Distributions
to Joint Venturers
|
(3,150,000 | ) | (1,200,000 | ) | (390,000 | ) | ||||||||||
|
Payment
of finance lease liability
|
-- | (1,416,281 | ) | (859,384 | ) | |||||||||||
|
Net
cash from financing activities
|
$ | (3,150,000 | ) | $ | (2,616,281 | ) | $ | (1,249,384 | ) | |||||||
|
Net
increase in cash and cash equivalents
|
174,013 | 170,283 | 394,440 | |||||||||||||
|
Cash
and cash equivalents at 1 January
|
1,300,373 | 1,130,090 | 735,650 | |||||||||||||
|
Cash
and cash equivalents at December 31
|
13 | $ | 1,474,386 | $ | 1,300,373 | $ | 1,130,090 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
Mt.
Gravatt Cinemas Joint Venture
Notes
to Financial Statements
December
31, 2007
1. Reporting
Entity
Mt.
Gravatt Cinemas Joint Venture (the “Joint Venture”) is an unincorporated joint
venture between Birch Carrol & Coyle Limited, Village Roadshow Exhibition
Pty Ltd and Reading Exhibition Pty Ltd. The Joint Venture is
domiciled and provides services solely in Australia. The address of
the Joint Venture’s registered office is 49 Market Street, Sydney NSW
2000. The Joint Venture primarily is involved in the exhibition of
motion pictures in cinemas.
The joint
venture is to continue in existence until the Joint Venture is terminated and
associated underlying assets have been sold and the proceeds of sale distributed
upon agreement of the members. All distributions of earnings are
required to be agreed upon and distributed evenly to the three Joint
Venturers. The three Joint Venturers will evenly contribute any
future required contributions.
For local
reporting purposes, the Joint Venture has been deemed a non-reporting entity
within the framework of Australian Accounting Standards (AASBs).
2. Basis
of Presentation
(a) Statement
of Compliance
These
financial statements have been prepared in accordance with the International
Financial Reporting Standards (IFRSs) adopted by the International Accounting
Standards Board.
The
financial year end of the Joint Venture is 30 June. For purposes of
the use of these financial statements by one of the Joint Venturers, these
financial statements have been prepared on a 12-month period basis ending on 31
December.
The financial statements were
approved by the Management Committee on March 13, 2008
|
(b)
|
Basis
of Measurement
|
The
financial statements have been prepared on the historical cost
basis. The methods used to measure fair values are discussed further
in Note 4.
|
(c)
|
Functional
and Presentation Currency
|
These
financial statements are presented in Australian dollars, which is also the
Joint Venture’s functional currency.
|
(d)
|
Use
of Estimates and Judgments
|
The
preparation of financial statements requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and
the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these
estimates.
Estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is
revised and in any future periods affected.
In
particular, information about significant areas of estimation uncertainty and
critical judgments in applying accounting policies that have the most
significant effect on the amount recognized in the financial statements are
described in Note 17 financial instruments.
3. Significant
Accounting Policies
The
accounting policies set out below have been applied consistently to all periods
presented in these financial statements.
The Joint
Venture has not elected to early adopt any accounting standards and
amendments. See Note 3(n).
(a) Financial
Instruments
Non-derivative
financial instruments comprise trade receivables, cash and cash equivalents, and
trade payables.
Non-derivative
financial instruments are recognized initially at fair value plus, for
instruments not at fair value through profit or loss, any directly attributable
transaction costs. Subsequent to initial recognition non-derivative financial
instruments are measured as described below.
A
financial instrument is recognized if the Joint Venture becomes a party to the
contractual provisions of the instrument. Financial assets are derecognized if
the Joint Venture’s contractual rights to the cash flows from the financial
assets expire or if the Joint Venture transfers the financial asset to another
party without retaining control or substantially all risks and rewards of the
asset. Regular way purchases and sales of financial assets are accounted for at
trade date, i.e., the date that the Joint Venture commits itself to purchase or
sell the asset. Financial liabilities are derecognized if the Joint Venture’s
obligations specified in the contract expire, are discharged or
cancelled.
Cash and
cash equivalents comprise cash balances and call deposits. Bank overdrafts that
are repayable on demand and form an integral part of the Joint Venture’s cash
management are included as a component of cash and cash equivalents for the
purpose of the statement of cash flows.
Accounting
for finance income and expense is discussed in Note 3(k).
(b) Property,
Plant and Equipment
(i) Recognition
and Measurement
Items of
property, plant and equipment are measured at cost less accumulated
depreciation. The cost of property, plant and equipment at 1 July 2004, the date
of transition to IFRS, was determined by reference to its fair value at that
date.
Cost
includes expenditures that are directly attributable to the acquisition of the
asset. The cost of self-constructed assets includes the cost of materials and
direct labour, any other costs directly attributable to bringing the asset to a
working condition for its intended use. Costs also may include
purchases of property, plant and equipment. Purchased software that
is integral to the functionality of the related equipment is capitalised as part
of that equipment. Borrowing costs related to the acquisition or construction of
qualifying assets are recognized in profit or loss as incurred.
When
parts of an item of property, plant and equipment have different useful lives,
they are accounted for as separate items (major components) of property, plant
and equipment.
(ii) Subsequent
Costs
The cost
of replacing part of an item of property, plant and equipment is recognized in
the carrying amount of the item if it is probable that the future economic
benefits embodied within the part will flow to the Joint Venture and its cost
can be measured reliably. The carrying amount of the replaced part is
derecognized. The costs of the day-to-day servicing of property,
plant and equipment are recognized in profit or loss as incurred.
(iii) Depreciation
Depreciation
is recognized in profit or loss on a straight-line basis over the estimated
useful lives of each part of an item of property, plant and
equipment. Leased assets are depreciated over the shorter of the
lease term and their useful lives. Land is not
depreciated.
The
estimated useful lives for the current and comparative periods are as
follows:
|
Leasehold
improvements
|
Shorter
of estimated useful life and term of lease
|
|
Plant and
equipment
|
5.0%
to 33.3%
|
|
Leased
plant and equipment
|
5.0%
to 20.0%
|
Depreciation
methods, useful lives and residual values are reassessed at the reporting
date.
(c) Leased
Assets
Leases in
which the Joint Venture assumes substantially all the risks and rewards of
ownership are classified as finance leases. Upon initial recognition
the leased asset is measured at an amount equal to the lower of its fair value
and the present value of the minimum lease payments. Subsequent to
initial recognition, the asset is accounted for in accordance with the
accounting policy applicable to that asset. The Joint Venture’s one
finance lease expired in June of 2006.
Other
leases are operating leases and are not recognized on the Joint Venture’s
balance sheet.
(d) Inventories
Inventories
are measured at the lower of cost and net realisable value. The cost
of inventories is based on the first-in first-out principle, and includes
expenditure incurred in acquiring the inventories, and other costs incurred in
bringing them to their existing location and condition.
(e) Impairment
(i) Financial
Assets
A
financial asset is assessed at each reporting date to determine whether there is
any objective evidence that it is impaired. A financial asset is
considered to be impaired if objective evidence indicates that one or more
events have had a negative effect on the estimated future cash flows of that
asset.
An
impairment loss in respect of a financial asset measured at amortized cost is
calculated as the difference between its carrying amount, and the present value
of the estimated future cash flows discounted at the original effective interest
rate. An impairment loss in respect of an available-for-sale financial asset is
calculated by reference to its fair value.
All
impairment losses are recognized in profit or loss.
An
impairment loss is reversed if the reversal can be related objectively to an
event occurring after the impairment loss was recognized. For financial assets
measured at amortized cost, the reversal is recognized in profit or
loss.
(ii) Non-financial
Assets
The
carrying amounts of the Joint Venture’s non-financial assets, other than
inventories, are reviewed at each reporting date to determine whether there is
any indication of impairment. If any such indication exists then the asset’s
recoverable amount is estimated.
The
recoverable amount of an asset or cash-generating unit is the greater of its
value in use and its fair value less costs to sell. In assessing value in use,
the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset.
An
impairment loss is recognized if the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment
losses are recognized in profit or loss.
In
respect of other assets, impairment losses recognized in prior periods are
assessed at each reporting date for any indications that the loss has decreased
or no longer exists. An impairment loss is reversed if there has been a change
in the estimates used to determine the recoverable amount. An impairment loss is
reversed only to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation, if no
impairment loss had been recognized.
(f) Employee
Benefits
(i) Long-Term
Employee Benefits
The Joint
Venture’s net obligation in respect of long-term employee benefits is the amount
of future benefit that employees have earned in return for their service in the
current and prior periods plus related on-costs.
(ii) Termination
Benefits
Termination
benefits are recognized as an expense when the Joint Venture is demonstrably
committed, without realistic possibility of withdrawal, to a formal detailed
plan to either terminate employment before the normal retirement date, or to
provide termination benefits as a result of an offer made to encourage voluntary
redundancy. Termination benefits for voluntary redundancies are recognized if
the Joint Venture has made an offer encouraging voluntary redundancy, it is
probable that the offer will be accepted, and the number of acceptances can be
estimated reliably.
(iii) Short-Term
Benefits
Liabilities
for employee benefits for wages, salaries, annual leave and sick leave represent
present obligations resulting from employees’ services provided to reporting
date and are calculated at undiscounted amounts based on remuneration wage and
salary rates that the Joint Venture expects to pay as at reporting date
including related on-costs, such as workers compensation insurance and payroll
tax.
(g) Provisions
A
provision is recognized if, as a result of a past event, the Joint Venture has a
present legal or constructive obligation that can be estimated reliably, and it
is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability.
(h) Contributed
Equity
The Joint
Venture is comprised of three parties who share an equal ownership over the
Joint Venture. The Contributed Equity amount represents the initial
investment in the partnership. Distribution to the partners are made
on behalf of the Joint Venture and are recognized through retained
earnings.
(i) Revenue
(i) Rendering
of Service/Sale of Concessions
Revenues
are generated principally through admissions and concession sales with proceeds
received in cash at the point of sale. Service revenue also includes product
advertising and other ancillary revenues which are recognized as income in the
period earned. The Joint Venture recognizes payments received attributable to
the advertising services provided by the Joint Venture under certain vendor
programs as revenue in the period in which services are delivered.
(j) Lease
Payments
Payments
made under operating leases recognized in profit or loss on a straight-line
basis over the term of the lease on a basis that is representative of the
pattern of benefit derived from the leased property.
Minimum
lease payments made under finance leases are apportioned between the finance
expense and the reduction of the outstanding liability. The finance expense is
allocated to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability. Contingent
lease payments are accounted for by revising the minimum lease payments over the
remaining term of the lease when the contingency no longer exists and the lease
adjustment is known. The Joint Venture’s one finance lease expired in
June of 2006.
(k) Finance
Income and Expenses
Finance
income comprises interest income on cash held in financial
institutions. Interest income is recognized as it accrues in profit
and loss using the effective interest method.
Finance
expenses comprise interest expense on the finance lease.
(l) Taxes
(i) Goods
and Service Tax
Revenue,
expenses and assets are recognized net of the amount of goods and services tax
(GST), except where the amount of GST incurred is not recoverable from the
taxation authority. In these circumstances, the GST is recognized as
part of the cost of acquisition of the asset or as part of the
expense.
Receivables
and payables are stated with the amount of GST included. The net
amount of GST recoverable from, or payable to, the ATO is included as a current
asset or liability in the balance sheet.
Cash
flows are included in the statement of cash flows on a gross
basis. The GST components of cash flows arising from investing and
financing activities which are recoverable from, or payable to, the ATO are
classified as operating cash flows.
(ii) Income
Tax
Under
applicable Australian law, the Joint Venture is not subject to tax on earnings
generated. Accordingly the Joint Venture does not recognise any
income tax expense, or deferred tax balances. Earnings of the Joint
Venture are taxed on the Joint Venturer level.
|
(m)
|
Film
Expense
|
Film
expense is incurred based on a contracted percentage of box office results for
each film. The managing party negotiates terms with each film
distributor on a film-by-film basis. Percentage terms are based on a
sliding scale, with the Joint Venture subject to a higher percentage of box
office results at the beginning of the term and declining each subsequent
week. Different films have different rates dependent upon the
expected popularity of
the film
and forecasted success.
|
(n)
|
New
Standards and Interpretations Not Yet
Adopted
|
The
following standards, amendments to standards and interpretations have been
identified as those which may impact the entity in the period of initial
application. They are available for early adoption at December 31, 2007, but
have not been applied in preparing this financial report:
|
·
|
Revised
AASB 101 Presentation of
Financial Statements (September 2007) introduces as a financial
statement (formerly “primary” statement) the “statement of comprehensive
income”. The revised standard does not change the recognition,
measurement or disclosure of transactions and events that are required by
other AASBs. The revised AASB 101 will become mandatory for the
Joint Venture’s December 31, 2009 financial statements. The
Joint Venture has not yet determined the potential effect of the revised
standard on the Joint Venture’s
disclosures.
|
|
·
|
Revised
AASB 123 Borrowing Costs
removes the option to expense borrowing costs and requires that an
entity capitalise borrowing costs directly attributable to the
acquisition, construction or production of a qualifying asset as part of
the cost of that asset. The revised AASB 123 will become
mandatory for the Joint Venture’s December 31, 2009 financial statements
and will constitute a change in accounting policy for the Joint
Venture. In accordance with the transitional provisions the
Joint Venture will apply the revised AASB 123 to qualifying assets for
which capitalisation of borrowing costs commences on or after the
effective date.
|
|
·
|
AI
13 Customer Loyalty
Programmes addresses the accounting by entities that operate, or
otherwise participate in, customer loyalty programmes for their
customers. It relates to customer loyalty programmes
under which the customer can redeem credits for awards such as free or
discounted goods or services. AI 13, which becomes mandatory
for the Joint Venture’s December 31, 2009 financial statements, is not
expected to have any impact on the financial
report.
|
4. Determination
of Fair Values
A number of the Joint Venture’s
accounting policies and disclosures require the determination of fair value, for
both financial and non-financial assets and liabilities. Fair values have been
determined for measurement and disclosure purposes based on the following
methods. Where applicable, further information about the assumptions made in
determining fair values is disclosed in the notes specific to that asset or
liability.
(a) Trade
and Other Receivables
The fair
value of trade and other receivables is estimated as the present value of future
cash flows, discounted at the market rate of interest at the reporting
date.
(b) Non-Derivative
Financial Liabilities
Fair
value, which is determined for disclosure purposes, is calculated based on the
present value of future principal and interest cash flows, discounted at the
market rate of interest at the reporting date.
5. Financial
Risk Management
Overview
The Joint
Venture has exposure to the following risks;
|
·
|
credit
risk
|
|
·
|
liquidity
risk
|
|
·
|
market
risk.
|
This note
presents information about the Joint Venture’s exposure to each of the above
risks, its objectives, policies and processes for measuring and managing risk,
and the management of capital. Further quantitative disclosures are included
throughout this financial report.
The Joint
Venturers’ have overall responsibility for the establishment and oversight of
the risk management framework and are also responsible for developing and
monitoring risk management policies.
Risk
management policies are established to identify and analyse the risks faced by
the Joint Venture to set appropriate risk limits and controls, and to monitor
risks and adherence to limits. Risk management policies and systems are reviewed
regularly to reflect changes in market conditions and the Joint Venture’s
activities. The Joint Venture, through its training and management standards and
procedures, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Joint
Venturers’ oversee how management monitors compliance with the Joint Venture’s
risk management policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the Joint
Venture.
Credit Risk
Credit
risk is the risk of financial loss to the Joint Venture if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Joint Venture’s receivables from
customers.
The Joint
Venture’s exposure to credit risk is influenced mainly by the individual
characteristics of each customer. The demographics of the Joint Venture’s
customer base, including the default risk of the industry and country, in which
customers operate, has less of an influence on credit risk.
The Joint
Venture operates under the managing Joint Venturer’s credit policy under which
each new customer is analysed individually for creditworthiness before the Joint
Venture’s standard payment and delivery terms and conditions are offered. The
Joint Venture’s review includes external ratings, when available, and in some
cases bank references. Purchase limits are established for each customer. These
limits are reviewed periodically. Customers that fail to meet the Joint
Venture’s benchmark creditworthiness may transact with the Joint Venture only on
a prepayment basis.
The Joint
Venture’s trade receivables relate mainly to the Joint Venture’s screen
advertiser and credit card companies. Customers that are graded as
“high risk” are placed on a restricted customer list, and monitored by the Joint
Venturers.
Liquidity Risk
Liquidity
risk is the risk that the Joint Venture will not be able to meet its financial
obligations as they fall due. The Joint Venture’s approach to managing liquidity
is to ensure, as far as possible, that it will have sufficient liquidity to meet
its liabilities when due, under both normal and stressed conditions, without
incurring unacceptable losses or risking damage to the Joint Venture’s
reputation.
Market Risk
Market
risk is the risk that changes in market prices, such as interest rates will
affect the Joint Venture’s income. The objective of market risk management is to
manage and control market risk exposures within acceptable parameters, while
optimising the return.
There
were no changes in the Joint Venture’s approach to capital management during the
year.
The Joint
Venture is not subject to market risks relating to foreign exchange rates or
equity prices.
6. Segment
Reporting
Business Segments
The
business segment of the Joint Venture is the motion picture exhibition in
cinemas which includes the sale of concession goods. The Joint
Venture did not operate in any other business segments during the financial
years.
Geographical Segments
The Joint
Venture operates one cinema location in Queensland, Australia. The
Joint Venture did not operate into any other geographical locations during the
financial years.
7. Revenue
|
In
AUS$
|
2007
|
2006
(unaudited)
|
2005
(unaudited)
|
|||||||||
|
Box
office revenue
|
$ | 8,473,778 | $ | 8,270,416 | $ | 7,996,406 | ||||||
|
Screen
advertising
|
223,462 | 163,456 | 201,869 | |||||||||
|
Other
cinema services
|
397,978 | 343,502 | 225,251 | |||||||||
|
Revenue
from rendering of services
|
$ | 9,095,218 | $ | 8,777,374 | $ | 8,423,526 | ||||||
8. Personnel
Expenses
|
In
AUS$
|
2007
|
2006
(unaudited)
|
2005
(unaudited)
|
|||||||||
|
Wages
and salaries
|
$ | 1,790,110 | $ | 1,652,334 | $ | 1,583,118 | ||||||
|
Employee
annual leave
|
42,849 | 29,698 | 18,451 | |||||||||
|
Employee
long-service leave
|
6,771 | 2,722 | 30,782 | |||||||||
|
Total
personnel expenses
|
$ | 1,839,730 | $ | 1,684,754 | $ | 1,632,351 | ||||||
9. Finance
Income and Expense
|
In
AUS$
|
2007
|
2006
(unaudited)
|
2005
(unaudited)
|
|||||||||
|
Interest
income on bank balances:
|
$ | 44,340 | $ | 50,874 | $ | 23,390 | ||||||
|
Finance
income
|
$ | 44,340 | $ | 50,874 | $ | 23,390 | ||||||
|
Interest
expense on finance lease commitment
|
$ | -- | $ | (82,494 | ) | $ | (112,168 | ) | ||||
|
Finance
expense
|
$ | -- | $ | (82,494 | ) | $ | (112,168 | ) | ||||
|
Net
finance income and expense
|
$ | 44,340 | $ | (31,620 | ) | $ | (88,778 | ) | ||||
10. Property,
Plant and Equipment
|
In
AUS$
|
Plant
and Equipment
|
Leasehold
Improvements
|
Capital
WIP
|
Total
|
||||||||||||
|
Cost
|
||||||||||||||||
|
Balance
at January 1, 2006 (unaudited)
|
$ | 8,187,337 | $ | 1,923,649 | $ | 499,713 | $ | 10,610,699 | ||||||||
|
Additions/(Transfers)
|
65,481 | 530,084 | (425,523 | ) | 170,042 | |||||||||||
|
Balance
at December 31, 2006 (unaudited)
|
$ | 8,252,818 | $ | 2,453,733 | $ | 74,190 | $ | 10,780,741 | ||||||||
|
Balance
at January 1, 2007
|
8,252,818 | 2,453,733 | 74,190 | 10,780,741 | ||||||||||||
|
Additions/(Transfers)
|
417,756 | 112,971 | (74,190 | ) | 456,537 | |||||||||||
|
Balance
at December 31, 2007
|
$ | 8,670,574 | $ | 2,566,704 | $ | -- | $ | 11,237,278 | ||||||||
|
In
AUS$
|
Plant
and Equipment
|
Leasehold
Improvements
|
Capital
WIP
|
Total
|
||||||||||||
|
Depreciation
|
||||||||||||||||
|
Balance
at January 1, 2006 (unaudited)
|
$ | (5,436,684 | ) | $ | (526,514 | ) | $ | -- | $ | (5,963,198 | ) | |||||
|
Depreciation
and amortization for the year
|
(630,523 | ) | (92,345 | ) | -- | (722,868 | ) | |||||||||
|
Balance
at December 31, 2006 (unaudited)
|
$ | (6,067,207 | ) | $ | (618,859 | ) | $ | -- | $ | (6,686,066 | ) | |||||
|
Balance
at January 1,2007
|
(6,067,207 | ) | (618,859 | ) | -- | (6,686,066 | ) | |||||||||
|
Depreciation
and amortization for the year
|
(570,525 | ) | (82,817 | ) | -- | (653,342 | ) | |||||||||
|
Balance
at December 31, 2007
|
$ | (6,637,732 | ) | $ | (701,676 | ) | $ | -- | $ | (7,339,408 | ) | |||||
|
In
AUS$
|
Plant
and Equipment
|
Leasehold
Improvements
|
Capital
WIP
|
Total
|
||||||||||||
|
Carrying
amounts
|
||||||||||||||||
|
At
January 1, 2006 (unaudited)
|
$ | 2,750,653 | $ | 1,397,135 | $ | 499,713 | $ | 4,647,501 | ||||||||
|
At
December 31, 2006 (unaudited)
|
2,185,611 | 1,834,874 | 74,190 | 4,094,675 | ||||||||||||
|
At
January 1, 2007
|
2,185,611 | 1,834,874 | 74,190 | 4,094,675 | ||||||||||||
|
At
December 31, 2007
|
2,032,842 | 1,865,028 | -- | 3,897,870 | ||||||||||||
Leased Plant and Machinery
The Joint Venture leased equipment
under a finance lease agreement. The lease provided the Joint Venture with the
option to purchase the equipment at a beneficial price. The Joint
Venture exercised the purchase option at the end of the finance lease in June of
2006 (unaudited) and assigned a remaining useful live in accordance with Joint
Venture policy.
11. Inventories
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Concession
stores at cost
|
$ | 88,317 | $ | 108,637 | ||||
|
Carrying
amount of inventories
|
88,317 | 108,637 | ||||||
12. Trade
Receivables and Other Assets
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
|||||||||
|
Trade
receivables
|
17 | $ | 97,597 | $ | 65,918 | |||||||
|
Prepayments
|
534 | 40,727 | ||||||||||
The Joint Venture’s exposure to credit
and currency risks and impairment losses related to trade and other receivables
are disclosed in Note 17.
13. Cash
and Cash Equivalents
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Bank
balances
|
$ | 1,410,567 | $ | 1,150,894 | ||||
|
Cash
in transit
|
28,119 | 112,379 | ||||||
|
Cash
on hand
|
35,700 | 37,100 | ||||||
|
Cash
and cash equivalents in the statement of cash flows
|
$ | 1,474,386 | $ | 1,300,373 | ||||
The Joint
Venture’s exposure to interest rate risk and a sensitivity analysis for
financial assets and liabilities are disclosed in Note 17.
14. Employee
Benefits
|
Current
|
||||||||
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Liability
for annual leave
|
$ | 49,355 | $ | 37,378 | ||||
|
Liability
for long-service leave
|
18,390 | 31,289 | ||||||
|
Total
employee benefits - current
|
$ | 67,745 | $ | 68,667 | ||||
|
Non-current
|
||||||||
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Liability
for long-service leave
|
$ | 55,396 | $ | 51,093 | ||||
|
Total
employee benefits – non current
|
$ | 55,396 | $ | 51,093 | ||||
15. Payables
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
|||||||||
|
Trade
payables
|
$ | 346,369 | $ | 212,591 | ||||||||
|
Other
creditors and accruals
|
448,364 | 319,245 | ||||||||||
|
Total
payables
|
17 | $ | 794,733 | $ | 531,836 | |||||||
The Joint
Venture’s exposure to liquidity risk related to trade and other payables is
disclosed in Note 17. Trade payables represent payments to trade
creditors. The Joint Venture makes these payments through the
managing parties shared service centre and is charged a management fee for these
services. Disclosure regarding management fee is made in Note
21.
16. Deferred
Revenue
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Deferred
revenue
|
$ | 77,645 | $ | 97,056 | ||||
Deferred
revenue consists of advance funds received from vendors for the exclusive rights
to supply certain concession items. Revenue is released over the term
of the related contract on a straight-line basis and is classified as service
revenue.
17. Financial
Instruments
Credit Risk
Exposure to Credit Risk
The
carrying amount of the Joint Venture’s financial assets represents the maximum
credit exposure. The Joint Venture’s maximum exposure to credit risk
at the reporting date was:
|
Carrying
Amount
|
||||||||||||
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
|||||||||
|
Trade
receivables
|
12 | $ | 97,597 | $ | 65,918 | |||||||
|
Cash
and cash equivalents
|
13 | 1,474,386 | 1,300,373 | |||||||||
The Joint
Venture’s maximum exposure to credit risk for trade receivables at the reporting
date by type of customer was:
|
Carrying
amount
|
||||||||
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Screen
advertisers
|
$ | 50,145 | $ | 7,242 | ||||
|
Credit
card companies
|
23,204 | 39,492 | ||||||
|
Screen
hire
|
12,137 | -- | ||||||
|
Games,
machine and merchandising companies
|
12,111 | 19,184 | ||||||
|
Total
|
$ | 97,597 | $ | 65,918 | ||||
The Joint
Venture’s most significant customer, a cinema screen advertising service,
accounts for $50,000 of the trade receivables carrying amount at December 31,
2007 (2006: $7,000 unaudited).
Impairment
losses
There
were no trade receivables at the reporting date or comparable period which were
past due. The carrying value of such receivables were $97,597 in 2007
(2006: $65,918 unaudited). There were no allowances for impairment
during the reporting periods.
Liquidity
risk
Financial
liabilities are only trade payables all contractually due within 6
months. The carrying value of such liabilities were $794,733 in 2007
(2006: $531,836 unaudited).
Interest
rate risk
Profile
At the
reporting date the interest rate profile of the Joint Venture’s interest-bearing
financial instruments was:
|
Variable
rate instruments
|
Carrying
amount
|
|||||||
|
In
AUS$
|
2007
|
2006
(unaudited)
|
||||||
|
Bank
Balances
|
$ | 1,410,567 | $ | 1,150,894 | ||||
The Joint
Venture held no fixed rate instruments during financial year 2007 or 2006
(unaudited).
Cash
Flow Sensitivity Analysis for Variable Rate Instruments
A change
of one percentage point in interest rates at the reporting date would have
increased (decreased) equity and profit or loss by the amounts shown below. This
analysis assumes that all other variables remain constant. The analysis is
performed on the same basis for 2006.
|
Profit
or loss
|
Equity
|
|||||||||||||||
|
Effect
In AUS$
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
||||||||||||
|
December
31, 2007
|
||||||||||||||||
|
Variable
rate instruments
|
$ | 6,804 | $ | (6,804 | ) | $ | 6,804 | $ | (6,804 | ) | ||||||
|
Cash
flow sensitivity
|
6,804 | (6,804 | ) | 6,804 | (6,804 | ) | ||||||||||
|
Profit
or loss
|
Equity
|
|||||||||||||||
|
Effect
In AUS$
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
1
percentage point
Increase
|
1
percentage point
Decrease
|
||||||||||||
|
December
31, 2006 (unaudited)
|
||||||||||||||||
|
Variable
rate instruments
|
$ | 8,446 | $ | (8,446 | ) | $ | 8,446 | $ | (8,446 | ) | ||||||
|
Cash
flow sensitivity
|
8,446 | (8,446 | ) | 8,446 | (8,446 | ) | ||||||||||
Fair
Values
Fair
Values versus Carrying Amounts
The fair
values of financial assets and liabilities, together with the carrying amounts
shown in the balance sheet, are as follows:
|
December
31, 2007
|
December
31, 2006
(unaudited)
|
|||||||||||||||
|
In
AUS$
|
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
||||||||||||
|
Trade
receivables
|
$ | 97,597 | $ | 97,597 | $ | 65,918 | $ | 65,918 | ||||||||
|
Cash
and cash equivalents
|
1,474,386 | 1,474,386 | 1,300,373 | 1,300,373 | ||||||||||||
|
Finance
lease liabilities
|
-- | -- | -- | -- | ||||||||||||
|
Trade
payables
|
794,733 | 794,733 | 531,836 | 531,836 | ||||||||||||
The basis
for determining fair values is disclosed in Note 4. The Joint
Venture’s one finance lease expired in June of 2006.
18. Operating
Leases
Leases as Lessee
|
|
Non-cancellable
operating lease rentals are payable as
follows:
|
|
In
AUS$
|
December
31, 2007
|
December
31, 2006
(unaudited)
|
||||||
|
Less
than one year
|
$ | 993,096 | $ | 993,096 | ||||
|
Between
one and five years
|
3,792,384 | 3,792,384 | ||||||
|
More
than five years
|
5,958,576 | 6,951,672 | ||||||
|
Total
|
$ | 10,744,056 | $ | 11,737,152 | ||||
The Joint
Venture leases the cinema property under operating leases expiring over 12
years.
19. Contingencies
The
nature of the Joint Venture’s operations results in claims for personal injuries
(including public liability and workers compensation) being received from time
to time. As at period end there were no material current or ongoing
outstanding claims.
20. Reconciliation
of Cash Flows from Operating Activities
|
In
AUS$
|
Note
|
2007
|
2006
(unaudited)
|
2005
(unaudited)
|
||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Profit
for the period
|
$ | 2,851,507 | $ | 2,579,356 | $ | 1,983,497 | ||||||||||
|
Adjustments
for:
|
||||||||||||||||
|
Depreciation
and amortization
|
10 | 653,342 | 722,828 | 774,111 | ||||||||||||
|
Operating
profit before changes in working capital
|
$ | 3,504,849 | $ | 3,302,184 | $ | 2,757,608 | ||||||||||
|
Change
in trade receivables
|
12 | (31,679 | ) | 105,744 | (19,793 | ) | ||||||||||
|
Change
in inventories
|
11 | 20,320 | (25,839 | ) | 1,776 | |||||||||||
|
Change
in other assets
|
12 | 40,193 | (40,727 | ) | 4,995 | |||||||||||
|
Change
in trade payables
|
15 | 262,897 | (372,760 | ) | (90,186 | ) | ||||||||||
|
Change
in employee benefits
|
14 | 3,381 | 2,547 | 32,861 | ||||||||||||
|
Change
in deferred revenue
|
16 | (19,411 | ) | (14,543 | ) | (287,035 | ) | |||||||||
|
Net
cash from operating activities
|
$ | 3,780,550 | $ | 2,956,606 | $ | 2,400,226 | ||||||||||
21. Related
Parties
|
|
Entities
with joint control or significant influence over the Joint
Venture
|
The
managing Joint Venturer is paid an annual management fee, which is presented
separately in the income statement. The management fee paid is as per
the Joint Venture agreement and is to cover the costs of the managing Joint
Venturer for managing and operating the cinema complex and providing all
relevant accounting and support services. The management fee is based
on a contracted base amount, increased by the Consumer Price Index for the City
of Brisbane as published by the Australian Bureau of Statistics on an annual
basis. Such management fee agreement is binding over the life of the
agreement which shall continue in existence until the Joint Venture is
terminated under agreement by the Joint Venturers.
As of
December 31, 2007, there were no outstanding payable amounts [2006: nil
(unaudited)].
22. Subsequent
Events
Subsequent to December 31, 2007 there
were no events which would have a material effect on the financial
report.
Independent Auditors’
Report
The
Management Committee and Joint Venturers
Mt.
Gravatt Cinemas Joint Venture:
We have
audited the accompanying balance sheet of Mt. Gravatt Cinemas Joint Venture as
of December 31, 2007, and the related income statement, statement of changes in
members’ equity, and statement of cash flows for the year then
ended. These financial statements are the responsibility of the Joint
Venture’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Joint
Venture’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mt. Gravatt Cinemas Joint Venture
as of December 31, 2007, and the results of its operations and its cash flows
for the year then ended in conformity with International Financial Reporting
Standards as published by the International Accounting Standards
Board.
KPMG
Sydney,
Australia
March 13,
2008
Exhibits (Listed by numbers corresponding to Item 601 of
Regulation S-K)
|
3.1
|
Certificate
of Amendment of Restatement Articles of Incorporation of Citadel Holding
Corporation (filed as Exhibit 3.1 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein by
reference).
|
|
3.2
|
Restated
By-laws of Citadel Holding Corporation, a Nevada corporation (filed as
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by
reference).
|
|
3.3
|
Certificate
of Amendment of Articles of Incorporation of Citadel Holding Corporation
(filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2001).
|
|
3.4
|
Articles
of Merger of Craig Merger Sub, Inc. with and into Craig Corporation (filed
as Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2001).
|
|
3.5
|
Articles
of Merger of Reading Merger Sub, Inc. with and into Reading Entertainment,
Inc. (filed as Exhibit 3.5 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2001).
|
|
3.6
|
Restated
By-laws of Reading International, Inc., a Nevada corporation (filed as
Exhibit 3.6 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004, and incorporated herein by
reference).
|
|
4.1
|
1999
Stock Option Plan of Reading International, Inc. as amended on December
31, 2001 (filed as Exhibit 4.1 to the Company’s Registration Statement on
Form S-8 filed on January 21, 2004, and incorporated herein by
reference).
|
|
4.2
|
Form
of Preferred Security Certificate evidencing the preferred securities of
Reading International Trust I (filed as Exhibit 4.1 to the Company’s
report on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
4.3
|
Form
of Common Security Certificate evidencing common securities of Reading
International Trust I (filed as Exhibit 4.2 to the Company’s report
on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
4.4
|
Form
of Reading International, Inc. Floating Rate Junior Subordinated Debt
Security due 2027 (filed as Exhibit 4.3 to the Company’s report on Form
8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
10.1
|
Tax
Disaffiliation Agreement, dated as of August 4, 1994, by and between
Citadel Holding Corporation and Fidelity Federal Bank (filed as Exhibit
10.27 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by
reference).
|
|
10.2
|
Standard
Office lease, dated as of July 15, 1994, by and between Citadel Realty,
Inc. and Fidelity Federal Bank (filed as Exhibit 10.42 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and
incorporated herein by reference).
|
|
10.3
|
First
Amendment to Standard Office Lease, dated May 15, 1995, by and between
Citadel Realty, Inc. and Fidelity Federal Bank (filed as Exhibit 10.43 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, and incorporated herein by
reference).
|
|
10.4
|
Guaranty
of Payment dated May 15, 1995 by Citadel Holding Corporation in favor of
Fidelity Federal Bank (filed as Exhibit 10.47 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated
herein by reference).
|
|
10.5
|
Exchange
Agreement dated September 4, 1996 among Citadel Holding Corporation,
Citadel Acquisition Corp., Inc. Craig Corporation, Craig Management, Inc.,
Reading Entertainment, Inc., Reading Company (filed as Exhibit 10.51 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by
reference).
|
|
10.6
|
Asset
Put and Registration Rights Agreement dated October 15, 1996 among Citadel
Holding Corporation, Citadel Acquisition Corp., Inc., Reading
Entertainment, Inc., and Craig Corporation (filed as Exhibit 10.52 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by
reference).
|
|
10.7
|
Articles
of Incorporation of Reading Entertainment, Inc., A Nevada Corporation
(filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 1999, and incorporated herein by
reference).
|
|
10.7a
|
Certificate
of Designation of the Series A Voting Cumulative Convertible preferred
stock of Reading Entertainment, Inc. (filed as Exhibit 10.7a to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1999,
and incorporated herein by
reference).
|
|
10.8
|
Lease
between Citadel Realty, Inc., Lesser and Disney Enterprises, Inc., Lessee
dated October 1, 1996 (filed as Exhibit 10.54 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference).
|
|
10.9
|
Second
Amendment to Standard Office Lease between Citadel Realty, Inc. and
Fidelity Federal Bank dated October 1, 1996 (filed as Exhibit 10.55 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, and incorporated herein by
reference).
|
|
10.10
|
Citadel
1996 Non-employee Director Stock Option Plan (filed as Exhibit 10.57 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by
reference).
|
|
10.11
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended December
31, 1997 (filed as Exhibit 10.58 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.12
|
Stock
Purchase Agreement dated as of April 11, 1997 by and between Citadel
Holding Corporation and Craig Corporation (filed as Exhibit 10.56 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
|
|
10.13
|
Secured
Promissory Note dated as of April 11, 1997 issued by Craig Corporation to
Citadel Holding Corporation in the principal amount of $1,998,000 (filed
as Exhibit 10.60 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
|
|
10.14
|
Agreement
for Purchase and Sale of Real Property between Prudential Insurance
Company of America and Big 4 Farming LLC dated August 29, 1997 (filed as
Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
|
|
10.15
|
Second
Amendment to Agreement of Purchase and Sale between Prudential Insurance
Company of America and Big 4 Farming LLC dated November 5, 1997 (filed as
Exhibit 10.62 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
|
|
10.16
|
Partnership
Agreement of Citadel Agricultural Partners No. 1 dated December 19, 1997
(filed as Exhibit 10.63 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.17
|
Partnership
Agreement of Citadel Agricultural Partners No. 2 dated December 19, 1997
(filed as Exhibit 10.64 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.18
|
Partnership
Agreement of Citadel Agricultural Partners No. 3 dated December 19, 1997
(filed as Exhibit 10.65 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.19
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 1 and Big 4 Farming LLC (filed as Exhibit 10.67 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.20
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 2 and Big 4 Farming LLC (filed as Exhibit 10.68 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.21
|
Farm
Management Agreement dated December 26, 1997 between Citadel Agricultural
Partner No. 3 and Big 4 Farming LLC (filed as Exhibit 10.69 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.22
|
Line
of Credit Agreement dated December 29, 1997 between Citadel Holding
Corporation and Big 4 Ranch, Inc. (filed as Exhibit 10.70 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
|
|
10.23
|
Management
Services Agreement dated December 26, 1997 between Big 4 Farming LLC and
Cecelia Packing (filed as Exhibit 10.71 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.24
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 1 (filed as Exhibit 10.72 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.25
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 2 (filed as Exhibit 10.73 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.26
|
Agricultural
Loan Agreement dated December 29, 1997 between Citadel Holding Corporation
and Citadel Agriculture Partner No. 3 (filed as Exhibit 10.74 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.27
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partners No. 1 (filed as Exhibit 10.75 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.28
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partners No. 2 (filed as Exhibit 10.76 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.29
|
Promissory
Note dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partners No. 3 (filed as Exhibit 10.77 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.30
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partnership No. 1 (filed as Exhibit 10.78 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.31
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partnership No. 2 (filed as Exhibit 10.79 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.32
|
Security
Agreement dated December 29, 1997 between Citadel Holding Corporation and
Citadel Agricultural Partnership No. 3 (filed as Exhibit 10.80 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by
reference).
|
|
10.33
|
Administrative
Services Agreement between Citadel Holding Corporation and Big 4 Ranch,
Inc. dated December 29, 1997 (filed as Exhibit 10.81 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
|
|
10.34
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended December
31, 1998 (filed as Exhibit as 10.41 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated herein by
reference).
|
|
10.35
|
Reading
Entertainment, Inc. Annual Report on Form 10-K for the year ended December
31, 1999 (filed by Reading Entertainment Inc. as Form 10-K for the year
ended December 31, 1999 on April 14, 2000 and incorporated herein by
reference).
|
|
10.36
|
Promissory
Note dated December 20, 1999 between Citadel Holding Corporation and
Nationwide Life Insurance 3 (filed as Exhibit 10.36 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
|
|
10.37*
|
Employment
Agreement between Citadel Holding Corporation and Andrzej Matyczynski
(filed as Exhibit 10.37 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
|
|
10.38
|
Citadel
1999 Employee Stock Option Plan (filed as Exhibit 10.38 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
|
|
10.39
|
Amendment
and Plan of Merger By and Among Citadel Holding Corporation and
Off-Broadway Theatres, Inc. (filed as Exhibit A to the Company’s Proxy
Statement and incorporated herein by
reference).
|
|
10.40
|
Amended
and Restated Lease Agreement dated as of July 28, 2000 as amended and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C. and
Citadel Cinemas, Inc. (filed as Exhibit 10.40 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
10.41
|
Amended
and Restated Citadel Standby Credit Facility dated as of July 28, 2000 as
amended and restated as of January 29, 2002 between Sutton Hill Capital,
L.L.C. and Reading International, Inc. (filed as Exhibit 10.40 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated herein by
reference).
|
|
10.42
|
Amended
and Restated Security Agreement dated as of July 28, 2000 as amended and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C. and
Reading International, Inc. (filed as Exhibit 10.40 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference).
|
|
10.43
|
Amended
and Restated Pledge Agreement dated as of July 28, 2000 as amended and
restated as of January 29, 2002 between Sutton Hill Capital, L.L.C. and
Reading International, Inc. (filed as Exhibit 10.40 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by
reference).
|
|
10.44
|
Amended
and Restated Intercreditor Agreement dated as of July 28, 2000 as amended
and restated as of January 29, 2002 between Sutton Hill Capital, L.L.C.
and Reading International, Inc. and Nationwide Theatres Corp. (filed as
Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by
reference).
|
|
10.45
|
Guaranty
dated July 28, 2000 by Michael R. Forman and James J. Cotter in favor of
Citadel Cinemas, Inc. and Citadel Realty, Inc. (filed as Exhibit 10.40 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2002 and incorporated herein by
reference).
|
|
10.46
|
Amended
and Restated Agreement with Respect to Fee Option dated as of July 28,
2000 as amended and restated as of January 29, 2002 between Sutton Hill
Capital, L.L.C. and Citadel Realty, Inc. (filed as Exhibit 10.40 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated herein by
reference).
|
|
10.47
|
Theater
Management Agreement between Liberty Theaters, Inc. and OBI LLC (filed as
Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by
reference).
|
|
10.48*
|
Non-qualified
Stock Option Agreement between Reading International, Inc. and James J.
Cotter (filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by
reference).
|
|
10.49
|
Omnibus
Agreement between Citadel Cinemas, Inc. and Sutton Hill Capital, LLC,
dated October 22, 2003 (filed on Quarterly Report Form 10-Q for the period
ended September 30, 2003 and incorporated herein by
reference).
|
|
10.50
|
Pledge
Agreement between Citadel Cinemas, Inc. and Sutton Hill Capital, LLC,
dated October 22, 2003 (filed on Quarterly Report Form 10-Q for the period
ended September 30, 2003 and incorporated herein by
reference).
|
|
10.51
|
Guarantee
of Lenders Obligation Under Standby Credit Agreement in favor of Sutton
Hill Capital, LLC, dated October 22, 2003 (filed on Quarterly Report Form
10-Q for the period ended September 30, 2003 and incorporated herein by
reference).
|
|
10.52*
|
Employment
agreement between Reading International, Inc. and Wayne D. Smith (filed as
exhibit 10.52 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2004, and incorporated herein by
reference).
|
|
10.53
|
Contract
of Sale between Sutton Hill Capital L.L.C. and Sutton Hill Properties, LLC
dated as of September 19, 2005 (filed as exhibit 10.53 to the Company’s
report on Form 8-K filed on September 21, 2005, and incorporated herein by
reference).
|
|
10.54
|
Installment
Sale Note dated as of September 19, 2005 (filed as exhibit 10.54 to the
Company’s report on Form 8-K filed on September 21, 2005, and incorporated
herein by reference).
|
|
10.55
|
Guaranty
by Reading International, Inc. dated as of September 1, 2005 (filed as
exhibit 10.55 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.56
|
Assignment
and Assumption of Lease between Sutton Hill Capital L.L.C. and Sutton Hill
Properties, LLC dated as of September 19, 2005 (filed as exhibit 10.56 to
the Company’s report on Form 8-K filed on September 21, 2005, and
incorporated herein by reference).
|
|
10.57
|
License
and Option Agreement between Sutton Hill Properties, LLC and Sutton Hill
Capital L.L.C. dated as of September 19, 2005 (filed as exhibit 10.57 to
the Company’s report on Form 8-K filed on September 21, 2005, and
incorporated herein by
reference).
|
|
10.58
|
Second
Amendment to Amended and Restated Master Operating Lease dated as of
September 1, 2005 (filed as exhibit 10.58 to the Company’s report on Form
8-K filed on September 21, 2005, and incorporated herein by
reference).
|
|
10.59
|
Letter
from James J. Cotter dated August 11, 2005 regarding liens (filed as
exhibit 10.59 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.60
|
Letter
amending effective date of transaction to September 19, 2005 (filed as
exhibit 10.60 to the Company’s report on Form 8-K filed on September 21,
2005, and incorporated herein by
reference).
|
|
10.61
|
Promissory
Note by Citadel Cinemas, Inc. in favor of Sutton Hill Capital L.L.C. dated
September 14, 2004 (filed as exhibit 10.61 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2005, and incorporated herein
by reference).
|
|
10.62
|
Guaranty
by Reading International, Inc. in favor of Sutton Hill Capital L.L.C.
dated September 14, 2004 (filed as exhibit 10.62 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005, and incorporated
herein by reference).
|
|
10.63
|
Purchase
Agreement, dated February 5, 2007, among Reading International, Inc.,
Reading International Trust I, and Kodiak Warehouse JPM LLC (filed as
Exhibit 10.1 to the Company’s report on Form 8-K dated February 5, 2007,
and incorporated herein by
reference).
|
|
10.64
|
Amended
and Restated Declaration of Trust, dated February 5, 2007, among Reading
International Inc., as sponsor, the Administrators named therein, and
Wells Fargo Bank, N.A., as property trustee, and Wells Fargo Delaware
Trust Company as Delaware trustee (filed as Exhibit 10.2 to the Company’s
report on Form 8-K dated February 5, 2007, and incorporated herein by
reference).
|
|
10.65
|
Indenture
among Reading International, Inc., Reading New Zealand Limited, and Wells
Fargo Bank, N.A., as indenture trustee (filed as Exhibit 10.4 to the
Company’s report on Form 8-K dated February 5, 2007, and incorporated
herein by reference).
|
|
10.66*
|
Employment
Agreement between Reading International, Inc. and John Hunter (filed as
Exhibit 10.66 to the Company’s report on Form 10-K for the year ended
December 31, 2006, and incorporated herein by
reference).
|
|
10.67
|
Asset
Purchase and Sale Agreement dated October 8, 2007 among Pacific Theatres
Exhibition Corp., Consolidated Amusement Theatres, Inc., a Hawaii
corporation, Michael Forman, Christopher Forman, Consolidated Amusement
Theatres, Inc., a Nevada corporation, and Reading International, Inc.
(filed herewith).
|
|
10.68
|
Real
Property Purchase and Sale Agreement dated October 8, 2007 between
Consolidated Amusement Theatres, Inc., a Hawaii corporation, and
Consolidated Amusement Theatres, Inc., a Nevada corporation (filed
herewith).
|
|
10.69
|
Leasehold
Purchase and Sale Agreement dated October 8, 2007 between Kenmore Rohnert,
LLC and Consolidated Amusement Theatres, Inc., a Nevada corporation (filed
herewith).
|
|
10.70
|
Amendment
No. 1 to Asset Purchase and Sale Agreement dated February 8, 2008 among
Pacific Theatres Exhibition Corp., Consolidated Amusement Theatres, Inc.,
a Hawaii corporation, Michael Forman, Christopher Forman, Consolidated
Amusement Theatres, Inc., a Nevada corporation, and Reading International,
Inc. (filed herewith).
|
|
10.71
|
Amendment
No. 2 to Asset Purchase and Sale Agreement dated February 14, 2008 among
Pacific Theatres Exhibition Corp., Consolidated Amusement Theatres, Inc.,
a Hawaii corporation, Michael Forman, Christopher Forman, Consolidated
Amusement Theatres, Inc., a Nevada corporation, and Reading International,
Inc. (filed herewith).
|
|
10.72
|
Credit
Agreement dated February 21, 2008 among Consolidated Amusement Theatres,
Inc., a Nevada corporation, General Electric Capital Corporation, and GE
Capital Markets, Inc. (filed
herewith).
|
|
10.73
|
Reading
Guaranty Agreement dated February 21, 2008 among Consolidated Amusement
Theatres, Inc., a Nevada corporation, General Electric Capital
Corporation, and GE Capital Markets, Inc. (filed
herewith).
|
|
10.74
|
Pledge
and Security Agreement dated February 22, 2008 by Reading Consolidated
Holdings, Inc. in favor of Nationwide Theatres Corp (filed
herewith).
|
|
10.75
|
Promissory
Note dated February 22, 2008 by Reading Consolidated Holdings, inc. in
favor of Nationwide Theatres Corp. (filed
herewith).
|
|
21
|
List
of Subsidiaries (filed herewith).
|
|
23.1
|
Consent
of Independent Auditors, Deloitte & Touche LLP (filed
herewith).
|
|
23.2
|
Consent
of Independent Auditors, Pricewaterhousecoopers LLP (filed
herewith).
|
|
23.3
|
Consent
of Independent Auditors, KPMG LLP (filed
herewith).
|
|
31.1
|
Certification
of Principal Executive Officer dated March 28, 2008 pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
31.2
|
Certification
of Principal Financial Officer dated March 28, 2008 pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
32.1
|
Certification
of Principal Executive Officer dated March 28, 2008 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
|
|
32.2
|
Certification
of Principal Financial Officer dated March 28, 2008 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
|
*These
exhibits constitute the executive compensation plans and arrangements of the
Company.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
READING
INTERNATIONAL, INC.
(Registrant)
|
Date: March
28, 2008
|
By:
|
/s/
Andrzej Matyczynski
|
|
Andrzej
Matyczynski
|
||
|
Chief
Financial Officer and Treasurer
|
||
|
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title(s)
|
Date
|
|
/s/
James J. Cotter
|
Chairman
of the Board and Director and Chief Executive Officer
|
March
28, 2008
|
|
James
J. Cotter
|
||
|
/s/
Eric Barr
|
Director
|
March
28, 2008
|
|
Eric
Barr
|
||
|
/s/
James J. Cotter, Jr.
|
Director
|
March
28, 2008
|
|
James
J. Cotter, Jr.
|
||
|
/s/
Margaret Cotter
|
Director
|
March
28, 2008
|
|
Margaret
Cotter
|
||
|
/s/
William D. Gould
|
Director
|
March
28, 2008
|
|
William
D. Gould
|
||
|
/s/
Edward L. Kane
|
Director
|
March
28, 2008
|
|
Edward
L Kane
|
||
|
/s/
Gerard P. Laheney
|
Director
|
March
28, 2008
|
|
Gerard
P. Laheney
|
||
|
/s/
Alfred Villaseñor
|
Director
|
March
28, 2008
|
|
Alfred
Villaseñor
|
-157-