10-Q 1 rdi-20140630x10q.htm a0a5a7f79ce540b

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

__________________________________

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  June 30, 2014

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

 

Commission file number 1-8625

C:\Users\matthew.elmshauser\Pictures\Reading International logo.jpg

READING INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

NEVADA

(State or other jurisdiction of incorporation or organization)

95-3885184

(IRS Employer Identification No.)

6100 Center Drive, Suite 900

Los Angeles,  CA

(Address of principal executive offices)

90045

(Zip Code)

 

Registrant’s telephone number, including area code: (213) 235-2240

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer  Accelerated filer   Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 11, 2014, there were 22,252,416 shares of Class A Nonvoting Common Stock, $0.01 par value per share and 1,495,490 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.

 

 

 

 

1

 


 

 

READING INTERNATIONAL, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I - Financial Information 

3

Item 1 – Financial Statements 

3

Condensed Consolidated Balance Sheets (Unaudited) 

3

Condensed Consolidated Statements of Income (Unaudited) 

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) 

5

Condensed Consolidated Statements of Cash Flows (Unaudited) 

6

Notes to Condensed Consolidated Financial Statements (Unaudited) 

7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 

26

Item 3 – Quantitative and Qualitative Disclosure about Market Risk 

47

Item 4 – Controls and Procedures 

49

PART II – Other Information 

50

Item 1 - Legal Proceedings 

50

Item 1A - Risk Factors 

50

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 

50

Item 3 - Defaults Upon Senior Securities 

50

Item 5 - Other Information 

50

Item 6 - Exhibits 

51

SIGNATURES 

52

Certifications 

53

2

 


 

 

 

PART 1 - Financial Information

Item 1 - Financial Statements

Reading International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

June 30,
2014

December 31, 2013

ASSETS

 

 

 

 

Current Assets:

 

 

 

 

Cash and cash equivalents

$

42,647 

$

37,696 

Receivables

 

10,696 

 

9,087 

Inventory

 

838 

 

941 

Investment in marketable securities

 

57 

 

55 

Restricted cash

 

783 

 

782 

Deferred tax asset

 

1,586 

 

3,273 

Prepaid and other current assets

 

3,693 

 

3,283 

Land held for sale

 

11,745 

 

--

Total current assets

 

72,045 

 

55,117 

 

 

 

 

 

Operating property, net

 

195,924 

 

191,660 

Land held for sale

 

46,756 

 

11,052 

Investment and development property, net

 

31,701 

 

74,230 

Investment in unconsolidated joint ventures and entities

 

7,052 

 

6,735 

Investment in Reading International Trust I

 

838 

 

838 

Goodwill

 

23,026 

 

22,159 

Intangible assets, net

 

12,433 

 

13,440 

Deferred tax asset, net

 

5,590 

 

5,566 

Other assets

 

6,449 

 

6,010 

Total assets

$

401,814 

$

386,807 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

Current Liabilities:

 

 

 

 

Accounts payable and accrued liabilities

$

18,079 

$

18,608 

Film rent payable

 

7,920 

 

6,438 

Notes payable – current

 

34,791 

 

75,538 

Taxes payable - current

 

3,474 

 

8,308 

Deferred current revenue

 

11,155 

 

11,864 

Other current liabilities

 

6,205 

 

6,155 

Total current liabilities

 

81,624 

 

126,911 

 

 

 

 

 

Notes payable – long-term

 

104,234 

 

65,009 

Subordinated debt

 

27,913 

 

27,913 

Noncurrent tax liabilities

 

12,142 

 

12,478 

Other liabilities

 

40,256 

 

32,749 

Total liabilities

 

266,169 

 

265,060 

Commitments and contingencies (Note 13)

 

 

 

 

Stockholders’ equity:

 

 

 

 

Class A non-voting common stock, par value $0.01, 100,000,000 shares authorized,

 

 

 

 

32,456,908 issued and 21,885,238 outstanding at June 30, 2014 and 32,254,199

 

 

 

 

issued and 21,890,029 outstanding at December 31, 2013

 

226 

 

225 

Class B voting common stock, par value $0.01, 20,000,000 shares authorized and

 

 

 

 

1,495,490 issued and outstanding at June 30, 2014 and at December 31, 2013

 

15 

 

15 

Nonvoting preferred stock, par value $0.01, 12,000 shares authorized and no issued

 

 

 

 

or outstanding shares at June30, 2014 and December 31, 2013

 

--

 

--

Additional paid-in capital

 

138,412 

 

137,849 

Accumulated deficit

 

(53,410)

 

(57,952)

Treasury shares

 

(6,307)

 

(4,512)

Accumulated other comprehensive income

 

52,073 

 

41,515 

Total Reading International, Inc. stockholders’ equity

 

131,009 

 

117,140 

Noncontrolling interests

 

4,636 

 

4,607 

Total stockholders’ equity

 

135,645 

 

121,747 

Total liabilities and stockholders’ equity

$

401,814 

$

386,807 

 

See accompanying notes to consolidated financial statements.

 

 

 

3

 


 

 

 

 

 

Reading International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(U.S. dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Operating revenue

 

 

 

 

 

 

 

 

Cinema

$

65,854 

$

64,659 

$

119,278 

$

119,429 

Real estate

 

4,068 

 

4,983 

 

8,697 

 

9,780 

Total operating revenue

 

69,922 

 

69,642 

 

127,975 

 

129,209 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

Cinema

 

49,933 

 

51,095 

 

93,723 

 

97,130 

Real estate

 

2,259 

 

2,730 

 

5,234 

 

5,399 

Depreciation and amortization

 

3,865 

 

3,650 

 

7,670 

 

7,640 

General and administrative

 

5,366 

 

4,401 

 

10,267 

 

8,738 

Total operating expense

 

61,423 

 

61,876 

 

116,894 

 

118,907 

 

 

 

 

 

 

 

 

 

Operating income

 

8,499 

 

7,766 

 

11,081 

 

10,302 

 

 

 

 

 

 

 

 

 

Interest income

 

147 

 

199 

 

226 

 

248 

Interest expense

 

(2,977)

 

(2,835)

 

(5,352)

 

(5,557)

Loss on sale of assets

 

--

 

--

 

--

 

(7)

Other income

 

646 

 

113 

 

1,388 

 

128 

Income  before income tax expense and equity earnings of unconsolidated joint ventures and entities

 

6,315 

 

5,243 

 

7,343 

 

5,114 

Income tax (expense)

 

(1,842)

 

(1,500)

 

(3,435)

 

(2,389)

Income before equity earnings of unconsolidated joint ventures and entities

 

4,473 

 

3,743 

 

3,908 

 

2,725 

Equity earnings of unconsolidated joint ventures and entities

 

301 

 

432 

 

611 

 

779 

Net Income

$

4,774 

$

4,175 

$

4,519 

$

3,504 

Net (income) loss attributable to noncontrolling interests

 

(15)

 

(40)

 

23 

 

(36)

Net income attributable to Reading International, Inc. common shareholders

$

4,759 

$

4,135 

$

4,542 

$

3,468 

Basic earnings  per share attributable to Reading International, Inc. shareholders

$

0.20 

$

0.18 

$

0.19 

$

0.15 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to Reading International, Inc. shareholders

$

0.20 

$

0.18 

$

0.19 

$

0.15 

Weighted average number of shares outstanding–basic

 

23,471,776 

 

23,344,057 

 

23,480,429 

 

23,305,466 

Weighted average number of shares outstanding–diluted

 

23,775,923 

 

23,447,250 

 

23,784,576 

 

23,408,659 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

Reading International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

4

 


 

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2014

 

2013

 

2014

 

2013

Net income

$

4,774 

$

4,175 

$

4,519 

$

3,504 

Foreign currency translation gain (loss)

 

2,443 

 

(19,874)

 

10,064 

 

(18,863)

Unrealized gain (loss) on available for sale investments

 

(1)

 

 

(1)

 

Amortization of pension prior service costs

 

235 

 

165 

 

471 

 

330 

Comprehensive income

 

7,451 

 

(15,528)

 

15,053 

 

(15,024)

Net (income) loss attributable to noncontrolling interests

 

(15)

 

(40)

 

23 

 

(36)

Comprehensive income attributable to noncontrolling interests

 

109 

 

71 

 

28 

 

72 

Comprehensive income attributable to Reading International, Inc.

$

7,545 

$

(15,497)

$

15,104 

$

(14,988)

 

See accompanying notes to consolidated financial statements.

5

 


 

 

Reading International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

 

2014

 

2013

Operating Activities

 

 

 

 

Net income

$

4,519 

$

3,504 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

Gain (loss) recognized on foreign currency transactions

 

22 

 

33 

Equity earnings of unconsolidated joint ventures and entities

 

(611)

 

(779)

Distributions of earnings from unconsolidated joint ventures and entities

 

623 

 

600 

Loss on sale of assets

 

--

 

Change in net deferred tax assets

 

2,094 

 

1,007 

Depreciation and amortization

 

7,670 

 

7,640 

Amortization of prior service costs

 

471 

 

330 

Amortization of above and below market leases

 

171 

 

183 

Amortization of deferred financing costs

 

114 

 

563 

Amortization of straight-line rent

 

(403)

 

406 

Stock based compensation expense

 

68 

 

130 

Changes in assets and liabilities:

 

 

 

 

Increase in receivables

 

(1,237)

 

(569)

(Increase) decrease in prepaid and other assets

 

(579)

 

(692)

Decrease in accounts payable and accrued expenses

 

(1,002)

 

(1,600)

Increase (decrease) in film rent payable

 

1,317 

 

3,492 

Decrease in taxes payable

 

(5,193)

 

(2,070)

Increase (decrease) in deferred revenue and other liabilities

 

1,165 

 

(2,697)

Net cash provided by operating activities

 

9,209 

 

9,488 

Investing Activities

 

 

 

 

Purchases of and additions to property and equipment

 

(3,899)

 

(3,424)

Change in restricted cash

 

19 

 

1,657 

Proceeds from notes receivable

 

--

 

2,000 

Distributions of investment in unconsolidated joint ventures and entities

 

212 

 

59 

Deposit from sale of property

 

6,423 

 

--

Proceeds of time deposits

 

--

 

8,000 

Net cash provided by investing activities

 

2,755 

 

8,292 

Financing Activities

 

 

 

 

Repayment of long-term borrowings

 

(6,127)

 

(22,097)

Proceeds from borrowings

 

--

 

12,500 

Capitalized borrowing costs

 

--

 

(103)

Repurchase of Class A Nonvoting Common Stock

 

(1,795)

 

--

Proceeds from the exercise of stock options

 

495 

 

200 

Noncontrolling interest contributions

 

125 

 

263 

Noncontrolling interest distributions

 

(101)

 

(2,016)

Net cash (used in) financing activities

 

(7,403)

 

(11,253)

Effect of exchange rate on cash

 

390 

 

(2,696)

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

4,951 

 

3,831 

Cash and cash equivalents at the beginning of the period

 

37,696 

 

38,531 

Cash and cash equivalents at the end of the period

$

42,647 

$

42,362 

Supplemental Disclosures

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest on borrowings

$

5,083 

$

5,981 

Income taxes

 

3,997 

 

3,961 

Non-Cash Transactions

 

 

 

 

Noncontrolling interest contribution in exchange for debt reduction - related party

$

--

$

2,250 

Acquisition of noncontrolling interest

 

--

 

101 

See accompanying notes to consolidated financial statements.

6

 


 

 

 

 

Reading International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Six Months Ended June 30, 2014

 

Note 1 – Basis of Presentation

Reading International, Inc., a Nevada corporation (“RDI” and collectively with our consolidated subsidiaries and corporate predecessors, the “Company,” “Reading” and “we,” “us,” or “our”), was founded in 1983 as a Delaware corporation and reincorporated in 1999 in Nevada.  Our businesses consist primarily of:

·

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.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) for interim reporting.  As such, certain information and disclosures typically required by US GAAP for complete financial statements have been condensed or omitted.  The financial information presented in this quarterly report on Form 10-Q for the period ended June 30, 2014 (the “June Report”) should be read in conjunction with our Annual Report filed on Form 10-K for the year ended December 31, 2013 (our “2013 Annual Report”) which contains the latest audited financial statements and related notes.  The periods presented in this document are the three (“2014 Quarter”) and six (“2014 Six Months”) months ended June 30, 2014 and the three (“2013 Quarter”) and six (“2013 Six Months”) months ended June 30, 2013.

In the opinion of management, all adjustments of a normal recurring nature considered necessary to present fairly in all material respects our financial position as of June 30, 2014 and the results of our operations and cash flows for the three and six months ended June 30, 2014 and 2013 have been made.  The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results of operations to be expected for the entire year.

Expiring Debt and Liquidity Requirements

Expiring Long-Term Debt

The term of our Union Square Theatre Term Loan matures on May 1, 2015.  Accordingly, the outstanding balance of this debt of $6.5 million has been classified as a current liability on the consolidated balance sheet as of June 30, 2014.

Additionally, the New Zealand Corporate Credit Facility matures on March 31, 2015 and as such the balance of $24.5 million (NZ$28.0 million) has been reclassified as a current liability on the consolidated balance sheet as of June 30, 2014.

While no assurances can be given that we will be successful, we currently anticipate that these loans will either be extended or replaced prior to their maturities.

7

 


 

Tax Settlement Liability

As indicated in our 2013 Annual Report, in accordance with the agreement between the U.S. Internal Revenue Service and our subsidiary, Craig Corporation, it is obligated to pay $290,000 per month, $3.5 million per year, in settlement of its tax liability for the tax year ended June 30, 1997.

For the above mentioned liabilities, we believe that we have the required liquidity to meet the obligations either through the extension or replacement of maturing debt or the generation of cash from our operating activities.  Together with our $42.6 million of cash and cash equivalents, we expect to meet our anticipated short-term working capital requirements for the next twelve months.

Receivables

Our receivables balance is composed primarily of credit card receivables, representing the purchase price of tickets, concessions 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 good and services tax (“GST”) refunded receivables from our Australian taxing authorities, management fee receivables from the managed cinemas and business interruption insurance recovery proceeds.

Marketable Securities

We had investments in marketable securities of $57,000 and $55,000 at June 30, 2014 and December 31, 2013, respectively.  We account for these investments as available for sale investments.  We assess our investment in marketable securities for other-than-temporary impairments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10 for each applicable reporting period.  These investments have a cumulative gain of $8,000 included in accumulated other comprehensive income at June 30, 2014.  For the three and six months ended June 30, 2014, our net unrealized gain (loss) on marketable securities was ($1,000) and ($1,000), respectively.  For the three and six months ended June 30, 2013, our net unrealized gain (loss) on marketable securities was $6,000 and $5,000, respectively.  During the six months ended June 30, 2014 and 2013, we did not buy or sell any marketable securities.

Deferred Leasing Costs

We amortize direct costs incurred in connection with obtaining tenants for our properties over the respective term of the lease on a straight-line basis.

Deferred Financing Costs

We amortize direct costs incurred in connection with obtaining financing over the term of the loan using the effective interest method, or the straight-line method, if the result is not materially different.  In addition, interest on loans with increasing interest rates and scheduled principal pre-payments, is also recognized using the effective interest method.

Accounting Pronouncements Adopted During 2014

No new pronouncements were adopted during the six months ended June 30, 2014.

New Accounting Pronouncements

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the criteria for determining which disposals can be presented as discontinued operations and modify related disclosure requirements. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date, and is effective for the Company as of January 1, 2015. However, all entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.

8

 


 

In May 2014, the Financial Accounting Standards Board issued a new standard to achieve a consistent application of revenue recognition within the U.S resulting in a single revenue model to be applied by reporting companies under U.S. general accepted accounting principles.  Under the new model, recognition of revenues occurs when a customer obtains control of promised good or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The new standard is effective for us beginning in the first quarter of 2017, early adoption is prohibited.  The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application.  We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated condensed financial statements.

 

Note 2 – Equity and Stock Based Compensation

Stock-Based Compensation

During the six months ended June 30, 2014 and 2013, we issued 125,209 and 217,890, respectively, of Class A Nonvoting shares to an executive employee associated with the vesting of his prior years’ stock grants.  During the three and six months ended June 30, 2014, we accrued $300,000 and $600,000, respectively, in compensation expense associated with the vesting of executive employee stock grants. During the three and six months ended June 30, 2013, we accrued $188,000 and $376,000, respectively, in compensation expense associated with the vesting of executive employee stock grants.

Employee/Director Stock Option Plan

We have a long-term incentive stock option plan that provides for the grant to eligible employees, directors, and consultants of incentive or nonstatutory options to purchase shares of our Class A Nonvoting Common Stock and Class B Voting Common Stock.  Currently we issue options under our 2010 Stock Incentive Plan. 

 

When the Company’s tax deduction from an option exercise exceeds the compensation cost resulting from the option, a tax benefit is created.  FASB ASC 718-20 relating to Stock-Based Compensation (“FASB ASC 718-20”), requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.  For the three and six months ended June 30, 2014 and 2013, there was no impact to the unaudited condensed consolidated statement of cash flows because there were no recognized tax benefits from stock option exercises during these periods.

 

FASB ASC 718-20 requires companies to estimate forfeitures.  Based on our historical experience and the relative market price to strike price of the options, we do not currently estimate any forfeitures of vested or unvested options.

 

In accordance with FASB ASC 718-20, 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.  As we intend to retain all earnings, we exclude the dividend yield from the calculation.  We expense the estimated grant date fair values of options issued on a straight-line basis over the vesting period.

 

For the 20,000 and 50,000 options granted during the six months ended June 30, 2014 and 2013, 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: 

9

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

2013

 

 

Stock option exercise price

$7.40

$5.89

 

 

Risk-free interest rate

2.88%

2.26%

 

 

Expected dividend yield

--

--

 

 

Expected option life in years

4

5

 

 

Expected volatility

30.65%

31.89%

 

 

Weighted average fair value

$2.46

$1.89

 

 

Based on the above calculation and prior years’ assumptions, and, in accordance with the FASB ASC 718-20, we recorded compensation expense for the total estimated grant date fair value of $ 34,000 and

$68,000 for the three and six months ended June 30, 2014, respectively, and $77,000 and $130,000 for the three and six months ended June 30, 2013, respectively.  At June 30, 2014, the total unrecognized estimated compensation cost related to non-vested stock options granted was $438,000, which we expect to recognize over a weighted average vesting period of 2.15 years.  77,500 options were exercised during the six months ended June 30, 2014 having an intrinsic value of $156,000 for which we received 

$494,712 of cash and 50,000 options were exercised during the six months ended June 30, 2013 having an intrinsic value of $99,500 for which we received $200,500 of cash.  The intrinsic, unrealized value of all options outstanding, vested and expected to vest, at June 30, 2014 was $1.4 million of which 62.0% are currently exercisable.

 

Pursuant to both our 1999 Stock Option Plan and our 2010 Stock Incentive Plan, all stock options expire not later than ten years of their 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 2010 Stock Incentive Plan is 1,250,000.  At the discretion of our Compensation and Stock Options Committee, the vesting period of stock options is usually between zero and four years.

 

We had the following stock options outstanding and exercisable as of June 30, 2014 and December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted Average

 

Common Stock

Average Exercise

Common Stock

 

Price of

 

Options

Price of Options

Exercisable

 

Exercisable

 

Outstanding

Outstanding

Options

 

Options

 

Class A

Class B

Class A

Class B

Class A

Class B

Class A

Class B

Outstanding - December 31, 2013

709,850 
185,100 

$

6.24 

$

9.90 
490,350 
185,100 

$

6.85 

$

9.90 

Granted

20,000 

--

$

7.40 

$

--

--

--

 

--

 

--

Exercised

(500)

--

$

6.23 

$

--

--

--

 

--

 

--

Outstanding - March 31, 2014

729,350 
185,100 

$

6.68 

$

9.90 
510,350 
185,100 

$

6.87 

$

9.90 

Granted

--

--

 

 

 

--

--

--

 

--

 

--

Exercised

(77,000)

--

 

6.38 

$

--

--

--

 

--

 

--

Outstanding - June 30, 2014

652,350 
185,100 

$

6.53 

$

9.90 
435,350 
185,100 

$

6.95 

$

9.90 

 

The weighted average remaining contractual life of all options outstanding, vested, and expected to vest at June 30, 2014 and December 31, 2013 was approximately 4.44 and 4.70 years, respectively.  The weighted average remaining contractual life of the exercisable options outstanding at June 30, 2014 and December 31, 2013 was approximately 3.36 and 3.63 years, respectively.

10

 


 

Note 3 – Business Segments

We organize our operations into two reportable business segments within the meaning of FASB ASC 280-10 - Segment Reporting.  Our reportable segments are (1) cinema exhibition and (2) real estate.  The cinema exhibition segment is engaged in the development, ownership, and operation of multiplex cinemas.  The real estate segment is engaged in the development, ownership, and operation of commercial properties.  Incident to our real estate operations we have acquired, and continue to hold, raw land in urban and suburban centers in Australia, New Zealand, and the United States.

The tables below summarize the results of operations for each of our principal business segments for the three months ended June 30, 2014 and 2013, respectively.  Operating expenses include costs associated with the day-to-day operations of the cinemas and the management of rental properties including our live theater assets (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2014

Cinema Exhibition

Real Estate

Intersegment Eliminations

Total

Revenue

$

65,854 

$

5,782 

$

(1,714)

$

69,922 

Operating expense

 

51,647 

 

2,259 

 

(1,714)

 

52,192 

Depreciation and amortization

 

2,817 

 

956 

 

--

 

3,773 

General and administrative expense

 

1,203 

 

260 

 

--

 

1,463 

Segment operating income

$

10,187 

$

2,308 

$

--

$

12,495 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2013

Cinema Exhibition

Real Estate

Intersegment Eliminations

Total

Revenue

$

64,659 

$

6,896 

$

(1,913)

$

69,642 

Operating expense

 

53,008 

 

2,730 

 

(1,913)

 

53,825 

Depreciation and amortization

 

2,525 

 

1,015 

 

--

 

3,540 

General and administrative expense

 

801 

 

214 

 

--

 

1,015 

Segment operating income

$

8,325 

$

2,937 

$

--

$

11,262 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to net income attributable to Reading International, Inc. shareholders:

 

 

 

 

 

2014 Quarter

 

2013 Quarter

Total segment operating income

 

 

 

 

$

12,495 

$

11,262 

Non-segment:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

91 

 

110 

General and administrative expense

 

 

 

 

 

3,903 

 

3,386 

Operating income

 

 

 

 

 

8,499 

 

7,766 

Interest expense, net

 

 

 

 

 

(2,830)

 

(2,636)

Other income

 

 

 

 

 

646 

 

113 

Income tax expense

 

 

 

 

 

(1,842)

 

(1,500)

Equity earnings of unconsolidated joint ventures and entities

 

 

 

 

 

301 

 

432 

Net income

 

 

 

 

$

4,774 

$

4,175 

Net (income) attributable to noncontrolling interests

 

 

 

 

 

(15)

 

(40)

Net income attributable to Reading International, Inc. common shareholders

 

 

 

 

$

4,759 

$

4,135 

 

The tables below summarize the results of operations for each of our principal business segments for the six months ended June 30, 2014 and 2013, respectively.  Operating expenses include costs associated with the day-to-day operations of the cinemas and the management of rental properties including our live theater assets (dollars in thousands):

11

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014

Cinema Exhibition

Real Estate

Intersegment Eliminations

Total

Revenue

$

119,278 

$

12,361 

$

(3,664)

$

127,975 

Operating expense

 

97,387 

 

5,234 

 

(3,664)

 

98,957 

Depreciation and amortization

 

5,613 

 

1,875 

 

--

 

7,488 

General and administrative expense

 

2,101 

 

434 

 

--

 

2,535 

Segment operating income

$

14,177 

$

4,818 

$

--

$

18,995 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

Cinema Exhibition

Real Estate

Intersegment Eliminations

Total

Revenue

$

119,429 

$

13,606 

$

(3,826)

$

129,209 

Operating expense

 

100,956 

 

5,399 

 

(3,826)

 

102,529 

Depreciation and amortization

 

5,285 

 

2,134 

 

--

 

7,419 

General and administrative expense

 

1,571 

 

334 

 

--

 

1,905 

Segment operating income

$

11,617 

$

5,739 

$

--

$

17,356 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to net income attributable

 

 

 

 

 

2014 Six

 

2013 Six

to Reading International, Inc. shareholders:

 

 

 

 

 

Months

 

Months

Total segment operating income

 

 

 

 

$

18,995 

$

17,356 

Non-segment:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

182 

 

221 

General and administrative expense

 

 

 

 

 

7,732 

 

6,833 

Operating income

 

 

 

 

 

11,081 

 

10,302 

Interest expense, net

 

 

 

 

 

(5,126)

 

(5,309)

Other income

 

 

 

 

 

1,388 

 

128 

Gain (loss) on sale of assets

 

 

 

 

 

--

 

(7)

Income tax expense

 

 

 

 

 

(3,435)

 

(2,389)

Equity earnings of unconsolidated joint ventures and entities

 

 

 

 

 

611 

 

779 

Loss from discontinued operations

 

 

 

 

 

--

 

--

Net income

 

 

 

 

$

4,519 

$

3,504 

Net (income) loss attributable to noncontrolling interests

 

 

 

 

 

23 

 

(36)

Net income attributable to Reading International, Inc. common shareholders

 

 

 

 

$

4,542 

$

3,468 

 

 

 

Note 4 – Operations in Foreign Currency

We have significant assets in Australia and New Zealand. To the extent possible, we conduct our Australian and New Zealand operations on a self-funding basis.  The carrying value of our Australian and New Zealand assets and liabilities fluctuate due to changes in the exchange rates between the U.S. dollar and the functional currency of Australia (Australian dollar) and New Zealand (New Zealand dollar).  We have no derivative financial instruments to hedge against the risk of foreign currency exposure.

Presented in the table below are the currency exchange rates for Australia and New Zealand as of June 30, 2014 , December 31, 2013 and June 30, 2013:

 

 

 

 

 

 

 

 

 

U.S. Dollar

 

June 30,
2014

December 31, 2013

June 30,
2013

Australian Dollar

0.9427

0.8929

0.9165

New Zealand Dollar

0.8755

0.8229

0.7755

12

 


 

 

Note 5 – Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to Reading International, Inc. common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per share is computed by dividing the net income (loss) attributable to Reading International, Inc. common shareholders by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive common shares that would have been outstanding if the dilutive common shares had been issued.  Stock options and non-vested stock awards give rise to potentially dilutive common shares.  In accordance with FASB ASC 260-10 - Earnings Per Share, these shares are included in the diluted earnings per share calculation under the treasury stock method.  The following is a calculation of earnings (loss) per share (dollars in thousands, except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

 

2014

 

2013

 

2014

 

2013

Net income from continuing operations

$

4,759 

$

4,135 

$

4,542 

$

3,468 

Net income attributable to Reading International, Inc. common shareholders

 

4,759 

 

4,135 

 

4,542 

 

3,468 

Basic earnings  per share attributable to Reading International, Inc. shareholders

$

0.20 

$

0.18 

$

0.19 

$

0.15 

Diluted earnings per share attributable to Reading International, Inc. shareholders

$

0.20 

$

0.18 

$

0.19 

$

0.15 

Weighted average shares of common stock – basic

 

23,471,776 

 

23,344,057 

 

23,480,429 

 

23,305,466 

Weighted average shares of common stock – diluted

 

23,775,923 

 

23,447,250 

 

23,784,576 

 

23,408,659 

For the three and six months ended June 30, 2014, the weighted average common stock – diluted included 304,147 of common stock compensation and in-the-money incremental stock options and for the three and six months ended June 30, 2013, the weighted average common stock – diluted included 103,193 of common stock compensation and in-the-money incremental stock options.  In addition, 695,946 of out-of-the-money stock options were excluded from the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2014, and 741,861 of out-of-the-money stock options were excluded from the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2013.

 

Note 6 – Property and Equipment

 

Operating Property, net

 

As of June 30, 2014 and December 31, 2013, property associated with our operating activities is summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Operating Property

 

June 30,
2014

 

December 31, 2013

Land

$

67,517 

$

65,578 

Building and improvements

 

129,225 

 

123,061 

Leasehold interests

 

48,975 

 

46,330 

Fixtures and equipment

 

112,909 

 

106,099 

13

 


 

Total cost

 

358,626 

 

341,068 

Less: accumulated depreciation

 

(162,702)

 

(149,408)

Operating property, net

$

195,924 

$

191,660 

 

Depreciation expense for property and equipment was $3.6 million and $7.0 million for the three and six months ended June 30, 2014, respectively, and $3.5 million and $7.1 million for the three and six months ended June 30, 2013, respectively.

 

Land Held for Sale – Moonee Ponds

 

On October 15, 2013, we entered into a definitive purchase and sale agreement to sell this property for a sale price of $21.9 million (AUS$23.0 million) payable in full upon closing of that transaction on April 16, 2015.  The property has a book value of $11.7 million (AUS $12.4 million) and while the transaction was treated as a current sale for tax purposes, it does not qualify as a sale under US GAAP until the close of the transaction on April 16, 2015.  As the scheduled closing date, is less than one year away, this asset has been listed as a current asset.

 

Land Held for Sale – Burwood

 

On May 12, 2014, we entered into a contract to sell our undeveloped 50.6 acre parcel in Burwood, Victoria, Australia, to an affiliate of Australand Holdings Limited for a purchase price of $59.1 million (AUS$65.0 million)

 

Reading received $5.9 million (AUS$6.5 million) on the May 12, 2014 closing.  The balance of the purchase price is due on December 31, 2017.  The agreement provides for mandatory pre-payments in the event that any of the land is sold by the buyer, any such prepayment being in an amount equal to the greater of (a) 90% of the net sale price or (b) the balance of the purchase price multiplied by a fraction the numerator of which is the square footage of property being sold by the buyer and the denominator of which is the original square footage of the property being sold to the buyer.  The agreement does not provide for the payment of interest on the balance owed.  

 

Our book basis in the property is $46.8 million (AUS$52.1 million) and while the transaction was treated as a current sale for tax purposes, it does not qualify as a sale under US GAAP until the receipt of the payment of the balance of the purchase price due on December 31, 2017, or earlier depending upon whether any prepayment obligation is triggered.  The asset has been listed as a long term asset.

 

Investment and Development Property

 

As of June 30, 2014 and December 31, 2013, our investment and development property is summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Investment and Development Property

 

June 30,
2014

 

December 31, 2013

Land

$

25,506 

$

59,550 

Construction-in-progress (including capitalized interest)

 

6,195 

 

14,680 

Investment and development property

$

31,701 

$

74,230 

 

The decrease of $42.5 million is substantially due to the reclassification of the Burwood property costs from the Investment and Development property category to Land Held for Sale under non-current assets on the balance sheet

14

 


 

Note 7 – Investments in Unconsolidated Joint Ventures and Entities

Our investments in unconsolidated joint ventures and entities are accounted for under the equity method of accounting except for Rialto Distribution, which is accounted for as a cost method investment, and, as of June 30, 2014 and December 31, 2013, included the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

June 30,
2014

 

December 31, 2013

Rialto Distribution

33.3%

$

--

$

--

Rialto Cinemas

50.0%

 

1,818 

 

1,571 

205-209 East 57th Street Associates, LLC

25.0%

 

--

 

--

Mt. Gravatt

33.3%

 

5,234 

 

5,164 

Total investments

 

$

7,052 

$

6,735 

 

For the three and six months ended June 30, 2014 and 2013, we recorded our share of equity earnings from our investments in unconsolidated joint ventures and entities as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2014

 

2013

 

2014

 

2013

Rialto Distribution

$

13 

$

20 

$

13 

$

41 

Rialto Cinemas

 

217 

 

40 

 

355 

 

68 

205-209 East 57th Street Associates, LLC

 

--

 

--

 

--

 

(1)

Mt. Gravatt

 

71 

 

372 

 

243 

 

671 

Total equity earnings

$

301 

$

432 

$

611 

$

779 

 

 

Note 8 – Goodwill and Intangible Assets

 

In accordance with FASB ASC 350-20-35, Goodwill - Subsequent Measurement and Impairment, we perform an annual impairment review in the fourth quarter of our goodwill and other intangible assets on a reporting unit basis, or earlier if changes in circumstances indicate an asset may be impaired.  No such circumstances existed during the 2014 Quarter and 2014 Six Month period.  As of June 30, 2014 and December 31, 2013, we had goodwill consisting of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinema

 

Real Estate

 

Total

Balance as of December 31, 2013

$

16,935 

$

5,224 

$

22,159 

Foreign currency translation adjustment

 

867 

 

--

 

867 

Balance at June 30, 2014

$

17,802 

$

5,224 

$

23,026 

 

We have intangible assets other than goodwill that are subject to amortization, which we amortize over various periods.  We amortize our beneficial leases over the lease period, the longest of which is 30 years; our trade name using an accelerated amortization method over its estimated useful life of 45 years; and our other intangible assets over 10 years.  For the three and six months ended June 30, 2014, the amortization expense of intangibles totaled $511,000 and $1.1 million, respectively, and, for the three and six months ended June 30, 2013, the amortization expense of intangibles totaled $457,000 and $1.0 million, respectively.  The accumulated amortization of intangibles includes $446,000 and $517,000 of the amortization of acquired leases which are recorded in operating expense for the six months ended June 30, 2014 and 2013, respectively.

 

Intangible assets subject to amortization consist of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2014

 

Beneficial Leases

 

Trade name

 

Other Intangible Assets

 

Total

Gross carrying amount

$

24,295 

$

7,254 

$

459 

$

32,008 

15

 


 

Less: Accumulated amortization

 

15,393 

 

3,723 

 

459 

 

19,575 

Total, net

$

8,902 

$

3,531 

$

--

$

12,433 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

Beneficial Leases

 

Trade name

 

Other Intangible Assets

 

Total

Gross carrying amount

$

24,223 

$

7,254 

$

455 

$

31,932 

Less: Accumulated amortization

 

14,520 

 

3,517 

 

455 

 

18,492 

Total, net

$

9,703 

$

3,737 

$

--

$

13,440 

 

 

 

Note 9 – Prepaid and Other Assets

 

Prepaid and other assets are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,
2014

 

December 31, 2013

Prepaid and other current assets

 

 

 

 

Prepaid expenses

$

1,559 

$

1,079 

Prepaid taxes

 

671 

 

623 

Prepaid rent

 

1,092 

 

1,210 

Deposits

 

368 

 

368 

Other

 

 

Total prepaid and other current assets

$

3,693 

$

3,283 

 

 

 

 

 

 

 

Other non-current assets

 

 

 

 

Other non-cinema and non-rental real estate assets

$

1,134 

$

1,134 

Long-term deposits

 

132 

 

144 

Deferred financing costs, net

 

2,172 

 

1,833 

Interest rate cap at fair value

 

34 

 

75 

Tenant inducement asset

 

526 

 

512 

Straight-line rent asset

 

2,451 

 

2,310 

Other

 

--

 

Total Other non-current assets

$

6,449 

$

6,010 

 

 

Note 10 – Income Tax

 

The provision for income taxes is different from the amount computed by applying U.S. statutory rates to consolidated losses before taxes.  The significant reason for these differences is as follows (dollars in thousands):

 

16

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2014

 

2013

 

2014

 

2013

Expected tax provision

$

2,310 

$

1,951 

$

2,792 

$

2,028 

Increase (decrease) in tax expense resulting from:

 

 

 

 

 

 

 

 

Change in valuation allowance, other

 

(2,023)

 

(1,846)

 

(2,407)