Notes to Condensed Consolidated Financial Statements (Unaudited)
For the
Three
Months Ended
March 31, 2013
Note 1 – Basis of Presentation
Reading International, Inc., a Nevada corporation (“RDI” and collectively with our consolidated subsidiaries and corporate predecessors, the “Company,” “Reading” and “we,” “us,” or “our”), was founded in 1983 as a Delaware corporation and reincorporated in 1999 in Nevada. Our businesses consist primarily of:
·
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the development, ownership
,
and operation of multiplex cinemas in the United States, Australia, and New Zealand; and
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·
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the development, ownership, and operation of retail and commercial real estate in Australia, New Zealand, and the United States.
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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 March 31, 2013 (the “
March
Report”) should be read in conjunction with our Annual Report filed on Form 10-K for the year ended
December 31, 2012
(our “2012 Annual Report”) which contains the latest audited financial statements and related notes. The periods presented in this document are the three (“2013 Quarter”) months ended March 31, 2013 and the three (“2012 Quarter”) months ended March 31, 2012.
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 March 31, 2013 and our results of our operations and cash flows for the three months ended March 31, 2013. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results of operations to be expected for the entire year.
Liquidity Requirements
L
iberty Theatre Term Loan
A
s our Liberty Theater Term Loan
was
due to mature on April 1, 2013, the March 31, 2013 outstanding balance of this debt of
$6.4
million is classified as current on our balance sheet.
On March 25, 2013, we borrowed $5.0 million on our BofA Revolver. On April 1, 2013, we
used $2.
3
million of the revolver proceeds
to partially repay the Liberty Theater Term Loan and
we
received a forbearance letter from the bank extending the loan’s term date to June 1, 2013 in exchange for a forbearance payment of $20,000. We intend to refinance the remaining balance with similar financing. See Note 18 –
Subsequent Events
.
Tax Settlement Liability
As indicated in our 201
2
Annual Report, in accordance with the agreement between the U.S. Internal Revenue Service and our subsidiary, Craig Corporation, is obligated to pay $290,000 per month, $3.5 million per year, in settlement of our tax liability for the tax year ended June 30, 1997.
For the abovementioned liabilities, we believe that we have sufficient borrowing capacity under our various credit facilities, together with our
$50.8
million of cash and
cash equivalents,
to meet our anticipated short-term working capital requirements for the next twelve months.
Marketable Securities
We had investments in marketable securities of $55,000 and
$55,000
at March 31, 2013 and December 31, 2012, 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 Accounting Standards Codification (“ASC”) 320-10 for each applicable reporting period. These investments have a cumulative income of
$8,000
included in accumulated other comprehensive income at March 31, 2013. For the three months ended March 31, 2013, our net unrealized
gain
(loss) on marketable securities was
($1,000)
. For the three months ended March 31, 2012, our net unrealized gain (loss) on marketable securities was
($12,000)
. During the
three
months ended
March 31, 2012,
we sold
$3.0
million of our marketable securities with a realized gain
of $111,000.
During the three months ended
March 31, 2013
, we did not buy or sell any marketable securities.
Deferred Leasing Costs
We amortize direct costs incurred in connection with obtaining tenants 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 201
3
No new pronouncements were adopted during the 2013 Quarter.
New Accounting Pronouncements
No new pronouncements were made pertaining to our Company’s accounting during the
2013 Quarter
.
Note 2 – Equity and Stock Based Compensation
Stock-Based Compensation
During the three months ended March 31, 2013 and 2012, we issued 217,890 and 155,925, respectively, of Class A Nonvoting shares to an executive employee associated with the vesting of his prior years’ stock grants. During the three months ended March 31, 2013, we accrued $188,000 in compensation expense associated with the vesting of executive employee stock grants. During the three months ended March 31, 2012, we accrued $238,000 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. Our 1999 Stock Option Plan expired in November 2009, and was replaced by our new 2010 Stock Incentive Plan, which was approved by the holders of our Class B Voting Common Stock in May 2010.
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 months ended March 31, 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 20,000 options granted during the three months ended March 31, 2013 and 2012, 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:
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|
|
|
2013
|
2012
|
|
|
Stock option exercise price
|
$5.55
|
$4.44
|
|
|
Risk-free interest rate
|
1.870%
|
1.830%
|
|
|
Expected dividend yield
|
--
|
--
|
|
|
Expected option life in years
|
5
|
10
|
|
|
Expected volatility
|
31.99%
|
31.88%
|
|
|
Weighted average fair value
|
$1.74
|
$1.96
|
|
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 $57,000 for the three months ended March 31, 2013, and $80,000 for the three months ended March 31, 2012. At March 31, 2013, the total unrecognized estimated compensation cost related to non-vested stock options granted was $342,000, which we expect to recognize over a weighted average vesting period of 2.38 years. 40,000 options were exercised during the three months ended March 31, 2012 having a realized value of $179,000 for which we received $100,000 of cash. There were no options exercised during the three months ended March 31, 2013. The intrinsic, unrealized value of all options outstanding, vested and expected to vest, at March 31, 2013 was $392,000 of which 100.0% are currently exercisable.
Pursuant to both our 1999 Stock Option Plan and our 2010 Stock Incentive Plan, all stock options expire within 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 March 31, 2013 and December 31, 2012:
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|
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|
|
|
|
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|
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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 - January 1, 2012
|
622,350
|
185,100
|
$
|
5.65
|
$
|
9.90
|
544,383
|
167,550
|
$
|
5.86
|
$
|
10.05
|
Granted
|
206,000
|
--
|
$
|
5.94
|
$
|
--
|
|
|
|
|
|
|
Exercised
|
(136,000)
|
--
|
$
|
4.68
|
$
|
--
|
|
|
|
|
|
|
Expired
|
(20,000)
|
--
|
$
|
3.75
|
$
|
--
|
|
|
|
|
|
|
Outstanding - December 31, 2012
|
672,350
|
185,100
|
$
|
6.24
|
$
|
9.90
|
546,350
|
185,100
|
$
|
6.26
|
$
|
9.90
|
Granted
|
20,000
|
--
|
$
|
5.55
|
$
|
--
|
|
|
|
|
|
|
Outstanding - March 31, 2013
|
692,350
|
185,100
|
$
|
6.22
|
$
|
9.90
|
566,350
|
185,100
|
$
|
6.23
|
$
|
9.90
|
The weighted average remaining contractual life of all options outstanding, vested, and expected to vest at March 31, 2013 and December 31, 2012 was approximately 5.04 and 5.32 years, respectively. The weighted average remaining contractual life of the exercisable options outstanding at March 31, 2013 and December 31, 2012 was approximately 3.93 and 4.28 years, respectively.
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
March 31, 2013
and
2012
, respectively. Operating expense includes 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):
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Three Months Ended March 31, 2013
|
Cinema Exhibition
|
Real Estate
|
Intersegment Eliminations
|
Total
|
Revenue
|
$
|
54,770
|
$
|
6,710
|
$
|
(1,913)
|
$
|
59,567
|
Operating expense
|
|
47,948
|
|
2,669
|
|
(1,913)
|
|
48,704
|
Depreciation and amortization
|
|
2,759
|
|
1,119
|
|
--
|
|
3,878
|
General and administrative expense
|
|
771
|
|
120
|
|
--
|
|
891
|
Segment operating income
|
$
|
3,292
|
$
|
2,802
|
$
|
--
|
$
|
6,094
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
Cinema Exhibition
|
Real Estate
|
Intersegment Eliminations
|
Total
|
Revenue
|
$
|
57,402
|
$
|
6,911
|
$
|
(1,882)
|
$
|
62,431
|
Operating expense
|
|
48,215
|
|
2,744
|
|
(1,882)
|
|
49,077
|
Depreciation and amortization
|
|
2,830
|
|
1,135
|
|
--
|
|
3,965
|
General and administrative expense
|
|
702
|
|
179
|
|
--
|
|
881
|
Segment operating income
|
$
|
5,655
|
$
|
2,853
|
$
|
--
|
$
|
8,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net loss attributable to Reading International, Inc. shareholders:
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|
2013 Quarter
|
|
2012 Quarter
|
Total segment operating income
|
|
|
|
|
$
|
6,094
|
$
|
8,508
|
Non-segment:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
112
|
|
139
|
General and administrative expense
|
|
|
|
|
|
3,448
|
|
3,539
|
Operating income
|
|
|
|
|
|
2,534
|
|
4,830
|
Interest expense, net
|
|
|
|
|
|
(2,673)
|
|
(3,759)
|
Other income (expense)
|
|
|
|
|
|
16
|
|
(45)
|
Loss on sale of assets
|
|
|
|
|
|
(7)
|
|
--
|
Income tax expense
|
|
|
|
|
|
(889)
|
|
(1,625)
|
Equity earnings of unconsolidated joint ventures and entities
|
|
|
|
|
|
347
|
|
413
|
Income from discontinued operations
|
|
|
|
|
|
--
|
|
77
|
Net loss
|
|
|
|
|
$
|
(672)
|
$
|
(109)
|
Net (income) loss attributable to noncontrolling interests
|
|
|
|
|
|
4
|
|
(130)
|
Net loss attributable to Reading International, Inc. common shareholders
|
|
|
|
|
$
|
(668)
|
$
|
(239)
|
Note 4 – Operations in Foreign Currency
We have significant assets in Australia and New Zealand. To the extent possible, we conduct our Australian and New Zealand operations on a self-funding basis. The carrying value of our Australian and New Zealand assets and liabilities fluctuate due to changes in the exchange rates between the US dollar and the functional currency of Australia (Australian dollar) and New Zealand (New Zealand dollar). We have no derivative financial instruments to hedge against the risk of foreign currency exposure.
Presented in the table below are the currency exchange rates for Australia and New Zealand as of
March 31, 2013
and December 31, 201
2
:
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|
|
|
|
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|
US Dollar
|
|
March 31,
2013
|
December 31, 2012
|
Australian Dollar
|
1.0409
|
1.0393
|
New Zealand Dollar
|
0.8360
|
0.8267
|
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. As noted in the table below, due to the small difference between the basic and diluted weighted average common shares, the basic and the diluted earnings (loss) per share are the same for each of the periods presented. The following is a calculation of earnings (loss) per share (dollars in thousands, except share data):
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|
|
Three Months Ended
March 31,
|
|
|
2013
|
|
2012
|
Loss from continuing operations
|
$
|
(668)
|
$
|
(316)
|
Income from discontinued operations
|
|
--
|
|
77
|
Net loss attributable to Reading International, Inc. common shareholders
|
|
(668)
|
|
(239)
|
Basic loss per common share attributable to Reading International, Inc. shareholders:
|
|
|
|
|
Loss from continuing operations
|
$
|
(0.03)
|
$
|
(0.01)
|
Earnings from discontinued operations, net
|
|
0.00
|
|
0.00
|
Basic loss per share attributable to Reading International, Inc. shareholders
|
$
|
(0.03)
|
$
|
(0.01)
|
Diluted loss per common share attributable to Reading International, Inc. shareholders:
|
|
|
|
|
Loss from continuing operations
|
$
|
(0.03)
|
$
|
(0.01)
|
Earnings from discontinued operations, net
|
|
0.00
|
|
0.00
|
Diluted loss per share attributable to Reading International, Inc. shareholders
|
$
|
(0.03)
|
$
|
(0.01)
|
Weighted average shares of common stock – basic
|
|
23,263,010
|
|
22,710,713
|
Weighted average shares of common stock – diluted
|
|
23,263,010
|
|
22,710,713
|
For the three months ended
March 31, 2013
and 2012
,
we recorded losses from continuing operations; therefore, we excluded
243,787
and 99,285
, respectively,
of in-the-money incremental stock options from the
computation of diluted loss per share because they were anti-dilutive.
In addition,
758,872
of out-of-the-money stock options were excluded from the computation of diluted earnings (loss) per share for the three months ended
March 31, 2013
, and
742,638
of out-of-the-money stock options were excluded from the computation of diluted earnings (loss) per share for the three months ended
March 31
, 201
2
.
Note 6 – Property
and Equipment
Acquisitions
Coachella, California Land Acquisition
On January 10, 2012, Shadow View Land and Farming, LLC, a limited liability company owned by our Company, acquired a 202-acre property, zoned for the development of up to 843 single-family residential units, located in the City of Coachella, California. The property was acquired at a foreclosure auction for $5.5 million. The property was acquired as a long-term investment in developable land. Half of the funds used to acquire the land were provided by Mr. James J. Cotter, our Chairman, Chief Executive Officer and controlling shareholder. Upon the approval of our Conflicts Committee, these funds were converted on January 18, 2012 into a 50% interest in Shadow View Land and Farming, LLC. We are the managing member of this company.
Disposals
Taringa
On February 21, 2012, we sold our three properties in the Taringa area of Brisbane, Australia consisting of approximately 1.1 acres for
$1.9
million (AUS$1.8 million).
Operating Property
As of
March 31, 2013
and December 31, 201
2
, we owned investments in property and equipment as follows (dollars in thousands):
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|
|
Operating property
|
|
March 31,
2013
|
|
December 31, 2012
|
Land
|
$
|
69,529
|
$
|
69,370
|
Building and improvements
|
|
136,961
|
|
136,225
|
Leasehold interests
|
|
46,319
|
|
45,391
|
Fixtures and equipment
|
|
108,827
|
|
108,169
|
Total cost
|
|
361,636
|
|
359,155
|
Less: accumulated depreciation
|
|
(160,485)
|
|
(156,377)
|
Operating property, net
|
$
|
201,151
|
$
|
202,778
|
Depreciation expense for property and equipment was
$3.1
million for the three months ended
March 31, 2013
, and
$3.8
million for the three months ended
March 31
, 20
12
.
Investment and Development Property
As of
March 31, 2013
and December 31, 2012, we owned
investment and
development
property
summarized as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
Investment and Development Property
|
|
March 31,
2013
|
|
December 31, 2012
|
Land
|
$
|
77,316
|
$
|
77,020
|
Construction-in-progress (including capitalized interest)
|
|
17,987
|
|
17,902
|
Investment and development property
|
$
|
95,303
|
$
|
94,922
|
At the beginning of 2010, we curtailed development activities
on
our
development
properties and are not currently capitalizing interest expense. As a result, we did not capitalize any interest during the three months ended
March 31, 2013
or 2012.
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
March 31, 2013
and December 31, 201
2
, included the following (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
March 31,
2013
|
|
December 31, 2012
|
Rialto Distribution
|
33.3%
|
$
|
--
|
$
|
--
|
Rialto Cinemas
|
50.0%
|
|
1,606
|
|
1,561
|
205-209 East 57
th
Street Associates, LLC
|
25.0%
|
|
--
|
|
60
|
Mt. Gravatt
|
33.3%
|
|
6,194
|
|
6,094
|
Total investments
|
|
$
|
7,800
|
$
|
7,715
|
For the three months ended
March 31, 2013
and
2012
, we recorded our share of equity earnings from our investments in unconsolidated joint ventures and entities as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2013
|
|
2012
|
Rialto Distribution
|
$
|
21
|
$
|
61
|
Rialto Cinemas
|
|
27
|
|
31
|
205-209 East 57
th
Street Associates, LLC
|
|
(1)
|
|
--
|
Mt. Gravatt
|
|
300
|
|
321
|
Total equity earnings
|
$
|
347
|
$
|
413
|
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
2013
Quarter. As of
March 31, 2013
and December 31, 201
2
, we had goodwill consisting of the following (dollars in thousands):
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|
|
|
|
|
|
|
|
|
2013
|
|
Cinema
|
|
Real Estate
|
|
Total
|
Balance as of December 31, 2012
|
$
|
17,674
|
$
|
5,224
|
$
|
22,898
|
Foreign currency translation adjustment
|
|
119
|
|
--
|
|
119
|
Balance at March 31, 2013
|
$
|
17,793
|
$
|
5,224
|
$
|
23,017
|
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 months ended
March 31, 2013
, the amortization expense of intangibles totaled
$578,000
, and
,
for the three months ended
March 31
, 201
2
, the amortization expense of intangibles totaled
$639,000
. The accumulated amortization of intangibles includes
$259,000
and
$270,000
of the amortization of acquired leases which are recorded in operating expense for the
three
months ended
March 31, 2013
and
2012
, respectively.
Intangible assets subject to amortization consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
Beneficial Leases
|
|
Trade name
|
|
Other Intangible Assets
|
|
Total
|
Gross carrying amount
|
$
|
24,294
|
$
|
7,254
|
$
|
459
|
$
|
32,007
|
Less: Accumulated amortization
|
|
13,335
|
|
3,174
|
|
405
|
|
16,914
|
Total, net
|
$
|
10,959
|
$
|
4,080
|
$
|
54
|
$
|
15,093
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
Beneficial Leases
|
|
Trade name
|
|
Other Intangible Assets
|
|
Total
|
Gross carrying amount
|
$
|
24,284
|
$
|
7,254
|
$
|
458
|
$
|
31,996
|
Less: Accumulated amortization
|
|
12,873
|
|
3,059
|
|
403
|
|
16,335
|
Total, net
|
$
|
11,411
|
$
|
4,195
|
$
|
55
|
$
|
15,661
|
Note 9 – Prepaid and Other Assets
Prepaid and other assets are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
December 31, 2012
|
Prepaid and other current assets
|
|
|
|
|
Prepaid expenses
|
$
|
1,445
|
$
|
1,150
|
Prepaid taxes
|
|
1,006
|
|
855
|
Deposits
|
|
165
|
|
373
|
Other
|
|
1,398
|
|
1,198
|
Total prepaid and other current assets
|
$
|
4,014
|
$
|
3,576
|
|
|
|
|
|
Other non-current assets
|
|
|
|
|
Other non-cinema and non-rental real estate assets
|
$
|
1,134
|
$
|
1,134
|
Long-term deposits
|
|
201
|
|
212
|
Deferred financing costs, net
|
|
1,947
|
|
2,230
|
Note receivable
|
|
200
|
|
2,000
|
Tenant inducement asset
|
|
684
|
|
716
|
Straight-line rent asset
|
|
2,757
|
|
2,775
|
Other
|
|
2
|
|
2
|
Total non-current assets
|
$
|
6,925
|
$
|
9,069
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2013
|
|
2012
|
Expected tax provision (benefit)
|
$
|
77
|
$
|
(27)
|
Increase (decrease) in tax expense resulting from:
|
|
|
|
|
Change in valuation allowance, other
|
|
4
|
|
(483)
|
Foreign tax provision
|
|
233
|
|
904
|
Foreign withholding tax provision
|
|
268
|
|
367
|
Tax effect of foreign tax rates on current income
|
|
(8)
|
|
511
|
State and local tax provision
|
|
64
|
|
113
|
Tax/audit litigation settlement
|
|
251
|
|
240
|
Actual tax provision (benefit)
|
$
|
889
|
$
|
1,625
|
Pursuant to ASC 740-10, a provision should be made for the tax effect of earnings of foreign subsidiaries that are not permanently invested outside the United States. Our intent is that earnings of our foreign subsidiaries are not permanently invested outside the United States. Current earnings were available for distribution in the Reading Australia and Reading New Zealand consolidated group of subsidiaries as of March 31, 2013. We have provided $0.4 million in withholding tax expense in relation to those earnings. We believe the U.S. tax impact of a dividend from our Australian and New Zealand subsidiaries, net of loss carry forward and potential foreign tax credits, would not have a material effect on the tax provision as of March 31, 2013.
Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. In accordance with FASB ASC 740-10 – Income Taxes (“ASC 740-10”), 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 assets and liabilities, projected future taxable income, tax planning strategies, and recent financial performance. ASC 740-10 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.
In the period ended June 30, 2011, the Company determined that substantial negative evidence regarding the realizable nature of deferred tax assets continues to exist in the U.S., New Zealand, and Puerto Rico subsidiaries, arising from ongoing pre-tax financial losses. Accordingly, the Company continues to record a full valuation allowance for net deferred tax assets available in these subsidiaries. After consideration of a number of factors for the Reading Australia group, including its recent history of pretax financial income, its expected future earnings, the increase in market value of its real estate assets, which would cause taxable gain if sold, and having executed in June 2011 a credit facility of over $100.0 million to resolve potential liquidity issues, the Company determined that
it is more likely than not that deferred tax assets in Reading Australia will be realized
. Accordingly, during 2011, Reading Australia reversed $13.8 million of the valuation allowance previously recorded against its net deferred tax, which mainly reflects the loss carryforwards available to offset future taxable income in Australia.
We have accrued $22.8 million in income tax liabilities as of March 31, 2013, of which $13.2 million has been classified as income taxes payable and $9.6 million have been classified as non-current tax liabilities. As part of current tax liabilities, we have accrued $3.5 million in connection with the negotiated Tax Court judgment, dated January 6, 2011, implementing our agreement with the IRS as to the final disposition of the 1996 tax litigation matter. We believe these amounts represent an adequate provision for our income tax exposures, including income tax contingencies related to foreign withholding taxes.
In accordance with FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions (“ASC 740-10-25”), we record interest and penalties related to income tax matters as part of income tax expense.
The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the periods ending March 31, 2013 December 31, 2012, and December 31, 2011 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
Year Ended December 31, 2012
|
|
Year Ended December 31, 2011
|
Unrecognized tax benefits – gross beginning balance
|
$
|
2,171
|
$
|
1,974
|
$
|
8,058
|
Gross increases – prior period tax provisions
|
|
62
|
|
197
|
|
--
|
Gross increases – current period tax positions
|
|
--
|
|
--
|
|
151
|
Settlements
|
|
--
|
|
--
|
|
(6,235)
|
Statute of limitations lapse
|
|
--
|
|
--
|
|
--
|
Unrecognized tax benefits – gross ending balance
|
$
|
2,233
|
$
|
2,171
|
$
|
1,974
|
For the three months ended March 31, 2013, we recorded a change of approximately $0.1 million to our gross unrecognized tax benefits. The net tax balance is approximately $2.2 million, of which $1.1 million would impact the effective rate if recognized.
It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events,
we estimate
that within the next 12 months the reserve for uncertain tax positions will increase within a range of $0.9 million to $1.8 million. The reasons for such changes include but are not limited to tax positions expected to be taken during the next twelve months, reevaluation of current uncertain tax positions, expiring statutes of limitations, and interest related to the ”Tax Audit/Litigation” settlement which occurred January 6, 2011.
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 2008 and earlier are barred by statutes of limitations. Our income tax returns of Australia filed since inception in 1995 are generally open for examination because of operating losses. The income tax returns filed in New Zealand and Puerto Rico for calendar year 2008 and afterward generally remain open for examination as of March 31, 2013.
Note 11 – Notes Payable
Notes payable are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Note Payable or Security
|
March 31,
2013
|
December 31, 2012
|
Maturity Date
|
|
March 31,
2013
|
|
December 31, 2012
|
Trust Preferred Securities
|
4.30%
|
4.31%
|
April 30, 2027
|
$
|
27,913
|
$
|
27,913
|
Australian NAB Corporate Term Loan
|
5.70%
|
5.82%
|
June 30, 2014
|
|
75,465
|
|
75,349
|
Australian NAB Corporate Revolver
|
5.70%
|
5.82%
|
June 30, 2014
|
|
--
|
|
--
|
Australian Shopping Center Loans
|
-
|
-
|
2013-2014
|
|
208
|
|
208
|
New Zealand Corporate Credit Facility
|
4.70%
|
4.70%
|
March 31, 2015
|
|
23,408
|
|
23,148
|
US Bank of America Revolver
|
3.31%
|
3.26%
|
October 31, 2017
|
|
35,000
|
|
30,000
|
US Bank of America Line of Credit
|
3.20%
|
3.21%
|
October 31, 2017
|
|
2,007
|
|
2,007
|
US Cinema 1, 2, 3 Term Loan
|
5.21%
|
5.24%
|
June 28, 2014
|
|
15,000
|
|
15,000
|
US Liberty Theaters Term Loan
|
6.20%
|
6.20%
|
April 1, 2013
|
|
6,390
|
|
6,429
|
US Nationwide Loan 1
|
0.00%
|
8.50%
|
February 21, 2013
|
|
--
|
|
593
|
US Sutton Hill Capital Note – Related Party
|
8.25%
|
8.25%
|
December 31, 2013
|
|
9,000
|
|
9,000
|
US Union Square Theatre Term Loan
|
5.92%
|
5.92%
|
May 1, 2015
|
|
6,893
|
|
6,950
|
Total
|
|
|
|
$
|
201,284
|
$
|
196,597
|
Derivative Instruments
As indicated in Note 17 –
Derivative Instruments
, for our NAB Australian Corporate Credit Facility (“NAB Loan”) and Bank of America Revolver (“BofA Revolver”), we have entered into interest rate swap agreements for all or part of these facilities. The loan agreement together with the swap results in us paying a total fixed interest rate of 8.15% (5.50% swap contract rate plus a 2.65% margin under the loan) for our NAB Loan and a total fixed interest rate of 4.44% (1.44% swap contract rate plus a 3.00% margin under the loan) for our BofA Revolver instead of the above indicated 5.70% and 3.31%, respectively, which are the obligatorily disclosed loan rates.
Notes Payable Refinancing
US Cinema 1, 2, 3 Term Loan
On March 20, 2013, pursuant to the loan agreement, we extended the term of our US Cinema 1, 2, 3 Term Loan by one year to June 28, 2014 for a renewal fee of $150,000.
US Bank of America Revolver
On March 25, 2013, Bank of America extended the borrowing limit on our BofA Revolver from $30.0 million to $35.0 million and we borrowed $5.0 million on this revolver. On April 1, 2013, we used $2.3 million of the revolver proceeds to partially repay our US Liberty Theaters Term Loan. See Note 18 –
Subsequent Events
.
Note 12 – Other Liabilities
Other liabilities are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
December 31, 2012
|
Current liabilities
|
|
|
|
|
Lease liability
|
$
|
5,882
|
$
|
5,855
|
Security deposit payable
|
|
174
|
|
174
|
Other
|
|
50
|
|
3
|
Other current liabilities
|
$
|
6,106
|
$
|
6,032
|
Other liabilities
|
|
|
|
|
Foreign withholding taxes
|
$
|
6,547
|
$
|
6,480
|
Straight-line rent liability
|
|
9,076
|
|
8,893
|
Environmental reserve
|
|
1,656
|
|
1,656
|
Accrued pension
|
|
7,067
|
|
6,976
|
Interest rate swap
|
|
5,094
|
|
5,855
|
Acquired leases
|
|
1,911
|
|
2,078
|
Other payable
|
|
1,191
|
|
1,191
|
Other
|
|
611
|
|
630
|
Other liabilities
|
$
|
33,153
|
$
|
33,759
|
Included in our other liabilities are accrued pension costs of
$7.1
million at
March 31, 2013
. The benefits of our pension plans are fully vested, and, as such, no service costs were recognized for the three months ended
March 31, 2013
and 201
2
. Our pension plans are unfunded; therefore, the actuarial assumptions do not include an estimate for any expected return on the plan assets. For the three months ended
March 31, 2013
, we recognized
$146,000
of interest cost and
$165,000
of amortized prior service cost. For the three months ended
March 31
, 201
2
, we recognized
$89,000
of interest cost and
$76,000
of amortized prior service cost.
Note 13 – Commitments and Contingencies
Unconsolidated Debt
Total debt of unconsolidated joint ventures and entities was
$694,000
and
$703,000
as of
March 31, 2013
and December 31, 201
2
. Our share of unconsolidated debt, based on our ownership percentage, was
$231,000
and
$234,000
as of
March 31, 2013
and December 31, 201
2
. This debt is guaranteed by one of our subsidiaries to the extent of our ownership percentage.
Digital Projection
We have a $15.5 million operating lease which we used to
finance
the implementation of digital projection in our U.S. cinema circuit during 2012. For our Australia and New Zealand circuits, we anticipate that we will purchase the digital projection equipment for approximately $8.0 million and $2.0 million, respectively, with our cash on hand during 2013.
Note 14 – Noncontrolling interests
Noncontrolling interests are composed of the following enterprises:
·
|
Angelika Film Centers LLC (“AFC LLC”) 50% membership interest owned by a subsidiary of iDNA, Inc.;
|
·
|
Australia Country Cinemas Pty Ltd (“ACC”) 25% noncontrolling interest owned by Panorama Cinemas for the 21st Century Pty Ltd.;
|
·
|
Shadow View Land and Farming, LLC 50% noncontrolling membership interest owned by Mr. James J. Cotter, Sr.; and
|
·
|
Sutton Hill Properties, LLC 25% noncontrolling interest owned by Sutton Hill Capital, LLC
|
The components of noncontrolling interests are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
December 31, 2012
|
AFC LLC
|
$
|
29
|
$
|
1,737
|
Australian Country Cinemas
|
|
602
|
|
601
|
Shadow View Land and Farming LLC
|
|
1,903
|
|
1,912
|
Sutton Hill Properties
|
|
(251)
|
|
(152)
|
Noncontrolling interests in consolidated subsidiaries
|
$
|
2,283
|
$
|
4,098
|
The components of income attributable to noncontrolling interests are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2013
|
|
2012
|
AFC LLC
|
$
|
104
|
$
|
178
|
Australian Country Cinemas
|
|
--
|
|
63
|
Shadow View Land and Farming LLC
|
|
(9)
|
|
(21)
|
Sutton Hill Properties
|
|
(99)
|
|
(90)
|
Net income (loss) attributable to noncontrolling interest
|
$
|
(4)
|
$
|
130
|
Summary of Controlling and Noncontrolling Stockholders’ Equity
A summary of the changes in controlling and noncontrolling stockholders’ equity is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling Stockholders’ Equity
|
|
Noncontrolling Stockholders’ Equity
|
|
Total Stockholders’ Equity
|
Equity at – January 1, 2013
|
$
|
126,856
|
$
|
4,098
|
$
|
130,954
|
Net loss
|
|
(668)
|
|
(4)
|
|
(672)
|
Increase in additional paid in capital
|
|
57
|
|
--
|
|
57
|
Distributions to noncontrolling stockholders
|
|
--
|
|
(1,811)
|
|
(1,811)
|
Accumulated other comprehensive income (loss)
|
|
1,175
|
|
--
|
|
1,175
|
Equity at – March 31, 2013
|
$
|
127,420
|
$
|
2,283
|
$
|
129,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling Stockholders’ Equity
|
|
Noncontrolling Stockholders’ Equity
|
|
Total Stockholders’ Equity
|
Equity at – January 1, 2012
|
$
|
123,752
|
$
|
1,235
|
$
|
124,987
|
Net loss
|
|
(239)
|
|
130
|
|
(109)
|
Increase in additional paid in capital
|
|
180
|
|
--
|
|
180
|
Contributions from noncontrolling stockholders
|
|
--
|
|
2,755
|
|
2,755
|
Accumulated other comprehensive income
|
|
4,056
|
|
5
|
|
4,061
|
Equity at – March 31, 2012
|
$
|
127,749
|
$
|
4,125
|
$
|
131,874
|
Note 15 – Common Stock
Common Stock Issuance
During the
three
months ended
March 31, 2013
and 201
2
, we issued
217,890
and
155,925
, respectively, of Class A Nonvoting shares to an executive employee associated with his prior years’ stock grant
s
.
Note 16 – Derivative Instruments
As more fully described in our 2012 Annual Report, w
e are exposed to interest rate changes from our outstanding floating rate borrowings. We manage our fixed to floating rate debt mix to mitigate the impact of adverse changes in interest rates on earnings and cash flows and on the market value of our borrowings. From time to time, we may enter into interest rate hedging contracts, which effectively convert a portion of our variable rate debt to a fixed rate over the term of the interest rate swap. For an explanation of the impact of these swaps on our interest paid for the periods, see Note 11 –
Notes Payable
.
The following table sets forth the terms of our interest rate swap derivative instruments at
March 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Instrument
|
|
Notional Amount
|
|
Pay Fixed Rate
|
|
Receive Variable Rate
|
|
Maturity Date
|
Interest rate swap
|
$
|
27,656,000
|
|
1.440%
|
|
0.284%
|
|
December 31, 2013
|
Interest rate swap
|
$
|
81,711,000
|
|
5.500%
|
|
3.050%
|
|
June 30, 2016
|
In accordance with FASB ASC 815-10-35, Subsequent Valuation of Derivative Instruments and Hedging Instruments (“FASB ASC 815-10-35”), we marked our interest rate swap instruments to market on the consolidated balance sheet resulting in an
de
crease in interest expense of
$761,000
during the three months ended
March 31, 2013
, and a
de
crease
of
$331,000
in interest expense during the three months ended
March 31
, 201
2
. At
March 31,
2013
and December 31, 201
2
, we recorded as other long-term liabilities the fair market value of our interest rate swaps of
$5.1
million and
$5.9
million, respectively. In accordance with FASB ASC 815-10-35, we have not designated any of our current interest rate swap positions as financial reporting hedges.
Note 17 – Fair Value of Financial Instruments
ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
·
|
Level 1: Quoted market prices in active markets for identical assets or liabilities.
|
·
|
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
|
·
|
Level 3: Unobservable inputs that are not corroborated by market data
.
|
We used the following methods and assumptions to estimate the fair values of the assets and liabilities:
Level 1 Fair Value Measurements
– are based on market quotes of our marketable securities.
Level 2 Fair Value Measurements
–
Interest Rate Swaps
– The fair value of interest rate swaps are estimated based on market data and quotes from counter parties to the agreements which are corroborated by market data.
Level 3 Fair Value Measurements
–
Impaired Property
– For assets measured on a non-recurring basis, such as real estate assets that are required to be recorded at fair value as a result of an impairment, our estimates of fair value are based on management’s best estimate derived from evaluating market sales data for comparable properties developed by a third party appraiser and arriving at management’s estimate of fair value based on such comparable data primarily based on properties with similar characteristics.
As of
March 31, 2013
and December 31, 201
2
, we held certain items that are required to be measured at fair value on a recurring basis. These included
available for sale securities
and interest rate derivative contracts. Our available-for-sale securities primarily consist of investments associated with the ownership of marketable securities in New Zealand and the U.S. Derivative instruments are related to our economic hedge of interest rates.
The fair values of the interest rate swap agreements are determined using the market standard methodology of discounting the future cash payments and cash receipts on the pay and receive legs of the interest swap agreements that have the net effect of swapping the estimated variable rate note payment stream for a fixed rate payment stream over the period of the swap. The variable interest rates used in the calculation of projected receipts on the interest rate swap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820-10, we incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by our counterparties and us. However, as of
March 31, 2013
and December 31, 201
2
, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The nature of our interest rate swap derivative instruments is described in Note 16 –
Derivative Instruments
.
We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. Additionally, there were no transfers of assets and liabilities between levels 1, 2, or 3 during the
three
months ended
March 31, 2013
.
We measure and record the following assets and liabilities at fair value on a recurring basis subject to the disclosure requirements of FASB ASC 820-20, Fair Value of Financial Instruments (dollars in thousands):
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Book Value
|
|
Fair Value
|
Financial Instrument
|
Level
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Time deposits
|
1
|
$
|
--
|
$
|
8,000
|
$
|
--
|
$
|
8,000
|
Investment in marketable securities
|
1
|
$
|
55
|
$
|
55
|
$
|
55
|
$
|
55
|
Interest rate swaps liability
|
2
|
$
|
5,094
|
$
|
5,855
|
$
|
5,094
|
$
|
5,855
|
We measure the following liabilities at fair value on a recurring basis subject to the disclosure requirements of FASB ASC 820-20, Fair Value of Financial Instruments (dollars in thousands):
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Book Value
|
Fair Value
|
Financial Instrument
|
Level
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Notes payable
|
3
|
|
$
|
164,371
|
$
|
159,684
|
$
|
152,381
|
$
|
154,795
|
Notes payable to related party
|
N/A
|
|
$
|
9,000
|
$
|
9,000
|
$
|
N/A
|
$
|
N/A
|
Subordinated debt
|
3
|
|
$
|
27,913
|
$
|
27,913
|
$
|
11,964
|
$
|
12,268
|
The fair value of notes payable to related party cannot be determined due to the related party nature of the terms of the notes payable.
We estimated the fair value of our secured mortgage notes payable, our unsecured notes payable, trust preferred securities, and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculated the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or LIBOR rates for variable-rate debt, for maturities that correspond to the maturities of our debt, adding appropriate credit spreads derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
Note 18 - Subsequent Events
US Liberty Theaters Term Loans
On March 25, 2013, we borrowed $5.0 million on our BofA Revolver. On April 1, 2013, we used $2.3 million of the revolver proceeds to partially repay the Liberty Theater Term Loan and we received a forbearance letter from the bank extending the loan’s term date to June 1, 2013 in exchange for a forbearance payment of $20,000. We intend to refinance the remaining balance with similar financing.
Courtenay Central Shopping Center Expansion
On February 7, 2013, we entered into an agreement with General Distributors Limited, a subsidiary of the publicly listed Australian company Woolworths Limited (ASX: WOW), providing for the construction of a Countdown branded supermarket in our Courtenay Central Shopping Center in Wellington, New Zealand. The Board approval conditions to that agreement were satisfied on April 10, 2013. The agreement contemplates the construction of an approximately 42,000 square foot expansion to be leased to General Distributors Limited and an approximately 10,000 square foot reconfiguring of the existing shopping center. The lease to General Distributors Limited is for an initial term of 20 years, and provides for an initial rent currently projected at approximately $1.4 million (NZ$1.7 million) per annum. The obligations of the parties are subject to a number of conditions, including obtaining various land use approvals and the finalization of plans and construction cost estimates.