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RDI > SEC Filings for RDI > Form 10-K on 19-Mar-2013All Recent SEC Filings

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Annual Report

Item 7 - Management's Discussions and Analysis of Financial Condition and Results of Operations

The following review should be read in conjunction with the consolidated financial statements and related notes included in this 2012 Annual Report. Historical results and percentage relationships do not necessarily indicate operating results for any future periods.


We are an internationally diversified company principally focused on the development, ownership, and operation of entertainment and real property assets in the United States, Australia, and New Zealand. Currently, we operate in two business segments:

Cinema Exhibition, through our 56 multiplex theaters, and

Real Estate, including investment, development, and the rental of retail, commercial and live theater assets.

We believe that these two business segments complement one another, as the comparatively consistent cash flows generated by our cinema operations can be used to fund new cinema business opportunities and the front-end cash demands of our real estate investment and development business.

We manage our worldwide cinema exhibition businesses under various different brands:

in the US, under the Reading, Angelika Film Center, Consolidated Amusements, and City Cinemas brands;

in Australia, under the Reading brand; and

in New Zealand, under the Reading and Rialto brands.

While we do not believe the cinema exhibition business to be a growth business, we do believe it to be a business that will likely continue to generate fairly consistent cash flows in the years ahead even in recessionary or inflationary environment. This is based on our belief that people will continue to spend some reasonable portion of their entertainment dollar on entertainment outside of the home and that, when compared to other forms of outside the home entertainment, movies continue to be a popular and competitively priced option. Since we believe the cinema exhibition business to be a mature business with most markets either adequately screened or over-screened, we see growth in our cinema business coming principally from the enhancement of our current cinemas, the development in select markets of specialty cinemas, and the opportunistic acquisition of already existing cinemas rather than from the development of new conventional cinemas. From time to time, we invest in the securities of other companies, where we believe the business or assets of those companies to be attractive or to offer synergies to our existing entertainment and real estate businesses. Also, in the current environment, we intend to be opportunistic in identifying and endeavoring to acquire undervalued assets, particularly assets with proven cash flow and which we believe to be resistant to current recessionary trends.

In summary, while we do have operating company attributes, we see ourselves principally as a geographically diversified real estate company and intend to add to stockholder value by building the value of our portfolio of tangible assets including both entertainment and other types of land and brick and mortar assets. We endeavor to maintain a reasonable asset allocation between our domestic and overseas assets and operations, and between our cash generating cinema operations and our cash consuming real estate investment and development activities. We believe that by blending the cash generating capabilities of a cinema operation with the investment and development opportunities of our real estate operations, our business strategy is unique among public companies.

Business Climate

Cinema Exhibition - General

After years of uncertainty as to the future of digital exhibition and the impact of this technology on cinema exhibition, it became clear in 2012 that the industry must go digital. We have now substantially completed the conversion of our domestic cinema operations to digital projection. We are in the process, and anticipate that we will complete this year the conversion of our Australia and New Zealand cinema operations to digital projection.

Over several years, we anticipate that the cost of this conversion will be covered in substantial part by the receipt of Virtual Print Fees paid by film distributors for the use of such digital projection equipment.

In the case of "in-home" entertainment alternatives, the industry has experienced significant leaps in recent periods in both the quality and affordability of in-home entertainment systems and in the accessibility to entertainment programming through cable, satellite, DVD, and internet distribution channels. These alternative distribution channels are putting pressure on cinema exhibitors to reduce the time period between theatrical and secondary release dates, and certain distributors are talking about possible simultaneous or near simultaneous releases in multiple channels of distribution. These are issues common to both our domestic and international cinema operations.

Cinema Exhibition - Australia / New Zealand

The film exhibition industry in Australia and New Zealand is highly concentrated in that Village, Event, and Hoyts (the "Major Exhibitors") control approximately 66% of the cinema box office in Australia while Event and Hoyts control approximately 57% of New Zealand's cinema box office. The industry is also vertically integrated in that one of the Major Exhibitors, Roadshow Film Distributors (part of Village), also serves as a distributor of film in Australia and New Zealand for Warner Bros. and New Line. Films produced or distributed by the majority of the local international independent producers are also distributed by Roadshow. Typically, the Major Exhibitors own the newer multiplex and megaplex cinemas, while the independent exhibitors typically have older and smaller cinemas. In addition, the Major Exhibitors have in recent periods built a number of new multiplexes as joint venture partners or under-shared facility arrangements, and have historically not engaged in head-to-head competition.

Cinema Exhibition - North America

In North America, distributors may find it more commercially appealing to deal with major exhibitors, rather than to deal with independents like us, which tends to compress the supply of screens in a very limited number of markets. This competitive disadvantage has increased significantly in recent periods with the development of mega circuits like Regal and AMC who are able to offer distributors access to screens on a truly nationwide basis, or, on the other hand, to deny access if their desires with respect to film supply are not satisfied.

These consolidations can adversely affect our ability to get film in certain domestic markets where we compete against major exhibitors. With the restructuring and consolidation undertaken in the industry, and the emergence of increasingly attractive "in-home" entertainment alternatives, strategic cinema acquisitions by our North American operation have and can continue to be a way to combat such a competitive disadvantage.

Real Estate - Australia and New Zealand

Over the past few years, there has been a noted decrease in real estate market activity resulting in decreases to commercial and retail property values in Australia and to a lesser extent in New Zealand. That being said, both countries have relatively stable economies with varying degrees of economic growth that are mostly influenced by global trends. Also, we have noted that our Australian and New Zealand developed properties have had consistent growth in rentals and values although project commencements have slowed. Once developed, we remain confident that our Australian and New Zealand holdings will continue to provide value and cash flows to our operations.

Real Estate - North America

The commercial real estate market has improved somewhat during 2012 and we have noted some strong increases associated with our real estate located in large urban environments.

Business Segments

As indicated above, our two primary business segments are cinema exhibition and real estate. These segments are summarized as follows:

Cinema Exhibition

One of our primary businesses consists of the ownership and operation of cinemas. For a breakdown of our current cinema assets that we own and/or manage please see Item 1 - Our Business of this 2012 Annual Report under the subheading "Our Cinema Exhibition Activities."

During 2012, we opened one cinema with 8 screens and closed two cinemas having a total of 8 screens. In 2011, we purchase one 17-screen cinema. In 2010, we opened one 8-screen cinema and closed two cinemas having a total of 12 screens.

Our cinema revenue consists of admissions, concessions, and advertising. The cinema operating expense consists of the costs directly attributable to the operation of the cinemas including film rent expense, operating costs, and occupancy costs. Cinema revenue and expense fluctuate with the availability of quality first-run films and the numbers of weeks the first-run films stay in the market.

Real Estate

For fiscal 2012, our income operating property consisted of the following:

our Belmont, Western Australia ETRC, our Auburn, New South Wales ETRC and our Wellington, New Zealand ETRC;

our Newmarket shopping center in Newmarket, Queensland, a suburb of Brisbane;

three single auditorium live theaters in Manhattan (Minetta Lane, Orpheum, and Union Square) and a four auditorium live theater complex in Chicago (The Royal George) and, in the case of the Union Square and the Royal George, their accompanying ancillary retail and commercial tenants;

a New Zealand commercial property and Australian commercial properties rented to unrelated third parties, to be held for current income and long-term appreciation; and

the ancillary retail and commercial tenants at some of our non-ETRC cinema properties.

In addition, we had various parcels of unimproved real estate held for development in Australia and New Zealand and certain unimproved land in the United States that was used in our historic activities. We also owned an 8,100 square foot commercial building in Melbourne, which serves as our administrative headquarters for Australia and New Zealand, approximately 36% of which is leased to an unrelated third party.


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 James J. Cotter, our Chairman, Chief Executive Officer and controlling shareholder. Upon the approval of our Conflicts Committee, these funds were converted into a 50% interest in Shadow View Land and Farming, LLC. We are the managing member of this company.

In August 2011, we purchased the CalOaks Cinema, our largest multi-screened cinema to date, for $4.2 million made up of $3.9 million of cash and a $250,000 holdback note for certain offset charges to the purchase price.


On November 20, 2012, we sold our Indooroopilly property for $12.4 million (AUS$12.0 million). As the book value was $12.5 million (AUS$12.1 million) for this property, we recorded a loss on sale as an impairment expense of $318,000 (AUS$306,000) for the year ended December 31, 2012 which included the cost to sell the property. Additionally, on February 21, 2012, we sold our three properties in the Taringa area of Brisbane, Australia of approximately 1.1 acres for $1.9 million (AUS$1.8 million). Because the net carrying amounts of these properties were greater than the total sale price, we recorded an impairment expense for these properties of $369,000 (AUS$365,000) for the year ended December 31, 2011.

On April 14, 2011, we sold our 66.7% share of the 5-screen Elsternwick Classic cinema located in Melbourne, Australia to our joint venture partner for $1.9 million (AUS$1.8 million) and recognized a gain on sale of a discontinued operation of $1.7 million (AUS$1.6 million).

Investment and Development Property

We are engaged in several real estate development projects. For a complete list of these properties with their size, status, and gross book values please see Item 2 - Properties under the heading of "Investment and Development Property."

Critical Accounting Policies

The Securities and Exchange Commission defines critical accounting policies as those that are, in management's view, most important to the portrayal of the company's financial condition and results of operations and the most demanding in their calls on judgment. We believe our most critical accounting policies relate to:

impairment of long-lived assets, including goodwill and intangible assets;

tax valuation allowance and obligations; and

legal and environmental obligations.

We review long-lived assets, including goodwill and intangibles, for impairment as part of our annual budgeting process, at the beginning of the fourth quarter, and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. We review internal management reports on a monthly basis as well as monitor current and potential future competition in film markets for indications of potential impairment. We evaluate our long-lived assets using historical and projected data of cash flow as our primary indicator of potential impairment and we take into consideration the seasonality of our business. If the sum of the estimated, undiscounted future cash flows are less than the carrying amount of the asset, then an impairment is recognized for the amount by which the carrying value of the asset exceeds its estimated fair value based on an appraisal or a discounted cash flow calculation. Goodwill and intangible assets are evaluated on a reporting unit basis. The impairment evaluation is based on the present value of estimated future cash flows of the segment plus the expected terminal value. There are significant assumptions and estimates used in determining the future cash flows and terminal value. The most significant assumptions include our cost of debt and cost of equity assumptions that comprise the weighted average cost of capital for each reporting unit. Accordingly, actual results could vary materially from such estimates. Based on calculations of current value, we recorded impairment losses of $1.5 million, $369,000 and $2.2 million relating to certain of our property and cinema locations for the years ended December 31, 2012, 2011, and 2010, respectively. The impairments reflect our estimates of fair value which were based on appraisals or a discounted income approach with market based assumptions. For a further explanation of our 2012 impairment losses see below under the heading "Coachella impairment" and see Note 7 - Investment and Development Property to our 2012 Consolidated Financial Statements.

We record our estimated future tax benefits and liabilities arising from the temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss carry forwards. We estimate the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. As of December 31, 2012, we had recorded approximately $50.6 million of deferred tax assets related to the temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss carry forwards and tax credit carry forwards. These deferred tax assets were offset by a valuation allowance of $37.9 million resulting in a net deferred tax asset of $12.6 million. The recoverability of deferred tax assets is dependent upon our ability to generate future taxable income. There is no assurance that sufficient future taxable income will be generated to benefit from our tax loss carry forwards and tax credit carry forwards.

Certain of our subsidiaries were historically involved in railroad operations, coal mining, and manufacturing. Also, certain of these subsidiaries appear in the chain of title of properties that may suffer from pollution. Accordingly, certain of these subsidiaries have, from time to time, been named in and may in the future be named in various actions brought under applicable environmental laws. Also, we are in the real estate development business and may encounter from time to time unanticipated environmental conditions at properties that we have acquired for development. These environmental conditions can increase the cost of such projects and

adversely affect the value and potential for profit of such projects. We do not currently believe that our exposure under applicable environmental laws is material in amount.

From time to time, we have claims brought against us relating to the exposure of former employees of our railroad operations to asbestos and coal dust. These are generally covered by an insurance settlement reached in September 1990 with our insurance carriers. However, this insurance settlement does not cover litigation by people who were not our employees and who may claim second hand exposure to asbestos, coal dust, and/or other chemicals or elements now recognized as potentially causing cancer in humans. Our known exposure to these types of claims, asserted or probable of being asserted, is not material.

From time to time, we are involved with claims and lawsuits arising in the ordinary course of our business that may include contractual obligations, insurance claims, tax claims, employment matters, and anti-trust issues, among other matters.

Coachella impairment

In January 2012, we acquired in a foreclosure auction for $5.5 million a 202-acre property located in Coachella, California zoned for the development of up to 843 single-family residential units. The only other bidder was the holder of the mortgage on the property who bid up to $50,000 less than our final bid. At the time of the purchase, we knew, based on our due diligence that we were paying more for the property than would be supported by an Uniform Standards of Professional Appraisal Practice ("USPAP") appraisal. However, the amount that we bid was the lowest price at which we were able to acquire the property from the mortgagor. In valuing the property, we took into account a variety of factors, including the fact that the property is located within the City of Coachella, the state of the land use entitlements, and the fact that the prior owner had invested considerable time and money in obtaining the entitlements from the City of Coachella. Since an independent USPAP appraisal of the property produced an appraised value as of December 2012 at $4.0 million, we have written down the book value of the property by $1.5 million. As noted below, this property is 50% owned by Mr. James J. Cotter who shares in any impairment loss to the extent of his ownership interest.

We acquired the property as a potentially long-term investment based on the expectation that ready-for-development residential real estate will recover in value. As we are not in the business of developing single family residences, it is anticipated that the property will eventually be sold to a developer of this type of property.

We hold the property in a limited liability company, which we manage. This company is owned 50/50 by ourselves and our Chairman and Chief Executive Officer, James J. Cotter. The opportunity to acquire the property was originally presented to Mr. Cotter in his individual capacity and the transaction was approved by our Conflicts Committee, comprised entirely of independent directors.

Results of Operations

We currently have two operating segments: Cinema Exhibition and Real Estate. Our cinema exhibition segment includes the operations of our consolidated cinemas. Our real estate segment includes the operating results of our commercial real estate holdings, cinema real estate, live theater real estate, and ETRC's.

The tables below summarize the results of operations for our principal business segments for the years ended December 31, 2012, 2011, and 2010 (dollars in thousands).

                                       Cinema                    Intersegment
Year Ended December 31, 2012         Exhibition   Real Estate    Eliminations      Total
Revenue                              $  234,703   $    27,256     $     (7,529) $  254,430
Operating expense                       198,040        11,163           (7,529)    201,674
Depreciation and amortization            11,154         4,441                --     15,595
General and administrative expense        2,598           718                --      3,316
Impairment expense                            --        1,463                --      1,463
Segment operating income             $   22,911   $     9,471     $          -- $   32,382

                                       Cinema                    Intersegment
Year Ended December 31, 2011         Exhibition   Real Estate    Eliminations      Total
Revenue                              $  225,849   $    26,562     $     (7,432) $  244,979
Operating expense                       189,647        10,190           (7,432)    192,405
Depreciation and amortization            11,842         4,444                --     16,286
General and administrative expense        2,740           646                --      3,386
Impairment expense                            --          369                --        369
Segment operating income             $   21,620   $    10,913     $          -- $   32,533

                                       Cinema                    Intersegment
Year Ended December 31, 2010         Exhibition   Real Estate    Eliminations      Total
Revenue                              $  211,073   $    24,715     $     (6,466) $  229,322
Operating expense                       178,261         9,049           (6,466)    180,844
Depreciation and amortization            10,559         4,289                --     14,848
General and administrative expense        2,880         1,043                --      3,923
Impairment expense                            --        2,239                --      2,239
Segment operating income             $   19,373   $     8,095     $          -- $   27,468

Reconciliation to net income
to Reading International, Inc.
shareholders:                                       2012         2011        2010
Total segment operating income                  $   32,382  $    32,533  $   27,468
Depreciation and amortization
expense                                                454          309         715
General and administrative expense                  12,801       14,046      13,684
Operating income                                    19,127       18,178      13,069
Interest expense, net                              (16,426)     (21,038)    (12,286)
Other income (loss)                                   (563)       1,157        (347)
Gain (loss) on sale of assets                          144          (67)        352
Income tax benefit (expense)                        (4,904)      12,330     (14,264)
Equity earnings (loss) of
unconsolidated joint ventures and
entities                                             1,621       (1,552)      1,345
Income (loss) from discontinued
operations                                             (85)         232          97
Gain (loss) on sale of discontinued
operation                                             (320)       1,656           --
Net income (loss)                               $   (1,406) $    10,896  $  (12,034)
Net (income) loss attributable to
noncontrolling interests                               492         (940)       (616)
Net income (loss) attributable to
Reading International, Inc. common
shareholders                                    $     (914) $     9,956  $  (12,650)

Cinema Exhibition Segment

The following tables and discussion that follows detail our operating results
for our 2012, 2011, and 2010 cinema exhibition segment (dollars in thousands):

Year Ended December 31, 2012         United States   Australia   New Zealand    Total
Admissions revenue                 $       78,745  $   68,819  $     13,897  $ 161,461
Concessions revenue                        32,219      24,564         4,266     61,049
Advertising and other revenues              5,433       5,806           954     12,193
Total revenues                            116,397      99,189        19,117    234,703

Cinema costs                               96,534      75,210        14,959    186,703
Concession costs                            5,374       4,908         1,055     11,337
Total operating expense                   101,908      80,118        16,014    198,040

Depreciation and amortization               6,482       3,589         1,083     11,154
General and administrative expense          1,937         661             --     2,598
Segment operating income           $        6,070  $   14,821  $      2,020  $  22,911

Year Ended December 31, 2011         United States   Australia   New Zealand    Total
Admissions revenue                 $       73,062  $   72,887  $     12,622  $ 158,571
Concessions revenue                        28,225      23,306         3,446     54,977
Advertising and other revenues              5,482       6,019           800     12,301
Total revenues                            106,769     102,212        16,868    225,849

Cinema costs                               89,602      75,771        13,998    179,371
Concession costs                            4,461       4,963           852     10,276
Total operating expense                    94,063      80,734        14,850    189,647

Depreciation and amortization               6,525       4,218         1,099     11,842
General and administrative expense          1,973         691            76      2,740
Segment operating income           $        4,208  $   16,569  $        843  $  21,620

Year Ended December 31, 2010         United States   Australia   New Zealand    Total
Admissions revenue                 $       73,266  $   61,640  $     15,601  $ 150,507
Concessions revenue                        27,391      18,658         3,861     49,910
Advertising and other revenues              5,096       4,559         1,001     10,656
Total revenues                            105,753      84,857        20,463    211,073

Cinema costs                               89,531      63,976        15,578    169,085
Concession costs                            4,260       4,009           907      9,176
Total operating expense                    93,791      67,985        16,485    178,261

Depreciation and amortization               6,556       2,969         1,034     10,559
General and administrative expense          2,040         840             --     2,880
Segment operating income           $        3,366  $   13,063  $      2,944  $  19,373

Cinema Results for 2012 Compared to 2011

. . .

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