Reading International - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

As indicated in our 2009 Annual Report, the term of our Australia Corporate Credit Facility matures on June 30, 2011.  Accordingly, the outstanding balance of this debt is classified as current on our June 30, 2010 balance sheet.  The Australia Corporate Credit Facility is secured by the majority of our theater and entertainment-themed retail center (“ETRC”) properties in Australia.  We are currently in the process of renegotiating this facility with our current lender while also seeking a replacement facility with other lenders.  While no assurances can be given that we will be successful, we currently anticipate that the current facility will either be extended or replaced prior to maturity.

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

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.

In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (Topic 810):  Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”  This ASU incorporates Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009.  The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact such ent ity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities, which enhances the information provided to users of financial statements.  We adopted ASU 2009-17 effective January 1, 2010.  As a result of the fact that we have no variable interests in variable interest entities, the adoption of this ASU did not have a material impact on our financial position or results of operations.

 

In January 2010, the FASB issued ASU 2010-06 to the Fair Value Measurements and Disclosure topic of the Accounting Standards Codification.  The ASU clarifies disclosure requirements relating to the level of disaggregation of disclosures relating to classes of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value estimates for Level 2 or Level 3 assets and liabilities.  These requirements of the ASU are effective for interim and annual disclosures for interim and annual reporting periods beginning after December 15, 2009.  The adoption of these requirements of the ASU resulted in the disclosure by the Company of the inputs and valuation techniques used in preparing the nonrecurring fair value measurement of an impaired property for purpose of presentation in the Company's financial statements.

The ASU also requires additional disclosures about the transfers of classifications among the fair value classification levels and the reasons for those changes and separate presentation of purchases, sales, issuances, and settlements in the presentation of the roll forward of Level 3 assets and liabilities.  Those disclosures are effective for interim and annual reporting periods for fiscal years beginning after December 15, 2010.  The adoption of this portion of the ASU is not expected to have a material effect on the Company's financial statements.

There were no other new accounting pronouncements issued during the 2010 Quarter that will have a material impact on our financial statements.

On April 1, 2010, we terminated our then existing contractual relationship with Doug Osborne, at that time the chief executive officer of our Landplan real estate operations.  Mr. Osborne’s incentive interest in our various Landplan projects was valued at $0 and closed out at that time.  Mr. Osborne continues to provide services to us on a non-exclusive independent contractor basis.  As consideration for his future services on our behalf with respect to our Manukau properties, we have agreed to pay Mr. Osborne an amount equal to 7.5% of the net profit realized, if any, from our investment in these properties.  Profits are to be measured based on our total investment, without taking into account amortization or depreciation, and capitalizing all costs related to the carrying, development, a nd/or disposition of the properties.  Based on our total investment to date in these properties (measured as stated in the immediately preceding sentence), we do not currently anticipate a profit from these properties, and, as a result, we have booked no expense in the three or six months ended June 30, 2010 with respect to Mr. Osborne’s consulting services with respect to our Manukau properties.  During the three and six months ended June 30, 2009, we expensed $5,000 and $55,000 associated with Mr. Osborne’s previous, contractual interest in the properties associated with Landplan Property Partners, Pty Ltd.

For the three and six months ended June 30, 2010, we recorded compensation expense of $0, and $4,000, respectively, and, for the three and six months ended June 30, 2009, we recorded compensation expense of $56,000, and $113,000, respectively, related to the vesting of all our restricted stock grants.  During the six months ended June 30, 2010, we issued 143,462 of Class A Nonvoting Shares to an executive employee associated with his prior years’ stock bonuses.  For the three and six months, ended June 30, 2010, no restricted stock grants were made to our employees.

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. Our 1999 Stock Option Plan expired in November 2009, and has been 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 718-40 relating to Stock-Based Compensation (“FASB ASC 718-40”), requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.  For the three months ended June 30, 2010 and 2009, 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.

In accordance with FASB ASC 718-40, 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.  We exclude the dividend yield from the calculation, as we intend to retain all earnings.  We expense the estimated grant date fair values of options issued on a straight-line basis over the vesting period.

We granted no options in the three or six months ended June 30, 2010 or 2009.

Based on prior year’s assumptions and in accordance with the FASB ASC 718-40 modified prospective method, we recorded compensation expense for the total estimated grant date fair value of stock options that vested of $8,000 and $22,000 for the three and six months ended June 30, 2010, respectively, and $58,000 and $218,000 for the three and six months ended June 30, 2009, respectively.  At June 30, 2010, the total unrecognized estimated compensation cost related to non-vested stock options granted was $72,000, which we expect to recognize over a weighted average vesting period of 1.58 years.  60,000 and 90,000 options were exercised during the three and six months ended June 30, 2010 having a realized value of $91,000 and $138,000, respectively, for which we received $166,000 and $248,000, respectively, of ca sh.  The grant date fair value of options vesting during the three and six months ended June 30, 2010 was $8,000 and $22,000, respectfully, and $58,000 and $218,000 for the three and six months ended June 30, 2009, respectively.  The intrinsic, unrealized value of all options outstanding, vested and expected to vest, at June 30, 2010 was $74,000 of which 100% 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 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.

 

 

 

The weighted average remaining contractual life of all options outstanding, vested, and expected to vest at June 30, 2010 and December 31, 2009 was approximately 5.22 and 5.05 years, respectively.  The weighted average remaining contractual life of the exercisable options outstanding at June 30, 2010 and December 31, 2009 was approximately 4.88 and 4.70 years, respectively.

During the six months ended June 30, 2010, we changed our reporting for intercompany property rent where our cinema operations were substantially the only tenant of such property by eliminating the intersegment revenue and expense relating to the intercompany rent, and transferring the third party lease costs from the real estate segment to the cinema segment.  This change in management’s structure of the reportable segments commenced on January 1, 2010, such changes to segment reporting are reflected in the segment results for the three and six months ended June 30, 2010 and 2009, respectively.  The retroactive presentation for the three and six months ended June 30, 2009 segment results decreased intersegment revenue and expense for the intercompany rent by $1.0 million and $2.2 million, respectively, and t ransferred the third party lease costs from the real estate segment to the cinema segment.  The overall results of these changes decreased real estate segment revenues and expense by $1.0 million and $2.2 million, respectively.  This change results in a reduction of real estate operating expense and an increase of cinema operating expense of $1.0 million and $2.2 million, respectively, on our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009, respectively.

The tables below summarize the results of operations for each of our principal business segments for the three and six months ended June 30, 2010 and 2009, 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):

 

 

In May 2010, we announced our intent to sell and began actively marketing our 50.6-acre Burwood development site in suburban Melbourne.  The current carrying value of this property on our books is $44.1 million (AUS$52.0 million) which has been reclassified from property held for development to land held for sale on our June 30, 2010 condensed consolidated balance sheet.

 

We recorded capitalized interest related to our properties under development for the six months ended June 30, 2009 of $136,000.  We have curtailed the development activities of our properties under development and are not currently capitalizing interest expense.  Therefore, we did not capitalize any interest during the three or six months ended June 30, 2010.

As of June 30, 2010 and December 31, 2009, we owned investments in property and equipment as follows (dollars in thousands):

Our investments in unconsolidated joint ventures and entities are accounted for under the equity method of accounting, and, as of June 30, 2010 and December 31, 2009, included the following (dollars in thousands):

For the three months ended June 30, 2010 and 2009, we recorded our share of equity earnings (loss) from our investments in unconsolidated joint ventures and entities as follows (dollars in thousands):

During the first quarter of 2010, Nationwide Theaters Corp. and Reading agreed to reduce the Nationwide Note 1 by $4.4 million pursuant to the original sale and purchase agreement (See Note 11 – Notes Payable and Subordinated Debt (Trust Preferred Securities)).  The reduction in this note has resulted in an adjustment to the carrying value of the goodwill for $4.4 million.

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 20 years; our trade name using an accelerated amortization method over its estimated useful life of 50 years; and our option fee and other intangible assets over 10 years.  For the three months ended June 30, 2010 and 2009, amortization expense totaled $614,000 and $697,000, respectively; and for the six months ended June 30, 2010 and 2009, amortization expense totaled $1.3 million and $1.3 million, respectively.

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

 

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

During the three and six months ended June 30, 2010 the Company’s FASB ASC 740-10-2a liability increased by $11.8 million and $12.0 million, respectively, reflecting the settlement in July 2010 of federal income tax matters under litigation, as more fully described in Note 13 – Commitments and Contingencies below.

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.  No current or cumulative earnings were available for distribution in the Reading Australia consolidated group of subsidiaries or in the Puerto Rico subsidiary as of June 30, 2010.  The Reading New Zealand consolidated group of subsidiaries generated earnings in the six months ending June 30, 2010, but had no cumulative earnings available for distribution.  We have provided $453,000 in foreign withholding taxes connected with foreign retained earnings.

We have accrued $25.9 million in income tax liabilities as of June 30, 2010, of which $23.9 million has been classified as income taxes payable and $2.0 million have been classified as non-current tax liabilities.  As part of current tax liabilities, we have accrued $18.1 million in accordance with the cumulative probability approach prescribed by FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions in connection with settlement of the IRS litigation matter discussed in Note 13 – Commitments and Contingencies below.  We believe these amounts represent an adequate provision for our income tax exposures, including income tax contingencies related to foreign withholding taxes described in Note 15 – Other Liabilities.

The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the periods ending June 30, 2010, December 31, 2009, and December 31, 2008 (dollars in thousands):

We adopted FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions (“ASC 740-10-25”) on January 1, 2007.  As a result, we recognized a $509,000 cumulative increase to reserves for uncertain tax positions, which was accounted for as an adjustment to the beginning balance of accumulated deficit in 2007.  As of that date, we also reclassified approximately $4.0 million in reserves from current taxes liabilities to non-current tax liabilities.  Interest and/or penalties related to income tax matters are recorded as part of income tax expense.  We had approximately $10.8 million of gross tax benefits and $1.7 million of tax interest unrecognized on the financial statements as of the date of adoption, mostly reflecting operating loss carry forwards and the IRS litigation matter d escribed below.  Of the $12.5 million total gross unrecognized tax benefits at January 1, 2007, $4.5 million would affect the effective tax rate if recognized.  The remaining balance consists of items that would not affect the effective tax rate due to the existence of the valuation allowance.  We recorded an increase to our gross unrecognized tax benefits of approximately $0.6 million and an increase to tax interest of approximately $0.6 million during the period January 1, 2007 to December 31, 2007.  Of the $11.3 million gross unrecognized tax benefit at December 31, 2008, $3.1 million would affect the effective rate if recognized.  We further recorded a decrease to our gross unrecognized tax benefits of approximately $0.1 million and an increase to tax interest of approximately $0.9 million during the period January 1, 2008 to December 31, 2008, and the total balance at December 31, 2008 was approximately $14.5 million (of which approximately $3.2 million represents interest).  We further recorded an increase to our gross unrecognized tax benefits of approximately $0.2 million and an increase to tax interest of approximately $0.6 million during the period January 1, 2009 to December 31, 2009, and the total balance at December 31, 2009 was approximately $15.3 million (of which approximately $3.8 million represents interest).  As of June 30, 2010, we recorded an increase to our gross unrecognized tax benefits of $3.8 million and an increase in tax interest of approximately $8.2 million to reflect a proposed agreement to settle the IRS litigation matter described in Note 13.  The total balance as of that date was $27.4 million, of which $12.1 million represents interest.  Of the $15.3 million gross unrecognized tax benefit at June 30, 2010, $7.1 million would affect the effective tax rate if recognized.

We anticipate that within 12 months following June 30, 2010 our gross unrecognized tax benefits will decrease by approximately $8.2 million, reflecting a reduction in available loss carry forwards related to the IRS litigation matter described in Note 13.  Because of valuation allowances, the decrease will not affect the effective tax rate.  We also anticipate in that period a tax payment of approximately $5.3 million tax, plus undetermined interest, to satisfy our obligation under the IRS litigation settlement.  We expect no other significant change to our gross unrecognized tax benefits caused by settlement of audits or expiration of statutes of limitations.

Notes payable and subordinated debt (trust preferred securities) are summarized as follows (dollars in thousands):

As indicated in our 2009 Annual Report, the term of our Australia Corporate Credit Facility matures on June 30, 2011.  Accordingly, the outstanding balance of this debt is classified as current on our balance sheet.  We are currently in the process of renegotiating this facility with our current lender while also seeking a replacement facility with other lenders.  While no assurances can be given that we will be successful, we currently anticipate that the current facility will either be extended or replaced prior to maturity.

 

As part of the negotiation of the Village East Lease (see Note 20 – Related Party Transactions), we paid off the Sutton Hill Capital (“SHC”) Note #1 on June 30, 2010 of $5.0 million and renegotiated the SHC Note 2 for $9.0 million.  Under the new terms of the SHC Note 2, the loan has a variable annual rate equal to a Five-Year Constant Maturity United States Treasury Note rate plus 575 basis points, subject to a minimum rate of 8.25% and a maximum rate of 10% and an expiration date of December 31, 2013.  No other covenants are required for this loan.  This loan is unsecured.

During the first quarter of 2010, Nationwide Theaters Corp. (the Seller’s note above associated with the Consolidated Cinemas acquisition) and Reading agreed to reduce the seller’s note, Nationwide Note 1, by $4.4 million pursuant to the original sale and purchase agreement.  This reduction in the note effectively reduces the original purchase price for the Consolidated Cinemas by $4.4 million from $20.0 million to $15.6 million.  The reduction in this note has resulted in an adjustment to the carrying value of the goodwill for $4.4 million.

Other liabilities are summarized as follows (dollars in thousands):

Included in our other liabilities are accrued pension costs of $4.1 million.  The benefits of our pension plans are fully vested, and, as such, no service costs were recognized for the three and six months ended June 30, 2010 and 2009.  Our pension plans are unfunded; therefore, the actuarial assumptions do not include an estimate for expected return on plan assets.  For the three and six months ended June 30, 2010, we recognized $75,000 and $152,000, respectively, of interest cost and $76,000 and $152,000, respectively, of amortized prior service cost.  For the three and six months ended June 30, 2009, we recognized $65,000 and $134,000, respectively, of interest cost and $71,000 and $142,000, respectively, of amortized prior service cost.

 

Total debt of unconsolidated joint ventures and entities was $932,000 and $979,000 as of June 30, 2010 and December 31, 2009.  Our share of unconsolidated debt, based on our ownership percentage, was $310,000 and $326,000 as of June 30, 2010 and December 31, 2009.  This loan is guaranteed by one of our subsidiaries to the extent of our ownership percentage.

 

 

 

 

 

 

The components of noncontrolling interest are as follows (dollars in thousands):

 

The components of income attributable to noncontrolling interests are as follows (dollars in thousands):

 

During the six months ended June 30, 2010, we issued 143,462 of Class A Nonvoting shares to an executive employee associated with his prior years’ stock bonuses.

We are exposed to interest rate changes from our outstanding floating rate borrowings.  We manage our fixed to floating rate debt mix to mitigate the impact of adverse changes in interest rates on earnings and cash flows and on the market value of our borrowings.  From time to time, we may enter into interest rate hedging contracts, which effectively convert a portion of our variable rate debt to a fixed rate over the term of the interest rate swap.  In the case of our Australian borrowings, we are presently required to swap no less than 70% of our drawdowns under our Australian Corporate Credit Facility into fixed interest rate obligations.  Under our GE Capital Term Loan, we are required to swap no less than 50% of our variable rate drawdowns for the first two years of the loan agreement.

The following table sets forth the terms of our interest rate swap derivative instruments at June 30, 2010:

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 increase in interest expense of $342,000 and $119,000 during the three and six months ended June 30, 2010, respectively, and a $1.1 million and $710,000 decrease to interest expense during the three and six months ended June 30, 2009, respectively.  At June 30, 2010, we recorded the fair market value of an interest rate swap and a cap of $356,000 as other long-term assets and an interest rate swap of $494,000 as an other long-term liability.  At December 31, 2009, we recorded the fair market value of an interest rate swap and a cap of $766,000 as other long-term assets and an interest rate swap of $785,000 as an other long-term liability.  In accordance with FASB ASC 815-10-35, we have not designated any of our current interest rate swap positions as financial reporting hedges.

We measure the following items 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):

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:

 

 

 

We used the following methods and assumptions to estimate the fair values of the assets and liabilities: