Reading International - 10-Q quarterly report FY

Washington, D.C.  20549

__________________________________

(Mark One)

For the quarterly period ended:  June 30, 2008

OR

For the transition period from _____________ to ___________

Commission file number 1-8625

(Exact name of Registrant as specified in its charter)

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

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 5, 2008, there were 20,987,115 shares of Class A Nonvoting Common Stock, $0.01 par value per share and 1,495,490 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.

 

 

 

 

See accompanying notes to consolidated financial statements.

 

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

 

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

 

 

The accompanying unaudited 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 for interim reporting.  As such, certain information and footnote disclosures typically required by US GAAP for complete financial statements have been condensed or omitted.  There have been no material changes in the information disclosed in the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Annual Report”).  The financial information presented in this quarterly report on Form 10-Q for the period ended June 30, 2008 (the “June Report”), including the information under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with our 2007 Annual Report which contains the latest audited financial statements and related footnotes.

In the opinion of management, all adjustments of a normal recurring nature considered necessary to present fairly in all material respects our financial position, results of our operations and cash flows as of and for the three months and six months ended June 30, 2008 and 2007 have been made.  The results of operations for the three months and six months ended June 30, 2008 and 2007 are not necessarily indicative of the results of operations to be expected for the entire year.

We have investments in marketable securities of $4.9 million at June 30, 2008.  These investments are accounted for as available for sale investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities.  In accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, assessments of potential impairment for these investments are performed for each applicable reporting period.  We have determined that there was no impairment for these investments at June 30, 2008.  These investments have a cumulative unrealized gain of $22,000 included in accumulated other comprehensive income at June 30, 2008.  For the three months and six months ended June 30, 2008 our net unrealized gain on marketable securities was $3,000 and $4,000, respectively, and for the three months and six months ended June 30, 2007 our net unrealized gain on marketable securities was $385,000 and $738,000, respectively.  During the three months ended June 30, 2007, we sold $5.7 million of our marketable securities resulting in a realized gain on sale of $224,000.

           Included in our six months ended June 30, 2008 other income is $910,000 of insurance settlement proceeds related to damage caused by Hurricane George in 1998 to one of our previously owned cinemas in

Puerto Rico, as well as legal settlement proceeds received on our Burstone litigation of $1.1 million and credit card dispute proceeds of $385,000 (See Note 13 –Commitments and Contingencies).

 

Effective January 1, 2008, we adopted, on a prospective basis, SFAS No. 157, Fair Value Measurements(“SFAS 157”) as amended by FASB Staff Position SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP FAS 157-1”) and FASB Staff Position SFAS 157-2,Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and provides for expanded disclosure about fair value measurements. SFAS 157 applies prospectively to all other accounting pronouncements that require or permit fair value measurements. FSP FAS 157-1 amends SFAS 157 to exclude from the scope of SFAS 157 certain leasing transactions accounted for under SFAS No. 13, Accounting for Leases. FSP FAS 157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15, 2008.

The adoption of SFAS 157 did not have a material impact on our consolidated financial statements. We are evaluating the impact that SFAS 157 will have on our non-financial assets and non-financial liabilities, since the application of SFAS 157 for such items was deferred, in our case, to January 1, 2009. We believe that the impact of these items will not be material to our consolidated financial statements. Assets and liabilities, typically recorded at fair value on a non-recurring basis, to which we have not yet applied SFAS 157 due to the deferral of SFAS 157 for such items include:

 

 

 

Effective January 1, 2008, we adopted, on a prospective basis, SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The adoption of SFAS 159 did not have a material impact on our consolidated financial statements since we did not elect to apply the fair value option for any of our eligible financial instruments or other items on the January 1, 2008 effective date.

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”).  SFAS 160 requires (i) that noncontrolling (minority) interests be reported as a component of shareholders’ equity, (ii) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, (iii) that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, (iv) that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (v) that sufficient disclosures are provided that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for annual periods beginning after December 15, 2008, which is the year ending December 31, 2009 for the Company, and should be applied prospectively.  However, the presentation and disclosure requirements of the statement shall be applied retrospectively for all periods presented.  The adoption of the provisions of SFAS 160 is not anticipated to materially impact the Company’s consolidated financial position and results of operations.

In March 2008, the Financial Accounting Standards Board issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”).  This new standard enhances disclosure requirements for derivative instruments in order to provide users of financial statements with an enhanced understanding of (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is to be applied prospectively for the first annual reporting period beginning on or after November 15, 2008.  We believe that the adoption of SFAS 161 will not have a material impact on our financial statement disclosures since we solely have interest rate swaps as derivative instruments.

As part of his compensation package, Mr. John Hunter, our Chief Operating Officer, was granted $100,000 of restricted Class A Non-Voting Common Stock on February 12, 2008 and 2007.  These stock grants have vesting periods of two years and stock grant prices of $9.70 and $8.63, respectively.  On February 11, 2008, $50,000 of restricted Class A Non-Voting Common Stock vested related to Mr. Hunter’s 2007 grant.  The 5,794 shares related to this vesting have yet to be issued to him.  During the three months and six months ended June 30, 2008, we recorded compensation expense of $100,000 and $196,000, respectively, and during the three months and six months ended June 30, 2007, we recorded compensation expense of $59,000 and $119,000, respectively, for the vesting of all our restricted stock grants.  The following table details the grants and vesting of restricted stock to our employees (dollars in thousands):

In 2006, we formed two new wholly owned subsidiaries, Landplan Property Partners, Pty Ltd and Landplan Property Partners New Zealand, Ltd collectively referred to as Landplan Property Partners (“LPP”), to engage in the real estate development business.  We have an agreement with the president of LPP, Mr. Doug Osborne pursuant to which he has a contingent interest in certain property trusts, owned by LPP, ranging between 27.5% and 15%, depending on a number of factors including the amount and duration of the investments of LPP.  Mr. Osborne’s interest is subordinated to (i) the repayment of all third party indebtedness, (ii) the repayment of all funds invested or advanced by Reading, and (iii) the realization by Reading of an 11% annual compounded preferred return on its capital.  Mr. Osborne’s interest of $331,000 is included in the minority interest of LPP at June 30, 2008 (see Note 14 – Minority Interest).  During the three and six months ended June 30, 2008, we expensed $30,000 and $91,000, respectively, and during the three and six months ended June 30, 2007, we expensed $86,000 and $96,000, respectively associated with Mr. Osborne’s interests.  At June 30, 2008, the total unrecognized compensation expense related to the LPP equity awards was $181,000, which is expected to be recognized over the remaining weighted average period of approximately 96 months.  These amounts will not, however, be payable unless the properties held by LPP, on a consolidated basis, provide returns on capital in excess of 11%, compounded annually.

We have a long-term incentive stock option plan that provides for the grant to eligible employees and non-employee directors of incentive stock options and non-qualified stock options to purchase shares of the Company’s Class A Nonvoting Common Stock.

When the Company’s tax deduction from an option exercise exceeds the compensation cost resulting from the option, a tax benefit is created.  SFAS No. 123(R),Accounting for Stock-Based Compensation (“SFAS 123(R)”, 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, 2008 and 2007, there was no impact to the consolidated statement of cash flows because there were no recognized tax benefits from stock option exercises during these periods.

SFAS 123(R) 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 SFAS 123(R), we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility, and the expected life of the options.  The dividend yield is excluded from the calculation, as it is our present intention to retain all earnings.  We expense the estimated grant date fair values of options issued on a straight-line basis over the vesting period.

We granted 231,250 and 301,250 of options during the three and six months ended June 30, 2007, respectively.  Of these options, 70,000 were granted to our directors as fully vested options during the six months

ended June 30, 2007.  There were no options granted to our employees during the three or six months ended June 30, 2008.  We estimated the fair value of the 2007 option grants at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:

Using the above assumptions and in accordance with the SFAS 123(R) modified prospective method, we recorded $160,000 and $320,000 in compensation expense for the total estimated grant date fair value of stock options that vested during the three and six months ended June 30, 2008, respectively.  We also recorded $92,000 and $418,000 in compensation expense for the total estimated grant date fair value of stock options that vested during the three and six months ended June 30, 2007, respectively.  At June 30, 2008, the total unrecognized estimated compensation cost related to non-vested stock options granted was $556,000, which is expected to be recognized over a weighted average vesting period of 0.93 years.  No options were exercised during the three or six months ended June 30, 2008 or during the three or six months ended June 30, 2007; therefore, no cash was received and no value was realized from the exercise of options during those periods.  There were 120,625 options vested during the three and six months ended June 30, 2008 having a current intrinsic value of $0 for the period as all the options were “out-of-the-money” at June 30, 2008.  Except for the 70,000 fully vested options granted to our directors during the first quarter, only 5,000 options vested during the three and six months ended June 30, 2007; therefore, the grant date fair value of options vesting during the three and six months ended June 30, 2007 was $41,000.  The intrinsic, unrealized value of all options outstanding, vested and expected to vest, at June 30, 2008 was $1.5 million of which 100.0% are currently exercisable.

All stock options granted have a contractual life of 10 years at the grant date.  The aggregate total number of shares of Class A Nonvoting Common Stock and Class B Voting Common Stock authorized for issuance under our 1999 Stock Option Plan is 1,287,150.  At the time that options are exercised, at the discretion of management, we will either issue treasury shares or make a new issuance of shares to the employee or board member.  Dependent on the grant letter to the employee or board member, the required service period for option vesting is between zero and four years.

We had the following stock options outstanding and exercisable as of June 30, 2008 and December 31, 2007:

 

The weighted average remaining contractual life of all options outstanding, vested and expected to vest, at June 30, 2008 and December 31, 2007 was approximately 5.72 and 6.22 years, respectively.  The weighted average remaining contractual life of the exercisable options outstanding at June 30, 2008 and December 31, 2007 was approximately 5.11 and 4.74 years, respectively.

Our operations are organized into two reportable business segments within the meaning of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.  Our reportable segments are (1) cinema exhibition and (2) real estate.  The cinema 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, including ETRC’s in Australia and New Zealand and live theatres in the United States.  Historically, our development projects have included a cinema component.  Incident to our real estate operations we have acquired, and continue to hold, raw land in urban and suburban centers in Australia and New Zealand.

The tables below summarize the results of operations for each of our principal business segments for the three (“2008 Quarter”) and six (“2008 Six Months”) months ended June 30, 2008 and the three (“2007 Quarter”) and six (“2007 Six Months”) months ended June 30, 2007, respectively.  Operating expense includes costs associated with the day-to-day operations of the cinemas and live theatres and the management of rental properties.  All operating results from discontinued operations are included in “Gain on sale of a discontinued operation” (dollars in thousands):

 

 

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 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 foreign currency exposure.

Presented in the table below are the currency exchange rates for Australia and New Zealand as of June 30, 2008 and December 31, 2007:

Basic earnings (loss) per share is computed by dividing the net income (loss) to common stockholders 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) to common stockholders 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 give rise to potentially dilutive common shares.  In accordance with SFAS No. 128, Earnings Per Share, these shares are included in the dilutive loss per share calculation under the treasury stock method.  The following is a calculation of earnings (loss) per share (dollars in thousands, except share data):

For the three and six months ended June 30, 2007, we recorded losses from continuing operations.  As such, the incremental shares of 262,428 in 2007 from stock options to purchase shares of common stock were excluded from the computation of diluted loss per share because they were anti-dilutive in those periods.

 

As of June 30, 2008 and December 31, 2007, we owned property under development summarized as follows (dollars in thousands):

 

We recorded capitalized interest related to our properties under development for the three months ended June 30, 2008 and 2007 of $1.7 million and $900,000, respectively, and $3.1 million and $2.0 million for six months ended June 30, 2008 and 2007, respectively.

As of June 30, 2008 and December 31, 2007, we owned investments in property and equipment as follows (dollars in thousands):

Depreciation expense for property and equipment was $4.7 million and $2.8 million for the three months ended June 30, 2008 and 2007, respectively, and $8.2 million and $5.5 million for the six months ended June 30, 2008 and 2007, respectively.

In April 2008, we opened a new, leased 9-screen cinema in Rouse Hill, Australia.  We fitted out the cinema with leasehold assets costing $1.4 million (AUS$1.4 million) and fixture and equipment costs of $3.9 million (AUS$4.1 million).

Except as noted below regarding our investment in Malulani Investments, Limited, investments in unconsolidated joint ventures and entities are accounted for under the equity method of accounting, and, as of June 30, 2008 and December 31, 2007, include the following (dollars in thousands):

For the three months and six months ended June 30, 2008 and 2007, we recorded our share of equity earnings (loss) from our investments in unconsolidated joint ventures and entities as follows:

We continue to treat this investment on a cost basis by recognizing earnings as they are distributed to us.  We are currently in litigation with certain controlling shareholders and directors of Malulani Investments Limited.  We have contractually agreed to share these litigation costs with another minority shareholder.  The outstanding balance for their obligation is included in our other assets as a receivable.

On June 6, 2008, we sold the Botany Downs Cinema to our joint venture partner for $3.3 million (NZ$4.3 million).  We continue to have certain outstanding claims related to interest and working capital, which may or may not increase the total sales price of the cinema.

From time to time, we will make investments in various activities that require equity method accounting including but not limited to investments in productions in our live theatres.  These investments are immaterial to our financials from the perspective of our investment and their potential earnings.

Subsequent to January 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we do not amortize goodwill.  Instead, we perform an annual impairment review of our goodwill and other intangible assets in the fourth quarter unless changes in circumstances indicate that an asset may be

impaired.  As of June 30, 2008 and December 31, 2007, we had goodwill consisting of the following (dollars in thousands):

We have intangible assets other than goodwill that are subject to amortization and are being amortized over various periods.  We amortize our beneficial leases over the lease period, the longest of which is 20 years, our trade name using a declining balance over 50 years, and our option fee and other intangible assets over 10 years.  For the three months ended June 30, 2008 and 2007, amortization expense totaled $804,000 and $248,000, respectively; and for the six months ended June 30, 2008 and 2007, amortization expense totaled $1.2 million and $475,000, respectively.

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

 

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

The income tax provision for the three months and six months ended June 30, 2008 and 2007 was composed of the following amounts (dollars in thousands):

We adopted FASB Interpretation No. 48 (“FIN 48”) on January 1, 2007.  As a result, we recognized a $509,000 cumulative increase to reserves for uncertain tax positions, which was accounted for as an adjustment to the beginning balance of accumulated deficit in 2007.  As of that date, we also reclassified approximately $4.0 million in reserves from current taxes liabilities to noncurrent tax liabilities.  During the six months ended June 30, 2008 the Company’s FIN 48 liability increased by $254,000 reflecting the accrual of interest for IRS matters under litigation.

 

Notes payable are summarized as follows (dollars in thousands):

During June 2008, we extended the term of our $105.2 million (AUS$110.0 million) Australian facility to June 30, 2011.  This facility will continue to roll to a 3-year term, following an annual bank review.  Besides the extended term, the only other changes to the original agreement was that the loan requires interest only payments and our interest margin increased from 1.00% to 1.25%.  The drawn balance of this loan was $96.1 million (AUS$100.5 million) at June 30, 2008.

 

In connection with the acquisition described in Note 17 - Acquisitions, on February 21, 2008, Consolidated Amusement Theatres, Inc., (now renamed Consolidated Entertainment, Inc.) as borrower (“Borrower”), and Consolidated Amusement Holdings, Inc. (“Holdings”) entered into a Credit Agreement with General Electric Capital Corporation (“GE”) as lender and administrative agent, and GE Capital Markets, Inc. as lead arranger, which provides Borrower with a senior secured credit facility of up to $55.0 million in the aggregate, including a revolving credit facility of up to $5.0 million and a $1.0 million sub-limit for letters of credit  (the “Credit Facility”).  The initial borrowings under the Credit Facility were used to finance, in part, our acquisition of the theaters and other assets described in Note 17 - Acquisitions.  We may borrow additional amounts under the Credit Facility for other acquisitions as permitted under the Credit Facility (and to pay any related transaction expenses), and for ordinary working capital and general corporate needs of Borrower, subject to the terms of the Credit Facility.  We incurred deferred financing costs of $2.6 million related to our borrowings under this Credit Facility.  The Credit Facility expires on February 21, 2013 and is secured by substantially all the assets of Borrower and Holdings.

 

Borrowings under the Credit Facility bear interest at a rate equal to either (i) the Index Rate (defined as the higher of the Wall Street Journal prime rate and the federal funds rate plus 50 basis points), or (ii) LIBOR (as defined in the Credit Facility), at the election of Borrower, plus, in each case, a margin determined by reference to Borrower's Leverage Ratio (as defined in the Credit Facility) that ranges between prime rate plus 2.00% and prime rate plus 2.75%, and between LIBOR plus 3.25% and LIBOR plus 4.00%, respectively.

 

Borrowings under the Credit Facility may be prepaid at any time without penalty, subject to certain minimums and payment of any LIBOR funding breakage costs.  Borrower will be required to pay an unused commitment fee equal to 0.50% per annum on the actual daily-unused portion of the revolving loan facility, payable quarterly in arrears.  Outstanding letters of credit under the Credit Facility are subject to a fee of the applicable LIBOR rate in effect per annum on the face amount of such letters of credit, payable quarterly in arrears.  Borrower will be required to pay standard fees with respect to the issuance, negotiation, and amendment of letters of credit issued under the letter of credit facility.  In accordance with the prepayment provisions of the credit agreement, in June 2008, we paid down on the facility by $5.0 million.  This includes a prepayment of the annual cash flow draw of $2.0 million and a pay down of the overall facility by an additional $3.0 million.

 

The Credit Facility contains other customary terms and conditions, including representations and warranties, affirmative and negative covenants, events of default and indemnity provisions.  Such covenants, among other things, limit Borrower's ability to incur indebtedness, incur liens or other encumbrances, make capital expenditures, enter into mergers, consolidations and asset sales, engage in transactions with affiliates, pay dividends or other distributions and change the nature of the business conducted by Borrower.

 

The Credit Agreement contains financial covenants requiring the Borrower to maintain minimum fixed charge and interest coverage ratios and not to exceed specified maximum leverage ratios.  The compliance levels for the maximum leverage and minimum interest coverage covenants become stricter over the term of the Credit Facility.

 

The Credit Facility provides for customary events of default, including payment defaults, covenant defaults, cross-defaults to certain other indebtedness, certain bankruptcy events, judgment defaults, invalidity of any loan documents or liens created under the Credit Agreement, change of control of Borrower, termination of certain theater leases and material inaccuracies in representations and warranties.

 

On February 22, 2008, we completed the acquisition of fifteen motion picture exhibition theaters and theater-related assets from Pacific Theatres Exhibition Corp. and its affiliates, Consolidated Amusement Theatres, Inc. and Kenmore Rohnert, LLC (collectively, the “Sellers”) for $70.2 million.  As part of the purchase, the Sellers, through an affiliate, provided $21.0 million of acquisition financing evidenced by a five-year promissory note of Reading Consolidated Holdings, Inc., our wholly owned subsidiary (“RCHI”), maturing on February 21, 2013.  The promissory note (referred to in the report as the “Nationwide Note”) bears interest (i) as to $8.0 million of principal at the annual rates of 7.50% for the first three years of the term of the note and 8.50% thereafter and (ii) as to $13.0 million of principal at the annual rates of 6.50% through July 31, 2009 and 8.50% thereafter.  Accrued interest on the promissory note will be due and payable on February 21, 2011 and thereafter on the last day of each calendar quarter, commencing on June 30, 2011.  The entire principal amount of the promissory note will be due and payable upon maturity, subject to our right to prepay the promissory note at any time without penalty and to the requirement that we make mandatory prepayments equal to a portion of free cash flow generated by the acquired theaters.

 

The $21.0 million loan under the Nationwide Note is recourse only to RCHI and its assets, which include the acquired assets and our Manville Theater, Dallas Angelika Theater and all of the cinema assets that we acquired in the transaction, other than two cinemas located in Southern California.

 

In connection with the completion of the acquisition, the Sellers also agreed to provide us up to three additional loans: one of $3.0 million to be drawn at our specific request, one of $1.5 million to be drawn on or before July 31, 2008, and a third of $1.5 million to be drawn on or before July 31, 2009.  If extended, such loans will bear interest at the annual rate of 8.50%, compounded annually, and will be due and payable, in full, on

February 21, 2011, subject to our right to prepay the loans without premium or penalty.  The $6.0 million of additional loans, if extended by the Sellers at our request, will be general obligations of Reading.  See Note 20 – Subsequent Events for such borrowings made subsequent to June 30, 2008.

The aggregate purchase price of the acquired assets is subject to reduction based upon a final determination of theater-level cash flows of the acquired theaters for the twelve months ended December 27, 2007, possible capital improvements by us to the acquired theaters, and post-closing matters relating to the possible opening of competing theater projects in the vicinity of certain acquired theaters.  These acquisition price reductions can range from $0 to as much as the full amount of the Nationwide Note, if all contingencies were met.

The outstanding balance of the promissory note will be subject to reduction, retroactive to the closing date of acquisition, as the means of effecting any reduction in the purchase price of the acquired assets as referred to above.  Pursuant to these reduction provisions, during the second quarter of 2008, the $8.0 million portion of the promissory note was reduced by $6.3 million to $1.7 million (see Note 17 – Acquisitions).

Additional adjustments may be made, depending upon competitive developments with respect to certain of the acquired cinemas.

On March 17, 2008, we entered into a $7.1 million loan agreement with a financial institution, secured by our Royal George Theatre in Chicago, Illinois and our Minetta and Orpheum Theatres in New York.  The loan has a 5-year term loan that accrues a 6.20% interest rate payable monthly in arrears.  We incurred deferred financing costs of $527,000 related to our borrowings of this loan.  The loan agreement requires only monthly principal and interest payments along with self-reported annual financial statements.

We have negotiated with an Australia bank a construction line of credit on our Indooroopilly property of $8.4 million (AUS$8.7 million) which, upon completion of the development project, converts to a term loan of up to $10.0 million (AUS$10.5 million).  As of June 30, 2008, we have not drawn on this credit facility.

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

 

Included in our other liabilities are accrued pension costs of $2.9 million.  Associated with our pension plans, for the three and six months ended June 30, 2008, we recognized $63,000 and $226,000, respectively, of interest cost and $71,000 and $143,000, respectively, of amortized prior service cost.  For the three and six months ended June 30, 2007, we recognized $39,000 and $52,000, respectively, of interest cost and $76,000 and $101,000, respectively, of amortized prior service cost.

Total debt of unconsolidated joint ventures and entities was $2.6 million and $4.2 million as of June 30, 2008 and December 31, 2007, respectively.  Our share of unconsolidated debt, based on our ownership percentage, was $872,000 and $2.0 million as of June 30, 2008 and December 31, 2007, respectively.  This debt is without recourse to Reading as of June 30, 2008 and December 31, 2007.

On May 10, 2005, a mixed judgment was entered by the trial court in Reading Entertainment Australia Pty Ltd vs. Burstone Victoria Pty Ltd.  Appeal rights have been exhausted and the net result of that judgment has been the payment to us by the defendants during the first quarter of $830,000 (AUS$901,000) and $314,000 (AUS$333,000) during the second quarter which are each included in other income.

This litigation was resolved by our sale, on June 6, 2008, of the Botany Downs Cinema to our joint venture partner for $3.3 million (NZ$4.3 million) (see Note 7 -Investments in Unconsolidated Joint Ventures and Entities).

On May 13, 2008, the High Court of Wellington rendered a decision against the liquidators of Condrens Parking Limited and in favor of Aeneas Edward O’Sullivan, Mark Gerard McKinley, and Clifford Joseph Condren in the matter titled Palmer and Petterson v. O’Sullivan et al. Because of this determination, the defendants are claiming costs of approximately $290,000 (NZ$381,000).  We have appealed this decision, and are contesting the defendants’ cost claims.

Minority interest is composed of the following enterprises:

 

 

 

 

 

 

 

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

 

As part of his compensation package, Mr. John Hunter, our Chief Operating Officer, was granted $100,000 of restricted Class A Non-Voting Common Stock on February 12, 2008.  This stock grant has a vesting period of two years and a stock grant price of $9.70.  On February 11, 2008, $50,000 of restricted Class A Non-Voting Common Stock vested related to Mr. Hunter’s 2007 grant.  These 5,794 vested shares have yet to be issued to him.

U.S. GAAP requires that the effect of foreign currency translation adjustments and unrealized gains and/or losses on securities that are available-for-sale (“AFS”) be classified as comprehensive income.  The following table sets forth our comprehensive income for the periods indicated (dollars in thousands):

 

In keeping with our business plan of being opportunistic in adding to our existing cinema portfolio, on February 22, 2008, we acquired 14 cinemas with 173 screens in Hawaii and California and entered into an agreement to manage one cinema with 8 screens (the “Consolidated Entertainment” acquisition) from Pacific Theatres Exhibition Corp. and its affiliates, Consolidated Amusement Theatres, Inc. and Kenmore Rohnert, LLC (collectively, the “Sellers”) for $70.2 million.  The purchase price was subsequently adjusted to $63.9 million as described below under post closing adjustments, which were applied to reduce the principal amount owed under financing provided by an affiliate of the Sellers (the “Nationwide Note”).  The financing of the transaction included $48.4 million of new debt from GE Capital, net of deferred financing costs of $1.6 million, a loan of $21.0 million as evidenced by the Nationwide Note, and $800,000 of cash from Reading (see Note 11 – Notes Payable for a more complete explanation of the new debt).

 

The theaters and assets are located in California and Hawaii.  We acquired the theaters and other assets through certain special purpose entities formed by us for this purpose.  The acquired assets consist primarily of the buildings and leasehold interests in fourteen of the theaters; a management agreement with the Sellers under which we will manage one other theater; and furniture, fixtures, equipment and miscellaneous inventory at the theaters.  The theaters contain a total of 181 screens, which compares to 286 total screens owned or operated by us immediately prior to the acquisition. The leasehold interests have current terms ranging from approximately 2 to 12 years, subject in some cases to renewal options in our favor.  The management agreement relating to the managed theater is for a term of approximately 4 years and entitles us to a management fee equal to the cash flow of the theater.  These cinemas produced approximately an unaudited $78.0 million of gross revenues for the year ended December 31, 2007.

 

The initial aggregate purchase price of the acquired assets was approximately $70.2 million, which has now been adjusted down to $63.9 million, and which is subject to further additional post-closing adjustments based upon post-closing matters relating to the possible opening of competing theater projects in the vicinity of certain acquired theaters.  These additional acquisition price reductions can range from $0 to as much as the full amount of the Nationwide Note as adjusted to date, if all contingencies were met.  Pursuant to the reduction in principal requirements of the seller’s note, during the second quarter of 2008, the purchase price was reduced by $6.3 million resulting in a decrease to the $8.0 million portion of the promissory note to $1.7 million and the above mentioned reduction of the purchase price from approximately $70.2 million to $63.9 million.  The reduction in purchase price results in a permanent reduction in the original $21.0 million debt obligation to $14.7 million at June 30, 2008.

 

We have made preliminary estimates of the value of the assets acquired from this acquisition.  These fair value estimates of the cinema assets acquired have been allocated to the acquired tangible assets, identified intangible assets and liabilities, consisting of the value of above and below-market leases, if any, based in each case on their respective fair values.  Goodwill was recorded to the extent the purchase price including certain acquisition and close costs exceeded the preliminary fair value estimates of the net acquired assets.  Once we have completed our estimates of fair value, which includes the pending completion of an appraisal of the assets acquired and liabilities assumed in the acquisition, we will have completed the purchase accounting for the assets and liabilities in accordance with SFAS No. 141, Business Combinations.  Our preliminary purchase price allocation is as follows:

The unaudited pro forma results, assuming the above noted acquisition had occurred as of January 1, 2007 for purposes of the 2008 and 2007 pro forma disclosures, are presented below.  These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as increased depreciation and amortization expenses as a result of tangible and intangible assets acquired in the acquisition, as well as higher interest expense as a result of the debt incurred to finance the acquisition.  These unaudited pro forma results do not purport to be indicative of what operating results would have been had the acquisition occurred on January 1, 2007 and may not be indicative of future operating results (dollars in thousands, except share data):

 

 

During the first quarter of 2008, we have acquired or entered into agreements to acquire a property in Australia, comprising four contiguous properties of approximately 50,000 square feet, which we intend to develop.  The aggregate purchase price of these properties is $12.5 million (AUS$13.7 million), of which $2.5 million (AUS$2.8 million) relates to the three properties that have been acquired and $10.0 million (AUS$10.9 million) relates to the one property that is still under contract to be acquired and which is subject to certain rezoning conditions.

 

The following table sets forth the terms of our interest rate swap derivative instruments at June 30, 2008:

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), we marked our interest rate swap instruments to market on the consolidated balance sheet resulting in a $754,000 and $815,000 decrease to interest expense during the three and six months ended June 30, 2008, respectively, and a $74,000 and $111,000 increase to interest expense during the three and six months ended June 30, 2007, respectively.  At June 30, 2008 and December 31, 2007, we have recorded the fair market value of our interest rate swaps of $1.3 million and $526,000, respectively, as an other noncurrent asset.  The last swap listed above with a notional amount of $1.4 million does not have a “Receive Variable Rate” because the instrument will not be effective until July 1, 2008.  In accordance with SFAS 133, we have not designated any of our current interest rate swap positions as financial reporting hedges.

As part of our newly adopted GE Capital loan, we are required to swap 50% our variable rate loan for fixed rate loans for a minimum period of two years.  During April 2008, we entered into a $49.0 million swap contract to comply with this requirement.  This swap balance is scheduled to decline to $42.0 million on April 1, 2009 and to $33.0 million on April 1, 2010.

 

 

SFAS 157 (see Note 1 – Basis of Presentation) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  As presented in the table above, 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 use appropriate valuation techniques based on the available inputs to measure the fair values of our assets and liabilities.  When available, we measure fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

We used the following methods and assumptions to estimate the fair values of the assets and liabilities in the table above.

 

As indicated in Note 11 – Notes Payable, the Sellers of the Pacific Theaters assets, agreed to provide us up to three additional loans.  We drew down on the first and second of these loans on July 21, 2008 of $3.0 million and $1.5 million, respectively.

As Reading International, Inc. (RDI and collectively with our consolidated subsidiaries, “Reading” and “we,” “us” or “our”), our businesses consist primarily of:

 

 

We believe cinema exhibition to be a business that will likely continue to generate fairly consistent cash flows in the years ahead.  This is based on our belief that people will continue to spend some reasonable portion of their entertainment dollar on entertainment outside of the home and that, when compared to other forms of outside the home entertainment, movies continue to be a popular and competitively priced option.  In keeping with our business plan of being opportunistic in adding to our existing cinema portfolio, on February 22, 2008, we acquired 14 cinemas with 173 screens in Hawaii and California and entered into an agreement to manage one cinema with 8 screens (the “Consolidated Entertainment” acquisition) and we continue to consider the acquisition of cinema assets currently being offered for sale in Australia, New Zealand, and the United States.  Also, in April 2008, we opened a leased cinema in Rouse Hill, Australia with 9 screens.  Nevertheless, we believe it is likely that, over the long term, we will be reinvesting the majority our free cash flow into our general real estate development activities.  We anticipate that our cinema operations will continue as our main source of cash flow and will support our real estate oriented activities.

In short, while we do have operating company attributes, we see ourselves principally as a hard asset company and intend to add to shareholder value by building the value of our portfolio of tangible assets.

In addition, we may from time to time identify opportunities to expand our existing businesses and asset base, or to otherwise profit, through the acquisition of interests in other publicly traded companies, both in the United States and in the overseas jurisdictions in which we do business.  At June 30, 2008, our investments in the securities of other public companies aggregated $4.9 million, based on the closing price of such securities on that date.  We may also, in addition to our investment in various private cinema joint ventures, take positions in private companies.

We manage our worldwide cinema business under various different brands:

 

 

 

At June 30, 2008, we owned and operated 50 cinemas with 413 screens, had interests in certain unconsolidated joint ventures and entities that own an additional 7 cinemas with 46 screens and managed 3 cinemas with 17 screens.

While remaining opportunistic in our acquisitions of cinema assets, our business plan going forward is to build-out our existing development properties and to seek out additional real estate development opportunities while continuing to use and judiciously expand our presence in the cinema exhibition and live theatre business, by identifying, developing, and acquiring cinema and live theatre properties when and where appropriate.

 

We continue to acquire, to dispose of, or to reposition assets in accordance with our business plan.  For a description of our acquisitions so far in 2008, see Note 17 – Acquisitions to our June 30, 2008 Consolidated Financial Statements.

As previously stated, with the purchase of the Consolidated Entertainment cinemas in February 2008 and the addition of our newly opened Rouse Hill cinema in Australia, at June 30, 2008, we owned and operated 50 cinemas with 413 screens, had interests in certain unconsolidated joint ventures and entities that own an additional 7 cinemas with 46 screens and managed 3 cinemas with 17 screens.  Regarding real estate, we owned and operated during the period four ETRC’s that we have developed in Australia and New Zealand; owned the fee interests in four developed commercial properties in Manhattan and Chicago, all of which are improved with live theatres, which together comprise seven stages and, in two cases, ancillary retail and commercial space; owned the fee interests underlying one of our Manhattan cinemas and hold for development an additional seven parcels (aggregating approximately 123 acres) located principally in urbanized areas of Australia and New Zealand.  Two of these parcels, Burwood and Moonee Ponds, comprise approximately 54 acres, and are in areas designated by the provincial government of Victoria, Australia as “major or principal activity centres,” and we are currently in the planning phases of their development.

Operating expense includes costs associated with the day-to-day operations of the cinemas and live theatres and the management of rental properties.  Our year-to-year results of operation were principally impacted by the following:

 

 

 

The tables below summarize the results of operations for each of our principal business segments for the three (“2008 Quarter”) and six (“2008 Six Months”) months ended June 30, 2008 and the three (“2007 Quarter”) and six (“2007 Six Months”) months ended June 30, 2007, respectively (dollars in thousands):