Reading International - 10-Q quarterly report FY

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FORM 10-Q

(Mark One)

Commission file number 1-8625

READING INTERNATIONAL, INC.
(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 [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes [X] No [  ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 6, 2003, there were 20,484,794 shares of Class A Nonvoting Common Stock, $0.01 par value per share and 1,336,335 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.

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READING INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

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PART I — Financial Information

Item 1 — Financial Statements

Reading International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended June 30, 2003

Note 1 — Basis of Presentation

     Reading International, Inc. along with its consolidated subsidiaries (the “Company” or “Reading”) is primarily in the business of development, ownership and operation of cinemas, live theater and commercial real estate. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission 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 condensed consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (“ 2002 Annual Report”). The financial information presented in this quarterly report on Form 10-Q for the period ended June 30, 2003, including the information under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the Company’s 2002 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 the Company’s financial position, results of its operations and cash flows for the six months ended June 30, 2003 have been made. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results of operations to be expected for the entire year. Certain amounts in previously issued financial statements have been reclassified to conform to the 2003 presentation.

Note 2 — Business Segments

     Reading’s operations are organized into two reportable business segments within the meaning of Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information. As a result, the Company has two reportable segments: (1) cinema/live theater and(2) rental/real estate. The Company’s cinema and live theater segment is primarily engaged in the development, ownership and operation of multiplex cinemas, and is also engaged in the ownership and operation of “Off Broadway” style live theaters. Reading’s rental and real estate segment is primarily engaged in the development, ownership and operation of commercial properties, including entertainment-themed retail centers (“ETRC”). Corporate results include interest income earned with respect to the Company’s cash balances, and other income (expense).

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     Information about the Company’s cinema/live theater and rental/real estate segment operations for the three and six months ended June 30, 2003 and 2002 is presented in the following tables (dollars in thousands):

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Note 3 — Foreign Currency and Derivative Instruments

     As fully described in the 2002 Annual Report, Reading has cinema operations and significant assets in Australia and New Zealand. To the extent possible, Reading conducts its Australia and New Zealand operations on a self funding basis. The carrying value of the Company’s Australian and New Zealand assets fluctuates due to changes in the exchange rates between the U.S. dollar and the functional currency of Australia (Australian dollar) and New Zealand (New Zealand dollar). The Company has 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, 2003 and December 31, 2002.

Note 4 — Earnings (Loss) Per Share

     Basic earnings (loss) per share is computed by dividing 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 net income (loss) to common stockholders by the weighted average number of common

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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.

     For the six months ended June 30, 2003 and the three and six months ended June 30, 2002, the Company recorded net losses. As such, the incremental shares 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. For the three months ended June 30, 2003 the Company recorded net income as a result of a one-time gain from the settlement of certain litigation, through the acquisition at a bargain price of a joint venture interest as fully described in Note 13. As such, the incremental shares from stock options were included in the computation of diluted earnings per share for the three months ended June 30, 2003.

Note 5 — Comprehensive Income

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

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Note 6 — Rental Property and Property and Equipment

     As of June 30, 2003 and December 31, 2002, Reading had investments in rental property and property and equipment as follows (dollars in thousands):

Note 7 — Goodwill and Intangible Assets

     As of January 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, Reading does not amortize goodwill and instead, performs annual impairment reviews of its goodwill and other intangible assets. As of June 30, 2003 and December 31, 2002, Reading had goodwill of $5,061,000 and $5,021,000 net of related accumulated amortization of $360,000 and $326,000, respectively, consisting of the following (dollars in thousands):

     Reading has intangible assets other than goodwill which are subject to amortization and are being amortized over various periods. The Company amortizes its beneficial lease over 20 years and its option fees and acquisition costs over 10 years. For the six months ended June 30, 2003, the amortization expense totaled $668,000.

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

Note 8 — Income Tax

     The income tax provision for the three and six months ended June 30, 2003 was comprised of the following amounts (dollars in thousands):

Note 9 — Minority Interest

     Minority interest is comprised of the following enterprises:

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

Note 10 — Recent Accounting Pronouncements

     In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement establishes standards of measurement and classification of certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150 is not expected to have a material impact on the Company’s consolidated financial statements.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities. It is effective for contracts entered into or modified after June 30, 2003. As previously disclosed in Note 3, Reading has no derivative instruments and does not engage in any hedging activities with respect to foreign currency issues. During the second quarter of 2003, the Company finalized negotiations on our AUS$30,000,000 loan facility, which contains an interest rate swap agreement as more fully described in Note 3. SFAS No. 149 is not expected to have a material adverse impact on the Company’s consolidated financial statements.

     In January 2003, the FASB issued Interpretation (“FIN”) No. 46,Consolidation of Variable Interest Entities. FIN 46 sets forth the criteria used to determine whether an investment in a variable interest entity (“VIE”) as defined by the Interpretation should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN 46 was immediately applicable to VIE’s created after January 31, 2003 and requires the consolidation of VIE’s created before February 1, 2003 for reporting periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of FIN 46 will have, but believes that the application of FIN 46 will not have a material adverse impact on its consolidated financial statements.

     In November 2002, the FASB issued FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 significantly changes the current practice in accounting for and disclosure of, guarantees. Guarantees and indemnification agreements meeting the

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criteria established in FIN 45 must be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The disclosure requirements within FIN 45 became effective for financial statements issued for periods beginning after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial statements.

Note 11 — Stock-Based Compensation

     The Company has elected to follow the intrinsic value method under Accounting Principle Board Opinion (“APBO”) No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its employee stock option plans. Under APBO No. 25, no compensation expense is recognized when stock options are granted if the exercise price of the option equals the fair market value of the underlying common stock on the dates of grant. The following table illustrates the effect on net income and (loss) and net income (loss) per common share as if the Company had applied the fair value provisions of SFAS No. 123, Accounting for Stock-Based Compensation to measure stock-based compensation (dollars in thousands):

Note 12 — Other Income

     Other income is comprised of the following (dollars in thousands):

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Note 13 — Gain on Settlement of Litigation and Acquisition of Joint Venture at Bargain Price

     On May 15, 2003, Reading completed the settlement of two lawsuits involving antitrust and trade practice claims against its principal competitors in Australia. The first was between Reading, as plaintiff, and Village Cinemas Australia Pty, Ltd. (“Village”), Birch Carroll & Coyle Ltd. (“BCC”), and AMP Life Limited, as defendants (the “AMP Litigation”) and related to alleged attempts by Village and BCC to keep Reading out of the Australian cinema exhibition market. The second was between Reading, as plaintiff, and Roadshow Film Distributors Pty Ltd (“Roadshow”), as defendant (the “Roadshow Litigation”) and related to alleged unfair practices by Roadshow in its distribution of first run film product to Reading. BCC is a wholly owned subsidiary of Greater Union and is referred to herein collectively with Greater Union as “GU.” Village and GU, are two of the three largest exhibition companies in Australia. AMP is an insurance company and, through its affiliates, a major commercial landlord in Australia. Roadshow is a major film distributor in Australia.

     Pursuant to that settlement:

     Reading’s purchase of its 1/3rd interest in the 16-screen multiplex cinema, at Village and GU’s undepreciated historic cost of $2,177,700 (AUS$3,244,000), resulted in a one-time gain of $2,259,299, net of applicable expenses. The gain was based on a fair market value for that joint venture interest of $4,959,600 (AUS$7,387,998), as reflected by the “Put Price.” In addition, the Company received approximately $287,000 (AUS$430,000) in profit distribution covering the period from December 18, 2002 (the agreed effective date of the parties’ settlement) to May 15, 2003 (the date on which the settlement was completed). As permitted by SFAS No. 141, Business Combinations,the proceeds were prorated and approximately $60,000 was recognized as income. The remainder was recorded as an adjustment to the joint venture purchase price.

Note 14 — Loan Agreement

     During the second quarter of 2003, the Company renewed a loan agreement that extended its existing AUS$30,000,000 loan facility in Australia. The amended and restated loan agreement provides for a fixed interest rate on a portion of the total loan facility which will serve as a cap should interest rates rise over the term of the loan.

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Note 15 — Subsequent Events

     On June 20, 2003 Berkeley Cinemas, an unincorporated joint venture in which Reading owns a 50% interest, entered into an agreement to construct and lease an eight screen cinema in a suburb of Auckland, New Zealand. That cinema is currently anticipated to open in the fourth quarter of 2004.

     On June 30, 2003, Reading entered into an agreement to lease a 6-screen cinema in Victoria, Australia. That cinema is currently under construction by the landlord, and is anticipated to open in the first quarter of 2005.

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

     Reading’s business consists primarily of the ownership and operation of cinemas and live theaters and developing, owning and operating commercial real estate. Our business operations include:

     We manage our worldwide cinema business under various different brands:

     We plan to continue to identify, develop and acquire cinema and live theater properties, focusing primarily on those opportunities where we can acquire either the fee interest underlying the operating assets, or long term leases, which we believe provide flexibility with respect to the usage of such leasehold assets. In the near term, we are focusing principally on the operation of our existing cinema and live theater assets and in the development of five parcels of undeveloped real estate in Melbourne, Brisbane, and Sydney in Australia and in Wellington in New Zealand while taking advantage of those opportunities that may present themselves to strategically expand our existing cinema circuits. We anticipate that over the remainder of the year, we will add a 6-screen cinema in Christchurch, New Zealand (owned in an unincorporated joint venture with our partner in the Berkeley Cinemas chain in New Zealand). During the second quarter of 2003, we closed the acquisition of a 1/3rd undivided interest in an existing 16-screen cinema in suburban Brisbane, Australia as fully described in Note 13 to the condensed consolidated financial statements. We have also been retained to manage a new art cinema in Plano, Texas which will be operated under our Angelika name.

     We continue to work toward the disposal of our interests in Puerto Rico and our interests in assets not core to our cinema, live theater and real estate businesses. To this end, we achieved the following since the end of 2002:

     1. Reduction of General and Administrative Expense

     As part of our ongoing effort to reduce general and administrative expense and our commitment to sell our Puerto Rico circuit, we consolidated our Puerto Rican administrative support functions into our corporate office in Los Angeles, California. This consolidation will allow us to reduce our annual general and administrative expense by approximately $170,000.

     2. Disposition of Non-Core Assets

     In April 2003, we entered into an agreement to sell for $525,000 plus an ongoing royalty right, our interest in certain anthracite coal deposits in Pennsylvania. The transaction closed in May of 2003 and we received proceeds from the sale. A dispute by the local municipality has resulted from this transaction, and the purchaser has agreed to assume the defense of those claims. In the event that it should be determined that the municipality and not Reading is the owner of these coal deposits, then our obligation is limited to the return of the $525,000 together with interest at the 30-day LIBOR rate as of the date of closing of the Settlement

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Agreement. Accordingly, we recorded the receipt of $525,000 as a deferred gain and will not recognize the gain until such time as the title dispute is resolved. The litigation previously brought by the purchaser to compel our sale of that property to them on a warranty deed basis was settled incident to this sale transaction.

     We are currently in negotiations to sell our Sutton Cinema property located on 3rd Avenue and 57th Street in Manhattan. While no assurances can be given, we are of the view that the sale will close during the quarter ended September 30, 2003. Since we hold the Sutton Cinema property pursuant to an operating lease with option to purchase, the net economic effect of the sale currently being negotiated, if completed, would be ultimately to reduce our net rent expense under the operating lease by approximately $1,343,800 per year.

Results of Operations

     At June 30, 2003, we operated 33 cinemas with 218 screens and four live theaters comprising seven stages. Along with the three ETRC’s that we developed in Australia and New Zealand, we have fee interests in five developed commercial properties in the United States, and hold for development an additional five parcels (aggregating approximately 60 acres) in urbanized areas of Australia and New Zealand.

     The tables below summarize the results of operations for each of our principal business segments for the three and six months ended June 30, 2003 (“2003 Quarter” and “2003 Six Months”, respectively) and three and six month ended June 30, 2002 (“2002 Quarter” and “2002 Six Months”, respectively). Operating expenses include costs associated with the day-to-day management of the theaters and rental properties.

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Cinema / Live Theater

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     Our live theaters’ rental weeks were ahead of the 2002 Quarter — 70 theater weeks rented in the 2003 Quarter compared to 65 theater weeks rented in the 2002 Quarter. The theaters are currently running the following shows:

Rental / Real Estate

     In the first six months of 2003, our rental generating real estate holdings consisted of:

     The Wellington ETRC opened in March 2002 and as a result, only 3 months of operation of this center was included in the 2002 Six Months results. The rental space in the Wellington Center is now approximately 89% leased (62% excluding the cinema space which is occupied by our own cinema). The ancillary retail space at our Perth and Auburn ETRC’s is now approximately 63% leased due to the loss of one tenant.

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     We own certain unimproved tracts of land which are currently either in various stages of development or held for sale, namely:

     Net loss increased in the 2003 Six Months for the real estate segment compared to the same period in 2002, primarily due to depreciation expense attributable to the Courtenay Central ETRC, which opened in March 2002 and the write off of certain legal costs relating to an aborted development project.

Corporate

     The revenue in 2002 is entirely comprised of fees earned for our agricultural activities which we disposed of in July 2002.

     General and administrative expense includes expense that is not directly attributable to other operating segments. The reduction in expense of $247,000 in the 2003 Six Months is primarily due to ongoing savings associated with the 2001 consolidation.

     Corporate other (income) expense is comprised of:

     The fluctuations in other (income) expense are primarily due to:

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