FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
COMMISSION FILE NUMBER 333-13413
READING ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2859312
(State of incorporation) (I.R.S. Employer Identification No.)
ONE PENN SQUARE WEST
30 SOUTH FIFTEENTH STREET, SUITE 1300
PHILADELPHIA, PENNSYLVANIA 19102-4813
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: 215-569-3344
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 12 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 [_]
There were 7,449,364 shares of Common Stock outstanding as of May 14, 1997.
INDEX
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
PART I. - FINANCIAL INFORMATION PAGE
- - - ------------------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 1997
(Unaudited) and December 31, 1996........................................................... 3-4
Condensed Consolidated Statements of Operations -- Three Months
Ended March 31, 1997 and 1996 (Unaudited)................................................... 5
Condensed Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 1997 and 1996 (Unaudited)................................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited).............................. 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 11-15
PART II. - OTHER INFORMATION
- - - ----------------------------
Item 1. Legal Proceedings............................................................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
Signatures.............................................................................................. 17
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- - - --------------------------------------------------------------------------------------------------
(Unaudited)
March 31, December 31,
1997 1996*
- - - --------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $45,635 $48,680
Amounts receivable 890 3,050
Dividend receivable 2,039 67
Restricted cash 4,151 3,683
Inventories 120 151
Prepayments and other current assets 1,153 814
- - - --------------------------------------------------------------------------------------------------
Total current assets 53,988 56,445
- - - --------------------------------------------------------------------------------------------------
Investment in Stater Preferred Stock 67,978 67,978
Investment in Citadel Common Stock 4,670 4,850
Net investment in leased equipment 2,125 2,125
Property and equipment - net 22,995 21,130
Other assets 3,173 2,997
Intangible assets:
Beneficial leases - net of accumulated amortization of $2,512
in 1997 and $2,284 in 1996 14,396 14,624
Cost in excess of assets acquired - net of accumulated
amortization of $344 in 1997 and $197 in 1996 11,464 11,605
- - - --------------------------------------------------------------------------------------------------
126,801 125,309
- - - --------------------------------------------------------------------------------------------------
$180,789 $181,754
==================================================================================================
* The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
-3-
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in thousands, except share and per share amounts)
- - - ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
March 31, December 31,
1997 1996*
- - - ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $4,928 $5,183
Accrued taxes 1,069 3,156
Accrued property costs and other 918 1,240
Film rent payable 1,319 1,102
Note payable 2,000 1,500
Due to affiliate 1,314 183
Other liabilities 1,119 1,352
- - - ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 12,667 13,716
- - - ----------------------------------------------------------------------------------------------------------------------
Capitalized lease, less current portion 514 516
Note payable 0 500
Other liabilities 2,366 1,972
- - - ----------------------------------------------------------------------------------------------------------------------
Total long term liabilities 2,880 2,988
- - - ----------------------------------------------------------------------------------------------------------------------
Minority interests 2,153 2,096
Reading Entertainment Redeemable Series A Preferred Stock, par value $.001 per 7,000 7,000
share, stated value $7,000; Authorized, issued and outstanding - 70,000 shares
Shareholders' Equity
Reading Entertainment Series B Preferred Stock, par value $.001 per share,
stated value $55,000; Authorized, issued and outstanding - 550,000 shares 1 1
Reading Entertainment preferred stock, par value $.001 per share:
Authorized -- 9,380,000 shares: None issued 0 0
Reading Entertainment common stock, par value $.001 per share:
Authorized -- 25,000,000 shares: Issued and outstanding -- 7,449,364 shares 7 7
Other capital 138,637 138,594
Retained earnings 17,655 17,238
Foreign currency translation adjustment (211) 114
- - - ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 156,089 155,954
- - - ----------------------------------------------------------------------------------------------------------------------
$180,789 $181,754
======================================================================================================================
* The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
-4-
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended
March 31,
- - - ---------------------------------------------------------------------------
1997 1996
- - - ---------------------------------------------------------------------------
REVENUES:
Theater:
Admissions $4,252 $2,776
Concessions 1,310 1,021
Advertising and other 209 214
Real estate 37 74
Interest and dividend 2,434 585
- - - ---------------------------------------------------------------------------
8,242 4,670
- - - ---------------------------------------------------------------------------
EXPENSES:
Theater costs 4,429 2,970
Theater concession costs 298 168
Depreciation and amortization 617 386
General and administrative 1,563 1,678
- - - ---------------------------------------------------------------------------
6,907 5,202
- - - ---------------------------------------------------------------------------
Income (loss) from operations 1,335 (532)
Equity in earnings of affiliate 65 0
Other income, net 230 15
- - - ---------------------------------------------------------------------------
Income (loss) before income taxes and
minority interests 1,630 (517)
Minority interests 46 (254)
- - - ---------------------------------------------------------------------------
Income (loss) before income taxes 1,584 (263)
Income taxes 159 10
- - - ---------------------------------------------------------------------------
Net income (loss) 1,425 (273)
Less: Preferred stock dividends and amortization
of asset put option (1,076) 0
- - - ---------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders $349 ($273)
===========================================================================
Per share information:
- - - ---------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders after preferred stock dividends
and amortization of asset put option $0.05 ($0.05)
===========================================================================
Weighted average common shares outstanding 7,449,364 4,973,259
See Notes to Condensed Consolidated Financial Statements.
-5-
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended
March 31,
- - - ------------------------------------------------------------------------------------------------------
1997 1996
- - - ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $1,425 ($273)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation 231 149
Amortization 386 239
Deferred rent expense 396 41
Equity in earnings of affiliate (65) 0
Minority interests 46 (254)
Changes in operating assets and liabilities:
Decrease (increase) in amounts receivable 2,160 (23)
Increase in dividends receivable (1,972) 0
Decrease in inventories 31 26
(Increase) decrease in prepayments and other current assets (339) 67
Decrease in accounts payable and accrued expenses (2,214) (173)
Increase in film rent payable 217 24
(Decrease) increase in other liabilities (4) 156
Other, net (309) 44
- - - ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (11) 23
- - - ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (2,445) (628)
Purchase of Citadel stock option 0 (50)
Decrease in restricted cash 31 89
Decrease in due from affiliate 0 763
Increase in due to affiliate 63 0
- - - ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (2,351) 174
- - - ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of stock transaction issuance costs (366) 0
Distributions to minority partner of the Angelika (87) 0
Proceeds from minority partner of Australian joint venture 0 12,888
Payments of debt issuance costs 0 (185)
Cash acquired as a result of consolidation of Australian joint venture 0 95
- - - ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (453) 12,798
- - - ------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (230) 65
- - - ------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,045) 13,060
Cash and cash equivalents at beginning of year 48,680 44,147
- - - ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $45,635 $57,207
======================================================================================================
See Notes to Condensed Consolidated Financial Statements.
-6-
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
NOTE 1 -- BASIS OF PRESENTATION
Reading Entertainment, Inc. ("REI" or "Reading Entertainment" and
collectively, with its subsidiaries and predecessors, "Reading" or the
"Company") operates motion picture exhibition theaters in Puerto Rico, Australia
and New York, New York.
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim information. Accordingly, they do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments of a recurring nature considered necessary for a fair presentation
of the results for the interim periods presented have been included. Operating
results for the three months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
Certain amounts in previously issued financial statements have been
reclassified to conform with the current period presentation.
NOTE 2 -- ACQUISITION AND INVESTMENT ACTIVITIES
In March 1996, the Company acquired 1,564,473 shares of Citadel Holding
Corporation (together with its wholly owned subsidiaries "Citadel") common stock
from Craig Corporation (together with its wholly owned subsidiaries "Craig")
representing an interest of approximately 26.1%. The Company accounts for its
investment in the Citadel Common Stock by the equity method. Citadel's net
earnings for the three months ended March 31, 1997 were $246,000 and the
Company's share of such earnings was $65,000, which amount is included in the
Condensed Consolidated Statement of Operations for the three months ended March
31, 1997 as "Equity in earnings of affiliate." Citadel's assets and liabilities
totaled $28,936,000 and $10,966,000, respectively, as of March 31, 1997. On
April 11, 1997 Citadel issued 666,000 common shares, thereby reducing the
Company's ownership to 23.4%. Management believes that the March 31, 1997
carrying amount of the Citadel common stock investment approximates its fair
value.
The Company acquired an 83.3% interest in the Angelika Film Center LLC
(the "Angelika") in August 1996. The Company acquired the Angelika assets in
part, by issuing a promissory note to the sellers of such assets in the amount
of $2,000,000. The note is fully collateralized by escrowed funds classified as
"Restricted cash." A portion of this note, $1,500,000, bears interest per annum
at the thirteen week U.S. Treasury bill rate, while the remaining $500,000 bears
interest at 9% per annum. Principal of $1,500,000 was paid in full in April
1997.
In April 1997, Reading Australia Pty Limited (together with its
subsidiaries "Reading Australia") entered into an agreement with an officer of a
subsidiary whereby the officer may borrow up to approximately $800,000 from
Reading Australia to invest in certain country cinema developments. In
accordance with the agreement (which agreement was effective as of January 2,
1997), the officer has borrowed approximately $400,000 from Reading Australia
and utilized the proceeds of the borrowing to acquire a 25% ownership interest
(computed after consideration of certain management fees payable to Reading
Australia) in Reading Australia's theater in Townsville, Queensland.
In October 1996, the Company acquired the 50% interest in Reading
Australia which was previously held by Craig, providing the Company with
ownership of 100% of Reading Australia.
Minority interest in 1997 reflects
-7-
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
the 16.67% interest of Sutton Hill Associates in the Angelika and 25% of the
interest reflects the 50% interest of Craig in Reading Australia.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, December 31,
1997 1996
------------- -------------
(unaudited)
Land $ 7,237 $ 7,332
Buildings 743 743
Capitalized premises lease 538 538
Leasehold improvements 7,462 5,774
Equipment 6,597 5,990
Construction-in-progress and property development costs 2,457 2,562
------------- -------------
25,034 22,939
Less: Accumulated depreciation (2,039) (1,809)
------------- -------------
$22,995 $21,130
============= =============
NOTE 4 -- INCOME TAXES
The Company is required to pay federal alternative minimum tax ("AMT").
AMT is calculated separately from the regular federal income tax and is based on
a flat rate applied to a broader tax base. Amounts payable thereunder cannot be
totally eliminated through the application of net operating loss carryforwards.
The Company recorded AMT expense of $0 and $10,000 in the three months ended
March 31, 1997 and 1996, respectively. The Company recorded $50,000 in state
income tax expense in the current year quarter related to earnings from the
Angelika and $109,000 in foreign withholding taxes which will be paid if certain
intercompany loans are repaid.
NOTE 5 -- COMMITMENTS
Cine Vista commenced operations of a newly-constructed, leased six-plex
theater located in Puerto Rico on March 26, 1997. At March 31, 1997 the Company
had lease agreements for three theater facilities with a total of 22 screens
which were then under construction or for which construction was anticipated to
commence in 1997. The aggregate anticipated contribution for construction costs
for such facilities was approximately $13,000,000 at
-8-
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
March 31, 1997. The aggregate minimum annual rental commitment for such leases
is approximately $550,000, which rentals commence upon the opening of the
theaters.
The Company has entered into purchase agreements and other lease
agreements which are subject to satisfaction of certain contingencies, which
contingencies were not satisfied as of May 15, 1997. In conjunction with lease
and purchase agreements, the Company escrowed and/or made deposits totaling
$2,579,000 at March 31, 1997, which amount has been classified as "Restricted
cash" in the Company's Condensed Consolidated Balance Sheet.
NOTE 6 -- LONG-TERM DEBT
In December 1995, Cine Vista entered into a $15 million, eight-year
revolving credit agreement (the "Credit Agreement") with a bank. Under terms of
the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine
Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of
the Company and fund certain new theater development expenditures. At March 31,
1997 and December 31, 1996, no amounts were outstanding under this agreement.
The provisions of the Credit Agreement require Cine Vista to maintain a
minimal level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowing and capital expenditures. Cine Vista
failed to maintain compliance with certain of the financial covenants contained
in the Credit Agreement during 1996 and the quarter ended March 31, 1997. The
Company is currently working with the lender to revise certain of the Credit
Agreement's financial coverage to ensure its continuing availability. The
lender has waived compliance with the covenants during 1996 and the Company has
requested a waiver for the covenant violations during the three months ended
March 31, 1997.
NOTE 7 -- COMMON STOCK TRANSFER RESTRICTIONS
REI Common Stock (par value $.001) is traded on the Nasdaq National Market
under the symbol RDGE and the Philadelphia Stock Exchange under the symbol RDG.
The Company's Articles of Incorporation include restrictions on the transfer of
Common Stock which are intended to reduce the risk that an "ownership change"
within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as
amended, will occur, which change could reduce the amount of federal tax net
loss carryforwards available to offset taxable income. The restrictions provide
that any attempted sale, transfer, assignment or other disposition of any shares
of Common Stock to any person or group who, prior to the transfer owns (within
the meaning of the Code and such regulations) shares of Common Stock or any
other securities of REI which are considered "stock" for proposes of Section
382, having a fair market value equal to or greater than 4.75% of the value of
all outstanding shares of REI "stock" shall be void ab initio, unless the Board
of Directors of the Company shall have given its prior written approval. The
transfer restrictions will continue until January 1, 2003 (unless earlier
terminated by the Company's Board of Directors).
In January 1997, the Company's Board of Directors voted to waive these
transfer restrictions to the extent necessary to permit Craig to acquire
-9-
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
additional shares of the Company's capital stock. Prior to granting the waiver
of the restrictions, the Board of Directors had determined that acquisition of
the shares by Craig would not affect the continuing availability of the
Company's federal tax loss carryforwards.
NOTE 8 -- IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted on
December 31, 1997. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of the Company's primary and fully diluted
earnings per share is not expected to be material.
NOTE 9 -- SUBSEQUENT EVENTS
In April 1997, the Board of Directors of the Company approved the issuance
to James J. Cotter, the Chairman of the Company, options to acquire up to
460,000 shares of the Company's common stock at an exercise price of $12.80 per
share. The closing price of the Company's common stock on the date of the grant
was $11.50 per share. The grant is subject to the ratification by the Company's
Compensation Committee of the form of the option. Among other things, exercise
of options to acquire 260,000 shares is permitted only if the holders of the
Company's Convertible Preferred Stock convert the Convertible Preferred Stock
into common stock; the exercise of options to acquire 90,000 shares is permitted
only if Citadel exercises an asset put (pursuant to which the Company is
required to issue up to $30 million of common stock to Citadel); and the
exercise of the remaining 110,000 shares is not subject to any similar
restrictions. The options in each of the three classes vest in equal amounts
over a four-year period.
-10-
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company has elected to focus its theater development and related real
estate development activities in three principal areas: (i) the management and
development of motion picture theaters and related entertainment centers in
Australia; (ii) the domestic management and development and acquisition of
specialty motion pictures theaters which feature foreign and limited release art
films similar to the Angelika; and (iii) the management and development of
motion picture theaters in Puerto Rico.
Results of Operations
Due to the nature of the Company's development and acquisition activities
and the timing associated with the results of such activities, the effect of
litigation awards and settlements, the acquisition of the Angelika in the third
quarter of 1996 and the closing of the Stock Transactions in the fourth quarter
of 1996, historical revenues and earnings have varied significantly and
management believes may not be indicative of future operating results.
Revenue
- - - -------
Theater Revenue is comprised of Admissions, Concessions and Advertising
and other revenues and totaled the amounts set forth below in each of the three
months ended March 31, 1997 and 1996, inclusive of minority interest in the
current year quarter:
1997 1996
---- ----
$5,771,000 $4,011,000
Cine Vista's Theater Revenues decreased approximately 31% between the
current and prior year quarters primarily as a result of the opening by a
competitor of three new multiplex theaters in the San Juan metropolitan market
and a slight decrease in box office revenue on the island versus the comparable
period last year. Cine Vista opened a new six-plex in March 1997 and in mid-
1997 will close four of six screens at another location to initiate construction
of a new eight-plex at the location which construction is anticipated to be
completed in mid-1998. Accordingly, Cine Vista anticipates a net increase of
two screens in 1997 and the addition of six more screens in mid-1998. However,
the increased competition in the San Juan metropolitan market is expected to
decrease theater revenues in subsequent quarters in 1997, relative to 1996
levels, if overall box office revenues on the island remain equal to the prior
year.
Theater Revenue for the three months ended March 31, 1997 includes
revenues of $1,925,000 from the Angelika, inclusive of minority interest. (The
Company acquired the Angelika on August 28, 1996.) Revenues from admissions at
the Angelika increased approximately 23% from the admission revenues recorded by
the Angelika in the same quarter of the prior year (such revenues which were
recorded prior to the Company's acquisition of the Angelika are therefore not
included in the Company's condensed consolidated financial results).
The Company opened its first theater in Australia, a six-plex located in
Townsville, Queensland, at the end of December 1996. Revenues from the new
theater totaled $801,000 and have been included in the Condensed Consolidated
Statement of Operations for the three months ended March 31, 1997.
In 1997, the Company will receive the benefit of a full year of Angelika
Theater Revenues (which totaled $7,549,000 in 1996) and the results of the
Company's theater in Townsville, Australia.
Real Estate revenues include rental income and the net proceeds of sales
of the Company's real estate. Real estate revenues in the current year quarter
remained consistent with the prior year quarter. The Company has 28 parcels and
rights-of-way remaining, many of which are of limited marketability. Future real
estate revenues may
-11-
increase as larger properties are sold. However, management believes that most
of the properties held for sale will be liquidated within the next three years.
Interest and dividend revenues were as follows in each of the three months
ended March 31, 1997 and 1996, respectively:
1997 1996
---- ----
$2,434,000 $585,000
The increase in interest and dividend income of $1,849,000 between current
and prior year quarters was largely a result of the Company's acquisition of the
Stater Preferred Stock on October 15, 1996 in the Stock Transactions. The Stater
Preferred Stock has a dividend yield of 10.5%.
Expenses
- - - --------
"Theater costs," "Theater concession costs" and "Depreciation and
amortization" reflect the direct theater costs of Cine Vista, the Angelika and
Reading Australia's theater operations. These costs inclusive of minority
interest increased $1,820,000 from $3,524,000 in the prior year quarter to
$5,344,000 in the current year quarter due primarily to the inclusion of
$1,454,000 of theater costs associated with the Angelika's operations subsequent
to the Company's August 1996 acquisition and $833,000 in costs associated with
the new six-plex theater which opened in Australia in December 1996 (which costs
include approximately $100,000 of start-up costs associated with the
initialization of activities at the theater). During the fourth quarter of 1996,
the minimum wage for Puerto Rico was increased by approximately 15%. Since most
of Cine Vista's theater employees are paid minimum wage, the increase will have
a negative effect on its operating results in future periods.
"General and administrative" expenses for the three months ended March 31,
1997 and 1996 listed below include the following components:
1997 1996
------------- -------------
Cine Vista $221,000 $295,000
Angelika/(1)/ 105,000 0
Australia/(2)/ 292,000 254,000
Other, general 926,000 875,000
------------- -------------
Total $1,544,000 $1,424,000
============= ==============
/(1)/ Net of minority interest of $21,000 in 1997.
/(2)/ Net of minority interest of $254,000 in 1996.
-12-
Equity in Earnings of Affiliate
- - - -------------------------------
The $65,000 in "Equity in earnings of affiliate" included in the current
year quarter reflects earnings from the Company's investment in Citadel. The
Company acquired its investment in Citadel in late March 1996.
Other Income
- - - ------------
"Other income" totaled $230,000 and $15,000 in the three months ended
March 31, 1997 and 1996, respectively, and is comprised in the current year
quarter primarily of amounts received from a third party as reimbursement of
certain acquisition related expenditures which were expensed by the Company in
prior periods.
Minority Interest
- - - -----------------
"Minority interest" for the three months ended March 31, 1997 includes
$52,000 which reflects Sutton Hill's minority share of the Angelika income and
$7,000 which reflects the minority share of the Townsville operations (See Note
2). The "minority interest" of $254,000 for three months ended March 31, 1996
reflects Craig's share of Reading International's loss for the period.
Income Tax Provision
- - - --------------------
Income tax expense in the current year quarter includes an accrual for
foreign withholding taxes of $109,000 which will be paid if certain intercompany
loans are repaid and state taxes of $50,000. Income tax expense in the prior
year quarter reflects $10,000 of AMT expense.
Net Income (Loss)
- - - -----------------
As a result of the above, the Company recorded "Net income" of
$1,425,000 and a net loss of $273,000 for the three months ended March 31, 1997
and 1996, respectively.
Net Income (loss) Applicable to Common Shareholders
- - - ---------------------------------------------------
In the three months ended March 31, 1997, "Net income applicable to
common stockholders" has been reduced by the 6.5% per annum dividend on the
$62,000,000 stated value of Convertible Preferred Series A and B Stock and
amortization of an asset put option issued to Citadel.
Liquidity and Capital Resources
To provide Reading Australia with funding needed to complete its theater
development plans without requiring REI to guarantee the indebtedness of Reading
Australia and as a means of minimizing the Company's exposure to fluctuations in
the value of the Australian dollar and to demonstrate the Company's commitment
to the Australian market, the Company contributed its Stater Preferred Stock to
Reading Australia. The Company anticipates that Reading Australia will pledge
the Stater Preferred Stock as collateral for Australian dollar borrowings and
Reading Australia has had preliminary discussions in furtherance thereof. In
addition, the Company has been advised that Stater is considering exercising its
right to repurchase the Stater Preferred Stock and that such repurchase may
occur as early as prior to the end of Stater's fiscal year, September 30, 1997.
If such repurchase were to occur, the repurchase would be at stated value,
$69,365,000. However, there can be no assurance that such repurchase can or
will be effected.
Cine Vista opened a new six-plex on March 26, 1997 and will close four
of six screens at another location in mid-1997 in order to initiate construction
of a new eight-plex at the same location, which construction is anticipated to
be completed in mid-1998. The Company anticipates that it will invest
approximately $7.7 million in 1997 and 1998 in furtherance of these two
projects. Cine Vista is also negotiating provisions of an agreement
-13-
to expand one facility and to open new theaters at two new sites which,
collectively could result in the addition of up to 30 new screens. The timing of
the additions is not predictable nor is the Company assured of concluding these
proposed developments. The capital cost of these new additions is estimated to
total approximately $15 million.
The Company entered into a lease for the first new theater based upon
the Angelika concept to be located in Houston, Texas in the first quarter of
1997. The Company is actively seeking sites to develop Angelika type theaters
throughout the United States and will consider acquiring leasehold or ownership
interests in conjunction with such developments. The cash cost of such
developments can range from approximately $1.5 million for a turnkey leased
facility to over $7 million for an owned site.
If the Company is successful in its efforts to develop all of the
projects which it is presently considering, its capital requirements over the
next three years will exceed its existing cash balances, the value of the Stater
Preferred Stock (or the proceeds thereof) and existing borrowing arrangements.
However, the Company believes that additional funding could be realized through,
among other things, bank borrowings, sale-leaseback transactions and the
issuance/sale of additional equity either of REI, Reading Australia or at the
project level.
The following summarizes the major sources and uses of cash funds in
each of the three months ended March 31, 1997 and 1996, respectively:
1997:
- - - ----
"Unrestricted cash and cash equivalents" decreased $3,045,000 from
$48,680,000 at December 31, 1996 to $45,635,000 at March 31, 1997. Working
capital decreased $1,408,000 from $42,729,000 at December 31, 1996 to
$41,321,000 at March 31, 1997.
While not necessarily indicative of its results of operations determined
under generally accepted accounting principles, Cine Vista's, the Angelika's and
Reading Australia's (net of minority interest of $46,000) operating cash flow
(income or loss before depreciation and amortization) of $620,000 contributed to
the Company's liquid funds for the three months ended March 31, 1997. Other
principal sources of liquid funds in the current year quarter were $696,000 in
"Interest" income and a net decrease in "Amounts receivable" of $2,160,000.
In addition to operating expenses, other uses of liquid funds in the
three months ended March 31, 1997 included $2,445,000 in property and equipment,
a net decrease in "Accounts payable and accrued expenses," of $2,214,000 a net
increase in "Dividends receivable" of $1,972,000 and a net increase in "Prepaids
and other current assets" of $339,000.
1996:
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"Unrestricted cash and cash equivalents" increased $13,018,000 from
$44,189,000 at December 31, 1995 to $57,207,000 at March 31, 1996. Working
capital increased $12,376,000 from $42,666,000 at December 31, 1995 to
$55,042,000 at March 31, 1996.
Craig contributions of $12,888,000 to Reading International, which
benefited the Company upon the acquisition of 100% ownership in Reading
International, contributed to the Company's liquid funds in the three months
ended March 31, 1996 as did Cine Vista's operating cash flow (income before
depreciation and amortization) of $584,000. Other principal sources of liquid
funds in the prior year quarter were a decrease in "Due from affiliate" of
$763,000 and $567,000 in "Interest" income.
In addition to operating expenses, principal uses of liquid funds in the
prior year quarter include $628,000 for the purchase of property, plant and
equipment related primarily to property acquisitions by Reading Australia.
Prior to Reading Company's 1981 quasi-reorganization, Reading Company
had extensive railroad and related
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operations. Such operations may have contributed to environmental contamination
of properties now owned by Reading Company, previously sold by Reading Company,
or to which Reading Company, prior to its reorganization, sent waste. The
ultimate extent of liabilities, if any, with respect to such matters, as well as
the timing of cash disbursements, if any, cannot be determined. However,
management is of the opinion, based on the information currently known, that
while the ultimate liability resulting from such matters could have a material
effect upon the results of operations in a given year, they will not have a
material adverse effect upon the Company's financial position or liquidity.
Forward-Looking Statements
From time to time, the Company or its representatives have made or may
make forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to stockholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The results contemplated by the Company's forward-looking statements are
subject to certain risks, trends, and uncertainties that could cause actual
results to vary materially from anticipated results, including without
limitation, delays in obtaining leases and permits for new multiplex locations,
construction risks and delays, the lack of strong film product, the impact of
competition, market and other risks associated with the Company's investment
activities and other factors described herein.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted on
December 31, 1997. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of the Company's primary and fully diluted
earnings per share is not expected to be material.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 24, 1997, a shareholder owning 50 shares of Reading
Entertainment, Inc. ("REI") common stock commenced a purported derivative action
(the "Action") on behalf of the Company entitled Walter Alphin v. James J.
-------------------------
Cotter, et. al. in the Philadelphia County Court of Common Pleas. The complaint
- - - ---------------
in the Action named Craig Corporation ("Craig"), former directors of Reading
Company, Gerard P. Laheney and Ralph B. Perry III and all of the current
directors of REI as defendants. The Action alleges that the defendants breached
their fiduciary duty to Reading Company by failing to utilize certain tax assets
of Reading Company over the years and such failure resulted in the defendants
causing Reading Company to use certain of the tax assets for the ultimate
benefit of Craig. No monetary claims have been asserted against the Company in
the Action and the plaintiff seeks unspecified monetary damages from the
defendants. Management is reviewing the Action and believes that the suit has no
merit and that it will not have a material adverse effect upon the Company. The
Company has directors and officers liability insurance and believes that the
claims set forth in the Action are covered by such insurance, if the Company is
ultimately deemed to have any monetary responsibility through its
indemnification of REI's directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
READING ENTERTAINMENT, INC.
Date: May 15, 1997 By: /s/ James A. Wunderle
------------------------- -------------------------------------
James A. Wunderle
Executive Vice President,
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 1997 By: /s/ Eileen M. Mahady
------------------------- -------------------------------------
Eileen M. Mahady
Controller
(Principal Accounting Officer)
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