READING INTERNATIONAL INC - Annual Report: 2018 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K



☑   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018 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 No. 1-8625



READING INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)





Registrant’s telephone number, including Area Code:  (213) 235-2240



Securities Registered pursuant to Section 12(b) of the Act:



Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐  No ☑

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes ☐  No ☑

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for shorter period than the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit post such files).  Yes ☑    No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K of any amendments to this Form 10-K. ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐   Accelerated Filer ☑   Non-Accelerated Filer ☐   Smaller Reporting Company ☐   Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  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 June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates based on the closing price on that date as reported by the Nasdaq Stock Market was $383,954,817.    As of March 15, 2019, there were 21,240,044 shares of class A non-voting common stock, par value $0.01 per share and 1,680,590 shares of class B voting common stock, par value $0.01 per share, outstanding.







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Documents Incorporated by Reference



Portion of the registrant’s definitive Proxy Statement for the 2019 annual meeting of the stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K.

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READING INTERNATIONAL, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2018

INDEX



 

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PART I



Item 1 – Our Business



GENERAL



Reading International, Inc. (“RDI” and collectively with our consolidated subsidiaries and corporate predecessors, the “Company,” “Reading”, “we,” “us,” or “our”) was incorporated in 1999 incident to our reincorporation in the State of Nevada. Our class A non-voting common stock (“Class A Stock”) and class B voting common stock (“Class B Stock”) are listed for trading on the NASDAQ Capital Market (Nasdaq-CM) under the symbols RDI and RDIB, respectively. Our Corporate Headquarters is located in the Silicon Beach area of Los Angeles County, at 5995 Sepulveda Blvd, Suite 300, Culver City, California, United States 90230.



Our corporate website address is www.ReadingRDI.com.  We provide, free of charge on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have electronically filed such material with or furnished it to the Securities and Exchange Commission (www.sec.gov).  The contents of our Company website are not incorporated into this report. Our corporate governance charters for our Audit and Conflicts Committee and Compensation and Stock Options Committee are available on our website.



BUSINESS DESCRIPTION



Synergistic Diversification and Branding



We are a diversified company focused on the development, ownership and operation of entertainment and real property assets in three jurisdictions: (i) United States (“U.S.”), (ii) Australia, and (iii) New Zealand.  We group our businesses in two (2) operating segments:



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Set forth below is a brief description of the various brands under which we organize our business operations:





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We synergistically bring together cinema based entertainment and real estate and believe that these two business segments complement one another, as our cinemas have historically provided the steady cash flows that allow us to be opportunistic in acquiring and holding real estate assets (including non-income producing land) and support our real estate development activities.  Our real estate allows us to develop an asset base that we believe will stand the test of time and one that is capable of providing financial  leverage. More specifically, the combination of these two segments provides a variety of business advantages including the following:



Insofar as we are aware, we are the only publicly traded company in the world to apply this two-track, synergistic approach to the cinema and real estate development businesses on an international basis.  None of the major cinema exhibition companies (other than Marcus Theatres) have any material landholdings as they operate predominantly on a leased-facility model.



Business Mix and Impact of Foreign Currency Fluctuations



We have worked to maintain a balance both between our cinema and real estate assets and between our U.S. and our Australian and New Zealand assets. In 2018, we invested approximately $40.6 million in our U.S. assets: $23.4 million for the development of our real estate assets (principally construction of our Union Square property) and $17.2 million for the improvements of our cinema assets (principally upgrading our offerings at our existing cinemas).  We invested approximately $12.3 million in our Australian assets:  $6.4 million for the development of our real estate assets (principally at our Auburn (Sydney) shopping centers), and $6.0 million for the development of our cinema assets (principally renovations of our cinemas at Auburn, Elizabeth, and Charlestown and the upgrade of certain other cinemas).  We invested approximately $1.8 million in our New Zealand assets:  $1.0 million for the development of

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real estate assets (principally towards the redevelopment of our Courtenay Central assets), and approximately $817,000 for the development of cinema assets (principally upgrades). 



As shown in the chart set forth the International Business Risks section below, exchange rates for the currencies of these jurisdictions have varied, sometimes materially.  These ratios naturally have an impact on our revenues and asset values, which are reported in USD.  Notwithstanding these fluctuations, we continue to believe that, over the long term, operating in Australia and New Zealand is a prudent diversification of risk.  Australia has been identified by the United Nations as among the Top 10 countries in the World in terms of natural resources per person. Deutsche Bank has twice named Wellington the best place in the world to live. In 2013, the Organization for Economic Co-operation and Development rated Australia as the best place to live and work in the world. In our view, the economies of Australian and New Zealand are stable economies and their lifestyles support our entertainment/lifestyle focus.



At December 31, 2018, the book value of our assets was $439.0 million, and, as of that same date, we had a consolidated stockholders’ book equity of $180.5 million. Calculated based on book value, $138.9 million, or 32% of our assets, relate to our cinema exhibition activities and $263.8 million, or 60%, of our assets, relate to our real estate activities. 



   



For additional segment financial information, please see Note 1 – Description of Business and Segment Reporting to our 2018 consolidated financial statements. 



We have diversified our assets among three countries: the United States, Australia, and New Zealand. Based on book value, at December 31, 2018, we had approximately 50% of our assets in the United States, 36% in Australia and 14% in New Zealand compared to 45%,  40%, and 15% respectively, at the end of 2017.  This increase in U.S. assets is principally due to our investments in the redevelopment of Union Square and the upgrades to our domestic cinema assets, as well as the continued strengthening of the U.S. dollar compared to the Australian and the New Zealand dollar.



At December 31, 2018, we had cash and cash equivalents of $13.1 million, which are treated as a corporate assets. Our cash included $7.6 million denominated in U.S. dollars, $3.5 million (AU $4.9 million) in Australian dollars, and $2.0 million (NZ$3.0 million) in New Zealand dollars. We had total worldwide non-current assets of $408.7 million, distributed as follows:  $203.8 million in the United States, $147.4 million (AU$209.2 million) in Australia and $57.5 million (NZ$85.7 million) in New Zealand.  We had $55.6 unused capacity of available and unrestricted corporate credit facilities at December 31, 2018.



For 2018, our gross revenues in the United States, Australia, and New Zealand were $165.8 million, $111.7 million, and $31.9 million, respectively, compared to $143.8 million, $106.5 million, and $29.7 million for 2017.  All three countries posted revenue increases in 2018 as a result of higher cinema attendance in all three of our circuits. 



   

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CINEMA EXHIBITION



Overall



We are dedicated to creating engaging cinema experiences for our guests through hospitality-styled comfort and service, cinematic presentation, uniquely designed venues, curated film and event programming, and crafted food and beverage options. As discussed previously, we manage our worldwide cinema exhibition business under various brands. 



Shown in the following table are the number of locations and theatre screens in our theatre circuit in each country, by state/territory/ region and indicating our cinema brands and our interest in the underlying asset as of December 31, 2018:



  





In January of 2019, we acquired our first cinema in Tasmania, a well-established 4 screen cinema (with liquor license) in Devonport, bringing our current cinema count up to 60.  In addition, as of today, we have entered into four lease agreements, providing for the development of an additional 25 state-of-the-art screens.  While no assurances can be given, the completion of these four new complexes is anticipated to increase our cinema count to 64 before the end of 2021.



We continue to focus on upgrading our existing cinemas and developing new cinema opportunities to provide our customers with premium offerings, including luxury seating, state-of-the-art presentation including sound, lounges, cafés and bar service, and other amenities.  Since 2017 and continuing through 2018, we increased the number of auditoriums featuring recliner seating from 58 to 136. In addition, we added large format TITAN XC or LUXE screen offerings to 18 of our cinemas. Our circuit has been completely converted to digital projection and sound systems. In 2018, we upgraded two of our auditoriums to feature Dolby ATMOS sound which we consider to be the best in the industry at this time.



Attendance and gross box office was significantly higher for the exhibition industry in the U.S., Australia and New Zealand for 2018, compared to 2017. We believe that the cinema exhibition business will continue to generate increasing cash flows in the years ahead, even in recessionary or inflationary environments, because people will continue to spend a reasonable portion of their entertainment dollars on entertainment outside of the home.  When compared to other forms of outside-the-home entertainment, movies continue to be a popular and competitively priced option.  We believe that the advent of an array of streaming and mobile video services is a threat to traditional in-home forms of entertainment (such as traditional cable and satellite providers), the creation of new sources of program production will ultimately be beneficial to our industry, as cinema exhibition becomes an increasingly important point of differentiation for the marketing of such product.



Recognizing that the cinema exhibition business is considered a mature business, we continue to see growth opportunities in our cinema exhibition business principally from (i) the enhancement of our existing cinemas, (ii) the development in select markets of art and specialty cinemas, (iii) the development of new state-of-the-art cinemas on land that we already own or may in the future acquire, and (iv) the development of new mainstream cinemas in selected markets. While we continue to consider possible opportunities in

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third party developments, we prefer, where possible, to put our capital to work in properties that we own rather than take on potentially burdensome lease obligations with their built-in rent increases and pass-throughs and their dependence on third party shopping center operators.



We continue to expand and upgrade our circuits on an opportunistic basis. Our philosophy is not one of growth at any cost and our goal is not to have more screens than anyone else. Rather, our goal is to have high quality, consistently grossing cinemas, and to grow on a steady and sustainable basis. During 2018, we continued working on the refurbishment of several of our cinema locations including Manville and Mililani in the U.S., and Charlestown, Elizabeth, and Auburn in the Australia and New Zealand circuits.  At the end of 2017, we opened a new cinema at our Newmarket Village Shopping Center in Brisbane, Australia, and re-opened our Cal Oaks cinema, located in Murrieta, California which now features our new “Spotlight” level of service in 6 out of the 17 auditoriums.  “Spotlight” puts focus directly on our customers by providing an in-auditorium, waitered, enhanced F&B experience for their enjoyment.  We also upgraded 54 of our screens to luxury seating and extended our enhanced food offerings to 25 of our cinemas in 2017.  In 2016, we opened an eight-screen, state-of-the-art cinema, branded Olino by Consolidated Theatres, our ninth theatre and first to break ground since 2001 in the state of Hawaii.  In 2015, we opened a new state-of-the-art cinema (eight screens) in Auckland, New Zealand, completed the renovation and rebranding as an “Angelika” luxury art cinema of our conventional cinema at the Carmel Mountain Plaza in San Diego, California, completely renovated our fourteen-screen Harbourtown cinema in Queensland, Australia, and added the first IMAX screen to our circuit.



Since 2015, we have consistently executed our strategic priority of upgrading the food and beverage menu at a number of our U.S. cinemas. We are focused on the renovation and upgrading of our existing U.S. cinemas, along the lines of our Carmel Mountain cinema.  Working with Bruce Seidel (veteran Food Network executive) of Hot Lemon Productions and chef Santos Loo, we are continuing to upgrade our food and beverage offerings.  During 2017, we created our “Spotlight” service concept, which  we  implemented at our Cal Oaks cinema during 2018.  At year-end 2018, we  currently have beer and wine, and in some cases liquor, licenses for 14 of our venues in the U.S. and are in the application process for an additional 5 venues.  As a result we are currently offering alcoholic beverages at 12 of our U.S. cinemas and two of our live theatres.  In our international cinema operations, we offer alcoholic beverages for 11 of our cinemas in Australia and five of our cinemas in New Zealand (which includes the joint ventures).

Operating Information



At December 31, 2018, our principal tangible assets included:



Although we operate cinemas in three jurisdictions, the general nature of our operations and operating strategies does not vary materially from jurisdiction-to-jurisdiction. In each jurisdiction, our gross receipts are primarily from box office receipts, food and beverage sales, and screen advertising. Our ancillary revenue is created principally from theater rentals (for example, for film festivals and special events), and ancillary programming (such as concerts and sporting events).



Our cinemas generated approximately 64% of their 2018 revenue from box office receipts.  Ticket prices vary by location, and in selected locations we offer reduced rates for senior citizens, children and, in certain markets, military and students.



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Show times and features are placed in advertisements on our various websites, on internet sites and, in some markets, in local newspapers. We are increasing our presence in social media, thereby, reducing our dependency on print advertising.  Film distributors may also advertise certain feature films in various print, radio and television media, as well as on the internet, and distributors generally pay those costs.



F&B sales accounted for approximately 29% of our total 2018 cinema revenue. Although certain cinemas have licenses for the sale and on-premises consumption of alcoholic beverages, historically F&B products have been primarily popcorn, candy, and soda. This is changing, as more of our theaters are offering expanded food and beverage offerings.  One of our strategic focuses is to upgrade our existing cinemas with expanded F&B offerings.



Screen advertising and other revenue contribute approximately 7% of our total 2018 cinema revenue.  With the exception of certain rights that we have retained to sell to local advertisers, generally speaking, we are not in the screen advertising business and nationally recognized screen-advertising companies’ contract with us for the right to show such advertising on our screens.



Management of Cinemas



With the exception of our three unconsolidated cinemas, we manage our cinemas with executives located in Los Angeles and Manhattan in the U.S.; Melbourne, Australia; and Wellington, New Zealand.  Our two New Zealand Rialto cinemas are owned by a joint venture in which Reading New Zealand is a 50% joint venture partner. While we assist in the booking of these two cinemas, our joint venture partner, Event Cinemas, manages their day-to-day operations.  In addition, we have a passive one-third interest in a 16-screen Brisbane cinema managed by Event Cinemas.



Licensing and Pricing



Film product is available from a variety of sources, ranging from the major film distributors, such as Paramount Pictures, Twentieth Century Fox, Warner Bros, Buena Vista Pictures (Disney), Sony Pictures Releasing, Universal Pictures and Lionsgate, to a variety of smaller independent film distributors.  In Australia and New Zealand, some of those major distributors distribute through local unaffiliated distributors. Worldwide, the major film distributors dominate the market for mainstream conventional films.  In the U.S., art and specialty film is distributed through the art and specialty divisions of these major distributors, such as Fox Searchlight and Sony Pictures Classics, and through independent distributors such as A24. Film payment terms are generally based upon an agreed-upon percentage of box office receipts that will vary from film-to-film.



Competition 



Film is allocated by the applicable distributor among competitive cinemas.  Accordingly, from time-to-time, we may be unable to license every film that we desire to play. In the Australian and New Zealand markets, we generally have access to all film product in the market.



Competition for films may be intense, depending upon the number of cinemas in a particular competitive market. Our ability to obtain top grossing first run feature films may be adversely impacted by our comparatively small size, and the limited number of screens and markets that we can supply to distributors. Moreover, because of the dramatic consolidation of screens into the hands of a few very large and powerful exhibitors such as Cineworld (the new owners of Regal), AMC (including the newly acquired Carmike), Cinemark, and Galaxy Cinemas, who control 64% of the North American market, these mega-exhibition companies are in a position to offer distributors access to many more screens in major markets than we can.  Also, the majors have a significant number of markets where they operate without material competition, meaning that the distributors have no alternative exhibitor for their films in these markets.  Accordingly, distributors may decide to give preference to these mega-exhibitors when it comes to licensing top-grossing films, rather than deal with independents such as ourselves. The situation is different in Australia and New Zealand, where typically every major multiplex cinema has access to all of the film currently in distribution, regardless of the ownership of that multiplex cinema.  However, on the reverse side, we have suffered somewhat in these markets from competition from boutique operators, who are able to book top grossing commercial films for limited runs, thus increasing competition for customers wishing to view such top grossing films.



The availability of state-of-the-art technology and/or luxury seating can also be a factor in the preference of one cinema over another. In recent periods, a number of cinemas have opened or re-opened featuring luxury seating and/or expanded food and beverage service, including the sale of alcoholic beverages and food served to the seat.  We have, for a number of years, offered alcoholic beverages in certain of our Australia and New Zealand cinemas and at certain of our Angelika Film Centers in the U.S.  We are currently working to upgrade the seating and food and beverage offerings (including the offering of alcoholic beverages) at a number of our existing cinemas. We now offer alcoholic beverages at 28 of our worldwide cinemas.



The film exhibition markets in the United States, Australia, and New Zealand are to a certain extent dominated by a limited number of major exhibition companies.  The principal exhibitors in the United States are AMC (with 11,247 screens in 1,027 cinemas, which includes the information of newly acquired Carmike), Regal (with 7,315 screens in 561 cinemas), recently acquired by Cineworld

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Group, the U.K.’s largest cinema operator, and Cinemark (with 4,561 screens in 339 cinemas).  As of December 31, 2018, we were the 11th largest exhibitor with 1% of the box office in the United States with 245 screens in 27 cinemas under management.



The principal exhibitors in Australia are Greater Union, which does business under the Event Cinemas name (a subsidiary of Amalgamated Holdings Limited) (“Event”), Hoyts Cinemas (“Hoyts”), and Village Cinemas (“Village”). The major exhibitors control approximately 78% of the total cinema box office: Event 43%, Hoyts 22%, and Village 13%.  Event has 566 screens nationally, Hoyts 354  screens, and Village 210 screens.  By comparison, our 149 screens (excluding any partnership theaters) represent approximately 7% of the total box office.



The principal exhibitors in New Zealand are Event Cinemas with 116 screens nationally and Hoyts with 70 screens.  Reading has 54 screens (excluding its interest in unconsolidated joint ventures).  The major exhibitors in New Zealand control approximately 52% of the total box office: Event 31% and Hoyts 21%.  Reading has 16% of the market (Event and Reading market share figures exclude any partnership theaters) and we were the third largest exhibitor in New Zealand.



In Australia and New Zealand, the industry is somewhat vertically integrated in that Roadshow Film Distributors, a subsidiary of Village, serves as a distributor of film in Australia and New Zealand for Warner Brothers.



Many of our competitors have substantial financial resources which could allow them to operate in a more competitive manner than us.



In-Home, Streaming and Mobile Device Competition



The “in-home,” streaming and mobile device entertainment industry has experienced significant leaps in recent periods in both the quality and affordability of in-home and mobile device entertainment systems and in the accessibility to, and quality of, entertainment programming through cable, satellite, internet distribution channels, and Blu-ray/DVD. The success of these alternative distribution channels and the entrance of new sources of product (like Netflix and Amazon) who are producing product competitive with films produced for theatrical release puts additional pressure on film distributors to reduce and/or eliminate the time period between theatrical and secondary release dates.  With the acquisition of Fox, Disney is now poised to enter this market.

To a certain extent, it appears that consumers are willing to choose convenience over presentation quality.  We are responding to this challenge generally by increasing the comfort and service levels available at our cinemas, by offering convenient on-line ticket reservations services with guaranteed seating, by investing in larger screens and enhanced audio, by offering more specialized and alternative product to our audiences and by providing value for the movie goer’s dollar. We are focusing on the fact that going to the movies is a social experience, and we are working to make that experience the best that it can be.  Also, that we must differentiate ourselves from other forms of video entertainment by emphasizing the special nature of seeing video presentations in a cinema environment and by developing ways to position ourselves to take advantage in the increased output of film and feature product.  These are issues common to both our U.S. and international cinema operations. 



Competitive issues are discussed in detail under the caption, Item 1A – Risk Factors.



Seasonality



Major films are generally released to coincide with holidays. With the exception of Christmas and New Year’s Days, this fact provides some balancing of our revenue because there is no material overlap between holidays in the United States and those in Australia and New Zealand. Distributors will delay, in certain cases, releases in Australia and New Zealand to take advantage of Australian and New Zealand holidays that are not celebrated in the United States. However, the deferral of releases is becoming increasingly less common, given the need to address internet and other channels of distribution that operate on a worldwide basis. 



REAL ESTATE



Overall



We engage in real estate development and the ownership and rental or licensing to third parties of retail, commercial and live theater assets. We own the fee interests in all of our live theaters, and in 12 of our cinemas (as presented in the preceding table within the “Cinema Exhibition” section).  Our real estate business creates long-term value for our stockholders through the continuous improvement and development of our investment and operating properties, including our ETCs.



Our real estate activities have historically consisted principally of:

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Over 2016 and 2017, we added 25,635 square feet of newly constructed net rentable space to our existing ETCs (calculated exclusive of cinema space), of which 24,924 square feet has been rented.



In light of the geographic reach of our business, and the highly localized nature of the real estate business, we have historically made use of third party contractors to provide on-site management of our real estate development and management activities. We have begun, however, in recent periods to selectively build our internal resources in this regard, concentrating on Australia and New Zealand where we have increased our overall real estate team from 3 to 7 full time employees over the last 3 years.



In 2016, we began the construction phase of the redevelopment of our Union Square property into approximately 73,322 square feet of net leasable area (inclusive of anticipated BOMA adjustments), comprised of retail and office space. While no assurances can be given, we currently anticipate that the building will be ready for the commencement of the construction of tenant improvements during the second quarter of 2019.  We are currently negotiating, on an exclusive basis, leases representing approximately 90% of the net leasable area of the building.  A short video on this project can be seen at www.44unionsquare.com.



Regarding our Cinemas 1,2,3 property in Manhattan, we have received the consent of the 25% minority member of the ownership entity for the redevelopment of the property. We are evaluating the potential to redevelop the property as a mixed use property.  While we are still talking with the owner of the adjacent property about a possible joint venture development, we have not been able to come to an agreement as to the terms of that joint venture. Accordingly, we have shifted our strategic plan with respect to that property and have commenced the master-planning for a go-it-alone development.  The Cinemas 1,2,3, is a cash flowing contributor to our domestic cinema operations. On August 31, 2016, we secured a new three-year mortgage loan ($20.0 million) with Valley National Bank, with a one year option to extend through August 31, 2020, the proceeds of which were used to repay the then existing mortgage on the property, and to repay certain inter-company indebtedness, and for working capital purposes. 



On April 11, 2016, we purchased for $11.2 million a 24,000 square foot office building with 72 parking spaces located at 5995 Sepulveda Boulevard in Culver City, California.  We currently use approximately 50% of the leasable area for our headquarters offices and endeavor to lease the remainder to unaffiliated third parties.  Culver City has in recent years developed as a center of entertainment and high-tech activity in Los Angeles County. We moved into the building in February, 2017, and have obtained $8.4 million in financing on the property pursuant to a 10-year, fixed rate mortgage loan at an interest rate of 4.64% per annum and in June 2017 we obtained an additional $1.5 million in financing due to a reappraisal of the property, at an interest rate of 4.44%. Currently, we own essentially all of the office space from which we conduct our executive and administrative operations. All of our leasehold interests are cinema operating properties.



All of our leasehold interests are cinema operating properties.



Overseas, on December 23, 2015, we acquired two adjoining properties in Townsville, Queensland, Australia for a total of $24.1 million (AU$33.4 million) comprising approximately 5.6 acres. The total gross leasable area of the two properties, the Cannon Park City Centre and the Cannon Park Discount Centre, is 133,000 square feet.  Our multiplex cinema at the Cannon Park City Centre is the anchor tenant of that center.  This acquisition is consistent with our business plan to own, where practical, the land underlying our entertainment assets. We operate these two (2) properties as a single ETC.  This acquisition was funded internally.   For additional information, see Note 4 – Real Estate Transactions.  



We continue to work on the expansion and upgrading of our Auburn/Redyard in Sydney, Australia and Newmarket Village in Brisbane, Australia and to master-plan the expansion and enhancement of our Cannon Park ETC in Townsville, Australia through the expansion or improvement of our Reading Cinemas at each of these centres and additional food and beverage focused space.



At Auburn/RedYard, since the beginning of 2016, we have constructed and entered into leases representing approximately 15,000 square feet of additional retail space, which increased the square footage of that center from approximately 117,000 to approximately 132,000 square feet.  Of this 15,000 square feet, 9,600 square feet was completed in 2016, and the remaining 5,900 square feet was completed in Q4 2017.  In 2018, we acquired a 20,870 square foot in-fill property, currently improved with a 16,830 square foot office building, leased to Telstra through July 2022. This increased our frontage on Parramatta Road to 1,620 of uninterrupted square feet.    The center is now comprised of 519,992 square feet of land, 75,492 square feet of retail improvements, surface parking for 367 vehicles and subterranean parking for 727 vehicles and is 83% leased.    The center also has approximately 10,586 square foot of additional land available for development.  This expansion was funded internally.



At Newmarket Village, we added a state-of-the art eight-screen Reading Cinema, 10,150 square feet of additional retail space and 124 additional parking spaces.   On November 30, 2015, we acquired an approximately 23,000 square foot parcel adjacent to our tenant Coles supermarket.  This property is currently improved with an office building, which is now fully leased.  These leases have early development provisions allowing us to terminate these arrangements in connection with a redevelopment of the property.  We intend to ultimately demolish this office building and to integrate this parcel into Newmarket Village.  This will increase our Newmarket

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Village footprint from approximately 204,000 square feet to approximately 227,000 square feet.  Our Newmarket Village project was funded internally and is currently approximately 98% leased.



Located in the heart of Wellington – New Zealand’s capital city – this center is comprised of 161,071 square feet of land situated proximate to the Te Papa Tongarewa Museum (attracting over 1.5 million visitors annually), across the street from the site of Wellington’s newly announced convention center (estimated to open its doors in 2022) and at a major public transit hub.   Damage from the 2016 earthquake necessitated demolition of our nine-story parking garage at the site, and unrelated seismic issues have caused us to close portions of the existing cinema and retail structure while we reevaluate the center for redevelopment as an entertainment themed urban center with a major food and grocery component.  

 

Wellington continues to be rated as one of the top cities in the world in which to live, and we continue to believe that the Courtenay Central site is located in one of the most vibrant and growing commercial and entertainment sections of  Wellington.



In addition to certain historic railroad properties (such as our 6.8 acre Viaduct Property in downtown Philadelphia and certain adjacent commercial properties) and certain expansion space associated with our existing ETCs, we have two unimproved properties that we acquired for, and are currently being held for, development:  (i) our 50% interest in a 202-acre parcel in Coachella, California (near the grounds where the Coachella Music Festival is held), currently zoned for residential and mixed-use uses, and (ii) our 70.4–acre parcel in Manukau, a suburb of Auckland, New Zealand (located adjacent to the Auckland Airport) currently zoned for a mixture of light and heavy industrial uses.



Our Coachella property was acquired as a long term land hold in a foreclosure auction by the Resolution Trust Corporation as the liquidator of the lender with the first mortgage on the property.   The zoning has been established and the property freed of a burdensome development agreement.   We are monitoring developments in the area, and believe that this property is likely a candidate for sale.   Development activity in the vicinity appears to be strengthening. 



In 2016, the Auckland City Council revised the zoning of the agricultural portion of our property in Manukau (approximately 64.0 acres) to light industrial uses.  The remaining 6.4 acres of our Manukau property were already zoned for heavy industrial use.  Light industrial uses include certain manufacturing, production, logistic, transportation, warehouse and wholesale distribution activities and, on an ancillary basis, certain office, retail and educational uses. Now that our zoning enhancement goal has been achieved, we are working with other major landowners in the area on the development of a master plan for the construction of needed infrastructure works, while we continue to develop our long range plans for the property.



While we report our real estate as a separate segment, it has historically operated as an integral portion of our overall business and, historically, has principally been in support of that business.  We have, however, acquired or developed certain properties that do not currently have any cinema or other entertainment component.



Our real estate activities, holdings and developments are described in greater detail in Item 2 – Properties.  



EMPLOYEES



As of December 31, 2018, we had 104 full-time executive and administrative employees, 113 live theatre employees, 8 Real Estate employees and 2,719 cinema employees. A small number of our cinema employees in New Zealand are union members, as are our projectionists in Hawaii. None of our Australian-based employees or other employees are subject to union contracts. Overall, we are of the view that the existence of these collective-bargaining agreements does not materially increase our costs of labor or our ability to compete.





FORWARD LOOKING STATEMENTS



Our statements in this annual report, including the documents incorporated herein by reference, contain a variety of forward-looking statements as defined by the Securities Litigation Reform Act of 1995. Forward-looking statements reflect only our expectations regarding future events and operating performance and necessarily speak only as of the date the information was prepared.  No guarantees can be given that our expectation will in fact be realized, in whole or in part.  You can recognize these statements by our use of words such as, by way of example, “may,” “will,” “expect,” “believe,” and “anticipate” or other similar terminology.



These forward-looking statements reflect our expectation after having considered a variety of risks and uncertainties.  However, they are necessarily the product of internal discussion and do not necessarily completely reflect the views of individual members of our Board of Directors or of our management team.  Individual Board members and individual members of our management team may have a different view as to the risks and uncertainties involved, and may have different views as to future events or our operating performance. 



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Among the factors that could cause actual results and our financial condition to differ materially from those expressed in or underlying our forward-looking statements are the following:



The above list is not necessarily exhaustive, as business is by definition unpredictable and risky, and it is subject to influence by numerous factors outside of our control, such as changes in government regulation or policy, competition, interest rates, supply,

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technological innovation, changes in consumer taste, the weather, and the extent to which consumers in our markets have the economic wherewithal to spend money on beyond-the-home entertainment. Refer to Item 1A Risk factors for more information.



Given the variety and unpredictability of the factors that will ultimately influence our businesses and our results of operation, it naturally follows that no guarantees can be given that any of our forward-looking statements will ultimately prove to be correct.  Actual results will undoubtedly vary and there is no guarantee as to how our securities will perform either when considered in isolation or when compared to other securities or investment opportunities.



Finally, we undertake no obligation to update publicly or to revise any of our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable law.  Accordingly, you should always note the date to which our forward-looking statements speak.



Additionally, certain of the presentations included in this annual report may contain “non-US GAAP financial measures.”  In such case, a reconciliation of this information to our US GAAP financial statements will be made available in connection with such statements.

 

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Item 1A – Risk Factors



Investing in our securities involves risk.  Set forth below is a summary of various risk factors that you should consider in connection with your investment in our Company. This summary should be considered in the context of our overall Annual Report on Form 10-K, as many of the topics addressed below, and our plans to address or mitigate the risks involved, are discussed in significantly greater detail in the context of specific discussions of our business plan, our operating results, and the various competitive forces that we face.



BUSINESS RISK FACTORS



We are currently engaged principally in the cinema exhibition and real estate businesses.  Because we operate in two business segments (cinema exhibition and real estate), we discuss separately below the risks we believe to be material to our involvement in each of these segments. We have discussed separately certain risks relating to the international nature of our business activities, our use of leverage, and our status as a controlled corporation.  Please note that, while we report the results of our live theater operations as real estate operations – because we are principally in the business of renting space to producers rather than in producing plays ourselves – the cinema exhibition and live theater businesses share certain risk factors and are, accordingly, discussed together below.



Cinema Exhibition and Live Theater Business Risk Factors



We operate in a highly competitive environment with many competitors who are significantly larger and may have significantly better access to funds than we do.  We are a comparatively small cinema operator and face competition from much larger cinema exhibitors.  These larger exhibitors are able to offer distributors more screens in more markets – including markets where they may be the exclusive exhibitor – than can we.  Faced with such competition, we may not be able to get access to all of the films we want, which may adversely affect our revenue and profitability.  While we are concerned about the use of larger competitors of national and international booking power to limit our access to film, there is little we can do to mitigate this risk as antitrust litigation is very expensive and typically long lived.  While several private lawsuits are currently pending challenging the practice of certain competitors to prevent or limit their access to film product, these are private lawsuits.  We have no control over the prosecution of such lawsuits or the terms on which they may be privately resolved or settled.  While several distributors have announced that they will generally provide access of film to all who desire it, this practice is not universal.  Also, for major films, the terms of exhibition as a practical matter limited the competitors who could exhibit the film.   This competitive disadvantage has been, in our view, exacerbated in recent periods with the further concentration of the cinema exhibition industry, for example, Cineworld Group Plc’s  acquisition of Regal Entertainment Group and  Dalian Wanda’s acquisition of AMC Entertainment, which has now acquired Carmike Cinemas, Odeon & UCI Cinemas Group and Nordic Cinema Group.



These larger competitors may also enjoy (i) greater cash flow, which can be used to develop additional cinemas, including cinemas that may be competitive with our existing cinemas, (ii) better access to equity capital and debt, (iii) better visibility to landlords and real estate developers, and (iv) better economies of scale than us.



In the case of our live theaters, we compete for shows not only with other “for profit” Off-Broadway theaters, but also with “not-for-profit” operators and, increasingly, with Broadway theaters.  We believe our live theaters are generally competitive with other Off-Broadway venues.  However, due to the increased cost of staging live theater productions, we are seeing an increasing tendency for plays that would historically have been staged in an Off-Broadway theater moving directly to larger Broadway venues.  In 2016, we closed our principal live theater in New York, the Union Square incident to our redevelopment of that property.



We face competition from other sources of entertainment and other entertainment delivery systems.  Both our cinema and live theater operations face competition from “in-home” and mobile device sources of entertainment. These include competition from network, cable and satellite television, internet streaming video services, Video on Demand, Blu-ray/DVD, the internet, video games and other sources of entertainment. The quality of “in-home” and mobile entertainment systems, as well as programming available on an in-home and mobile basis, has increased, while the cost to consumers of such systems (and such programming) has decreased in recent periods, and some consumers may prefer the security and/or convenience of an “in-home” or mobile entertainment experience to the more public and presentation oriented experience offered by our cinemas and live theaters. Film distributors have been responding to these developments by, in some cases, decreasing or eliminating the period of time between cinema release and the date such product is made available to “in-home” or mobile forms of distribution. The competitive pressure from streaming video may increase as a result of the acquisition of Fox by Disney.



In order to compete with these in-home and mobile forms of distribution, it is likely that we will make material capital improvements to our cinemas to increase the amenities and quality of presentation delivered.  It may also be necessary to reduce admission prices.



There is the risk that, over time, distributors may move towards simultaneous release of motion picture product in multiple channels of distribution. Also, some traditional in-home and mobile distributors have begun the production of full-length movies, specifically for the purpose of direct or simultaneous release to the in-home and mobile markets. These factors may adversely affect the competitive advantage enjoyed by cinemas over “in-home” and mobile forms of entertainment, as it may be that the cinema market and the “in-home” and mobile markets will have simultaneous access to the same motion picture product. In recent times, a number of movies

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were released on a simultaneous basis to movie exhibitors and to in-home and mobile markets. It is likely that this trend will continue, making it, in our view, increasingly important for exhibitors to enhance the convenience and quality of the theater-going experience.   This can require substantial capital outlays and increased labor expense, which exhibitors may not be able to fully pass on to their customers.   Also, the amount of programming (including without limitation, the live streaming of sporting, theatrical and political events) available on an “in-home” and mobile basis continues to increase.



The narrowing and/or elimination of this so-called “window” for cinema exhibition may be problematic for the cinema exhibition industry.  However, to date, attempts by the major film distributors to continue to narrow or eliminate the window have  been strenuously resisted by the cinema exhibition industry, and we view the total elimination of the cinema exhibition window by major film distributors, while theoretically possible, to be unlikely.



We also face competition from various other forms of “beyond-the-home” entertainment, including sporting events, concerts, restaurants, casinos, video game arcades, and nightclubs. Our cinemas also face competition from live theaters and vice versa.  Also, social media offerings – such as Facebook, Instagram and Snapchat – appear to be commanding increasing portions of the recreational time of our potential audience.



Our cinema and live theater businesses may be vulnerable to fears of terrorism and random shooter incidents which could cause customers to avoid public assembly seating, and natural disasters.  Political events, such as terrorist attacks, random shooter incidents and health-related epidemics, such as flu outbreaks, could cause patrons to avoid our cinemas or other public places where large crowds are in attendance. In addition, a natural disaster, such as a typhoon or an earthquake, could impact our ability to operate certain of our cinemas, which could adversely affect our results of operations.



Our cinema operations depend upon access to film and alternative entertainment product that is attractive to our patrons, and our live theater operations depend upon the continued attractiveness of our theaters to producers.  Our ability to generate revenue and profits is largely dependent on factors outside of our control, specifically, the continued ability of motion picture, alternative entertainment and live theater producers to produce films, alternative entertainment and plays that are attractive to audiences, the amount of money spent by film and alternative entertainment distributors and theatrical producers to promote their motion pictures, alternative entertainment and plays, and the willingness of these distributors and producers to license their films and alternative entertainment on terms that are financially viable to our cinemas and to rent our theaters for the presentation of their plays.  To the extent that popular movies, alternative entertainment and plays are produced, our cinema and live theater activities are ultimately dependent upon our ability, in the face of competition from other cinema and live theater operators to book such movies, alternative entertainment and plays into our facilities, and to provide a superior customer offering.



Distribution of film is in the discretion of the film distribution companies.  Accordingly, we are at risk that the distributors may not give us all of the film we request.



Adverse economic conditions could materially affect our business by reducing discretionary income and by limiting or reducing sources of film and live theater funding.  Cinema and live theater attendance is a luxury, not a necessity.  Furthermore, consumer demand for better and better amenities and food offerings have resulted in an increase of the cost of a night at the movies.  Accordingly, a decline in the economy resulting in a decrease in discretionary income, or a perception of such a decline, may result in decreased discretionary spending, which could adversely affect our cinema and live theater businesses. Adverse economic conditions can also affect the supply side of our business, as reduced liquidity can adversely affect the availability of funding for movies and plays.  This is particularly true in the case of Off-Broadway plays, which are often times financed by high net worth individuals (or groups of such individuals) and that are very risky due to the absence of any ability to recoup investment in secondary markets like Blu-ray/DVD, cable, satellite or internet distribution.



Our screen advertising or auditorium leasing revenue may decline.  Over the past several years, cinema exhibitors have been looking increasingly to screen advertising and auditorium leasing as a way to improve income.  No assurances can be given that this source of income will be continuing, or that the use of screen advertising will not ultimately prove to be counterproductive, by giving consumers a disincentive to choose going to the movies over “in-home” or mobile entertainment alternatives.



We face uncertainty as to the timing and direction of technological innovations in the cinema exhibition business and as to our access to those technologies.  We have converted all of our cinema auditoriums to digital projection.  However, no assurances can be given that other technological advances will not require us to make further material investments in our cinemas or face loss of business.  Also, equipment is currently being developed for holographic or laser projection. The future of these technologies in the cinema exhibition industry is uncertain.



We face competition from competitors offering food and beverage and luxury seating as an integral part of their cinema offerings.  A number of our competitors offering an expanded food and beverage menu (including the sale of alcoholic beverages) and luxury seating, have emerged in recent periods. In addition, some competitors such as AMC are converting existing cinemas to provide such expanded menu offerings and in-theater dining options. The existence of such cinemas may alter traditional cinema selection practices of moviegoers, as they seek out cinemas with such expanded offerings as a preferred alternative to traditional cinemas.  In order to

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compete with these new cinemas,  the Company has begun to materially increase its capital expenditures to add such features to many of our cinemas and to take on additional and more highly trained (and, consequently, compensated) staff.  Also, the conversion to luxury seating typically requires a material reduction in the number of seats that an auditorium can accommodate which may translate into fewer movie tickets being sold.



Our failure to obtain and maintain liquor licenses at any of our cinemas could adversely affect our business, results of operations or financial condition. Each of our cinemas offering beer and wine, and in some cases liquor, is subject to licensing and regulation by the alcoholic beverage control agency in the state, county and municipality in which the cinema is located. Each cinema is required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each store, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. The failure to receive or retain a liquor license, or any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a material adverse effect on our profitability, our ability to attract patrons, and our ability to obtain such a liquor license in other locations.



We may be subject to increased labor and benefits costs generally. We are subject to laws governing such matters as minimum wages, working conditions and overtime. As minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees, but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages, increased employee turnover and health care mandates could also increase our labor costs. This in turn could lead us to increase prices which could impact our sales. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our results of operations may be adversely impacted.



Cyber security threats and our failure to protect our electronically stored data could adversely affect our business. We store and maintain electronic information and data necessary to conduct our business.  Data maintained in electronic form is subject to the risk of intrusion, tampering and theft. While we have adopted industry-accepted security measures and technology to protect the confidential and proprietary information, the development and maintenance of these systems is costly and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. As such, we may be unable to anticipate and implement adequate preventive measures in time. This may adversely affect our business, including exposure to government enforcement actions and private litigation, and our reputation with our customers and employees may be injured. In addition to Company-specific cyber threats or attacks, our business and results of operations could also be impacted by breaches affecting our peers and partners within the entertainment industry, as well as other retail companies.



Real Estate Development and Ownership Business Risks



We operate in a highly competitive environment in which we must compete against companies with much greater financial and human resources than we have.  We have limited financial and human resources, compared to our principal real estate competitors.  In recent periods, we have relied heavily on outside professionals in connection with our real estate development activities.  Many of our competitors have significantly greater resources and may be able to achieve greater economies of scale than we can.  Given our structure as a taxable corporation, our cost of capital is typically higher than other real estate investment vehicles such as real estate investment trusts.



Risks Related to the Real Estate Industry Generally



Our financial performance will be affected by risks associated with the real estate industry generally.  Events and conditions generally applicable to developers, owners, and operators of real property will affect our performance as well.  These include (i) changes in the national, regional and local economic climate, (ii) local conditions, such as an oversupply of, or a reduction in demand for, commercial space and/or entertainment-oriented properties, (iii) reduced attractiveness of our properties to tenants, (iv) the rental rates and capitalization rates applicable to the markets in which we operate and the quality of properties that we own, (v) competition from other properties, (vi) inability to collect rent from tenants, (vii) increased operating costs, including labor, materials, real estate taxes, insurance premiums, and utilities, (viii) costs of complying with changes in government regulations, (ix) the relative illiquidity of real estate investments, and (x) decreases in sources of both construction and long-term lending as traditional sources of such funding leave or reduce their commitments to real estate-based lending.  In addition, periods of rising interest rates or declining demand for real estate (for example, due to competition from internet sellers the demand for brick and mortar retail spaces may decline, and due to the increasing popularity of tele-commuting demand for traditional office space may decline), or the public perception that any of these events may occur, could result in declining rents or increased lease defaults. Increasing cap rates can result in lower property values.  Also, we have holdings in areas that are subject to earthquake, storm and flooding risk.



We may incur costs complying with the Americans with Disabilities Act and similar laws.  Under the Americans with Disabilities Act and similar statutory regimes in Australia and New Zealand or under applicable state or local law, all places of public accommodation (including cinemas and theaters) are required to meet certain governmental requirements related to access and use by persons with disabilities.  A determination that we are not in compliance with those governmental requirements with respect to any of

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our properties could result in the imposition of fines or an award of damages to private litigants.  The cost of addressing these issues could be substantial. 



Illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties.  Real estate investments are relatively illiquid and, therefore, tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions.  Many of our properties are either (i) “special purpose” properties that could not be readily converted to general residential, retail or office use, or (ii) undeveloped land.  In addition, certain significant expenditures associated with real estate investment, such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment, and competitive factors may prevent the pass-through of such costs to tenants.



Real estate development involves a variety of risks. 



Real estate development involves a variety of risks, including the following:



The ownership of properties involves risk.  The ownership of investment properties involves risks, such as:  (i) ongoing leasing and re-leasing risks, (ii) ongoing financing and re-financing risks, (iii) market risks as to the multiples offered by buyers of investment properties, (iv) risks related to the ongoing compliance with changing governmental regulation (including, without limitation, environmental laws and requirements to remediate environmental contamination that may exist on a property (such as, by way of example, asbestos), even though not deposited on the property by us), (v) relative illiquidity compared to some other types of assets, and (vi) susceptibility of assets to uninsurable risks, such as biological, chemical or nuclear terrorism, or risks that are subject to caps tied to the concentration of such assets in certain geographic areas, such as earthquakes. Furthermore, as our properties are typically developed around an entertainment use, the attractiveness of these properties to tenants, sources of finance and real estate investors will be influenced by market perceptions of the benefits and detriments of such entertainment-type properties.



A number of our assets are in geologically active areas, presenting risk of earthquake and land movement.  We have properties in California and New Zealand, areas that present a greater risk of earthquake and/or land movement than other locations. New Zealand has in recent periods had several major earthquakes damaging our facilities in Christchurch and Wellington. The ability to insure for such casualties is limited and may become more difficult and/or more expensive in future periods.



We may be subject to liability under environmental laws and regulations. We own and operate a large number of cinemas and other properties within the U.S. and internationally, which may be subject to various foreign, federal, state and local laws and regulations relating to the protection of the environment or human health. Such environmental laws and regulations include those that impose liability for the investigation and remediation of spills or releases of hazardous materials. We may incur such liability, including for any currently or formerly owned, leased or operated property, or for any site, to which we may have disposed, or arranged for the disposal of, hazardous materials or wastes. Certain of these laws and regulations may impose liability, including on a joint and several liability, which can result in a liable party being obliged to pay for greater than its share, regardless of fault or the legality of the

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original disposal. Environmental conditions relating to our properties or operations could have an adverse effect on our business and results of operations and cash flows.



Legislative or regulatory initiatives related to global warming/climate change concerns may negatively impact our business.  Recently, there has been an increasing focus and continuous debate on global climate change including increased attention from regulatory agencies and legislative bodies. This increased focus may lead to new initiatives directed at regulating an as yet unspecified array of environmental matters. Legislative, regulatory or other efforts in the U.S. to combat climate change could result in future increases in the cost of raw materials, taxes, transportation and utilities for our vendors and for us which would result in higher operating costs for the Company. Also, compliance by our cinemas and accompanying real estate with new and revised environmental, zoning, land-use or building codes, laws, rules or regulations, could have a material and adverse effect on our business. However, we are unable to predict at this time, the potential effects, if any, that any future environmental initiatives may have on our business.



Changes in interest rates may increase our interest expense. Because a portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. In each of March, June, September and December 2018, the U.S. Federal Reserve raised its benchmark interest rate by a quarter of a percentage point, with additional increases expected to come over the next year. If interest rates continue increasing, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Based on our debt outstanding as of December 31, 2018, if interest rates were to increase by 1%, the corresponding increase in interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $1.4 million per year. Potential future increases in interest rates may therefore negatively affect our financial condition and results of operations, and reduce our access to the debt or equity capital markets.



In addition, some of our variable rate indebtedness uses LIBOR as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness.



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International Business Risks



Our international operations are subject to a variety of risks, including the following:





In recent periods, we have repaid intercompany debt and used the proceeds to fund capital investment in the United States.  Accordingly, our debt levels in Australia are higher than they would have been if funds had not been returned for such purposes.  On a company wide basis, this means that a reduction in the relative strength of the US dollar versus the Australian Dollar and/or the New Zealand dollar will effectively raise the overall cost of our borrowing and capital and make it more expensive to return funds from the United States to Australia and New Zealand.



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Trade disputes and geopolitical instability outside of the U.S. may adversely impact the U.S. and global economies. In 2018, global growth weakened, trade tensions heightened, and several emerging markets experienced significant downturns as macroeconomic and geopolitical developments weighed on market sentiments. Governmental policies of developed economies, such as the U.S., have a substantial effect on emerging markets, and the consequences of a trade war between two developed countries, like that of the U.S. and China, could further contribute to the adverse economic and political conditions of emerging and other developed economies. Additionally, North Korea’s nuclear weapons capabilities continue to be an ongoing security concern and worsening relations between the U.S. and North Korea continue to create a global security issue that may adversely affect international business and economic conditions. While it is difficult for us to predict the effect of such trade wars and heightened geopolitical and economic instability on our business, they could lead to currency devaluation, economic and political turmoil, market volatility, and a loss of consumer confidence in the broader U.S. economy.



Risks Associated with Certain Discontinued Operations



Certain of our subsidiaries were previously in industrial businesses. As a consequence, properties that are currently owned or may have in the past been owned, by these subsidiaries may prove to have environmental issues.  Where we have knowledge of such environmental issues and are in a position to make an assessment as to our exposure, we have established what we believe to be appropriate reserves, but we are exposed to the risk that currently unknown problems may be discovered. These subsidiaries are also exposed to potential claims related to exposure of former employees to coal dust, asbestos, and other materials now considered to be, or which in the future may be found to be, carcinogenic or otherwise injurious to health. 



Operating, Financial Structure and Borrowing Risk



From time to time, we may have negative working capital.  In recent years, as we have invested our cash in new acquisitions and the development of our existing properties, we have had negative working capital. This negative working capital is typical in the cinema exhibition industry because our short-term liabilities are in part financing our long-term assets instead of long-term liabilities financing short-term assets, as is the case in other industries such as manufacturing and distribution.



We are subject to complex taxation, changes in tax rates, adoption of new U.S. or international tax legislation and disagreements with tax authorities that could adversely affect our business, financial condition or results of operations. We are subject to many different forms of taxation in both the U.S. and in foreign jurisdictions where we operate, such as the U.S. Tax Cuts and Jobs Act signed into law in December 2017. The new laws are still evolving and require we interpret the provisions of the law as we try to comply with them. The costs of compliance with these laws and regulations are high and are likely to increase in the future. Any failure on our part to comply with these laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities and other penalties.



Changes in U.S. accounting standards may adversely impact our business. In February 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-02 Leases (ASC 842). This ASU was a joint effort by FASB and the International Accounting Standards Board (IASB) to improve the financial reporting of leasing transactions by requiring companies to recognize lease assets and lease liabilities on their balance sheet. ASU 2016-02 could require significant changes to our balance sheet relating to the recognition of operating leases as assets or liabilities based on existing lease terms and whether we are the lessor or lessee. Although these standards become effective in 2019, these changes in accounting standards could have a material effect on our financial condition or results of operations which, ultimately, could materially impact the price of our stock.



We have substantial short to medium term debt.  Generally speaking, we have historically financed our operations through relatively short-term debt.  No assurances can be given that we will be able to refinance this debt, or if we can, that the terms will be reasonable.  However, as a counterbalance to this debt, we have certain unencumbered real property assets, which could be sold to pay debt or encumbered to assist in the refinancing of existing debt, if necessary. 



We have substantial lease liabilities.  Most of our cinemas operate in leased facilities. These leases typically have “cost of living” or other rent adjustment features and require that we operate the properties as cinemas.  A downturn in our cinema exhibition business might, depending on its severity, adversely affect the ability of our cinema operating subsidiaries to meet these rental obligations.  Even if our cinema exhibition business remains relatively constant, cinema level cash flow will likely be adversely affected unless we can increase our revenue sufficiently to offset increases in our rental liabilities.



Our stock is thinly traded.  Our stock is thinly traded, with an average daily volume in 2018 of only approximately 45,123 Class A Stock.  Our Class B Stock is very thinly traded with even less volume.  This can result in significant volatility, as demand by buyers and sellers can easily get out of balance.



Ownership and Management Structure, Corporate Governance, and Change of Control Risks 



Pending disputes among the heirs of James J. Cotter, Sr., have over the past three years caused, and may continue to cause, uncertainty regarding the ongoing control of the Company by the Cotter family and have distracted and may continue to distract

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the time and attention of our officers and directors from our business and operations and may ultimately interfere with the effective management of the Company.  Up until his death on September 13, 2014, James J. Cotter, Sr., the father of Ellen Cotter, James J. Cotter, Jr. and Margaret Cotter, was our controlling stockholder, having the sole power to vote approximately 66.9% of the outstanding voting stock of the Company.  Under applicable Nevada Law, a stockholder holding more than 2/3rds of the Company’s voting stock has the power at any time, with or without cause, to remove any one or more directors (up to and including the entire board of directors) by written consent taken without a meeting of the stockholders.



Since his death, disputes have arisen among Ellen Cotter, James J. Cotter, Jr. and Margaret Cotter concerning the voting control of those shares and regarding the exercise by the Estate of James J. Cotter, Sr. Deceased (the “Cotter Estate”) of options to acquire an additional 100,000 shares of Class B Stock.  At the present time, Ellen Cotter is the Chair, President and Chief Executive Officer of our Company.  Margaret Cotter is the Vice-Chair of our Company, Executive Vice-President – Real Estate Management and Development, NYC and the President of Liberty Theaters, LLC, the company through which we own and operate our live theaters.  She heads up the management and redevelopment of our New York properties.  James J. Cotter, Jr., from June 2013 until June 12, 2015 was the President and from August 7, 2014 until June 12, 2015 was the Chief Executive Officer of our Company, having been removed from those positions by Board action on June 12, 2015.  From 2002 until November 7, 2018, Mr. Cotter, Jr., was also a director of our Company.



As of December 31, 2018, according to the books of the Company, the Living Trust established by the Declaration of Trust dated June 5, 2013, by James J. Cotter, Sr. (the “Cotter Trust”), held of record 696,080 shares of our Class B  Stock  constituting approximately 41.4% of the voting power of our outstanding capital stock.  According to the books of the Company, the Cotter Estate as of that date held of record an additional 427,808 shares of Class B Stock, constituting approximately 25.5% of the voting power of our outstanding capital stock. We are advised, based upon public filings made by one or more of Ellen Cotter, Margaret Cotter and James J. Cotter, Jr. (the “Cotter Filings”) that the Class B Stock currently held of record by the Cotter Estate will eventually pour over into the Cotter Trust.  We are further advised from the Cotter Filings that the Cotter Trust also provides for the establishment of a voting trust (the “Cotter Voting Trust”) which will eventually hold the Class B Stock currently held by the Cotter Estate and the Cotter Trust.  At the present time, however, such Class B Stock is held of record by the Cotter Trust and the Cotter Estate, respectively.



On December 22, 2014, the District Court of Clark County, Nevada, (the “Nevada District Court”) appointed Ellen Cotter and Margaret Cotter as co-executors of the Cotter Estate.  On March 23, 2018, the Superior Court of the State of California, County of Los Angeles (the “California Superior Court”), issued its judgement in the case captioned In re James J. Cotter Living Trust dated August 1, 2000 (Case No. BP159755) (the “Trust Case”), to the effect that Ellen Cotter and Margaret Cotter are the Co-Trustees of the Cotter Trust and that Margaret Cotter is the sole Trustee of the Voting Trust.  As the appeal period for that judgment has expired, the California Superior Court’s determination in this regard is now final and not subject to review.  Accordingly, in the view of the Company, Ellen Cotter and Margaret Cotter have voting control over the shares held by the Cotter Trust and the Cotter Estate, collectively representing 66.9% of our Company’s Class B Stock.  Taking into account Ellen Cotter and Margaret Cotter’s personal holdings of voting stock, Ellen Cotter and Margaret Cotter have the power to vote 71.9% of our Company’s voting stock. 



We understand from public filings made by Ellen Cotter and Margaret Cotter and public filings made by James J. Cotter, that James J. Cotter, Jr. is the first alternate trustee of the Voting Trust, in the event that Margaret Cotter is unable or unwilling to serve as trustee.



While our Company is not a party to the Trust Case, our Company has appeared to  protect (a) the business plan adopted by our Board of Directors and its determination that stockholder interests are best achieved by continuing with that business plan rather than selling the Company at this time and (b) in the event that the California Court were to disregard the advice of our Board and order that a controlling interest in our Company be marketed or sold,  that the interests of our Company and stockholders generally are protected.   Our Company’s participation in the Trust Case since August 2017 has been overseen by a Special Independent Committee of the Board of Directors currently comprised of directors Doug McEachern and Judy Codding.



On February 8, 2017, James Cotter, Jr. filed in the Trust Case an Ex Parte Petition for Appointment of a trustee ad litem and of a guardian ad litem for the benefit of Cotter, Sr.’s, minor grandchildren (two of whom are the children of Margaret Cotter and three of whom are the children of James Cotter, Jr., and who are referred to herein as the “Cotter Grandchildren”).  Mr. Cotter, Jr., sought the appointment of a trustee ad litem, to evaluate the non-binding indication of interest sent by Patton Vision, LLC (“Patton Vision”), to the Trustees of the Cotter Trust to acquire the RDI shares held by the Cotter Trust at $18.50 per share (referred to in Mr. Cotter, Jr’s pleadings as the “Offer”) and to take reasonable steps to act on the Offer in the trustee’s sole discretion.  Specifically, Mr. Cotter Jr. sought an order “granting the trustee ad litem with full power, authority, and protections under the Cotter Trust and California trust law, as any other named trustee would have, to evaluate the Offer, conduct due diligence, negotiate with Patton Vision or any other potential offerors, and take all actions necessary or appropriate to consummate the sale of the Cotter Trust’s RDI shares, including but not limited to:



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Notwithstanding its determination that Mr. Cotter, Jr. was not a trustee of either the Cotter Trust or the Voting Trust, on February 14, 2018, the California Superior Court issued its “Statement of Decision” to appoint a temporary trustee ad litem (the “TTAL”) “with the narrow and specific authority to obtain offers to purchase the RDI stock in the voting trust, but not to exercise any other powers without court approval, specifically the sale of the company or any other powers possessed by the trustees.”  The California Superior Court’s order based on that Statement of Decision was entered on March 23, 2018.  That order was appealed by Ellen Cotter and Margaret Cotter to the California Court of Appeals for the Second District (the “California Court of Appeals”), and on April 2, 2018, the California Court of Appeals entered its order to show cause and a stay (the “Order to Show Cause and Stay”) as to why the court below “should not be compelled to vacate your order of March 23, 2018 directing that trustee ad litem be appointed to obtain offers to purchase the voting-stock trust’s interest in Reading International, Inc., and issue a new and different order denying the ex parte petition seeking a trustee ad litem.   . . . All trial court proceedings are stayed pending disposition of this proceeding or further order of this court.”   Briefs have been submitted by all parties, and a hearing is set for April 5, 2019.  Accordingly, no temporary trustee ad litem has been appointed and no solicitation of offers is ongoing. 



In so far as we are aware, based upon public filings and our internal records, at the present time the Voting Trust does not own any shares of RDI stock.   The shares which are anticipated to flow into the Voting Trust are, insofar as our Company is aware, currently owned by the Cotter Estate and the Cotter Trust.



We continue to believe that, whether or not a final determination is made to sell the voting shares, the appointment of a TTAL would pose risks to our Company and our stockholders  for a variety of reasons, including the resultant potential for:  (i) distraction of management and key employees from focusing on the conduct of our business, including the implementation of our three year business strategy, (ii) incurrence of additional general and administrative costs due to the need to implement employee retention programs and to incur legal expenses of the type and at levels not typically required in the ordinary conduct of our Company’s business, (iii) interference with contractual relationships, negotiations and potential negotiations with third parties important to our Company’s business, including, without limitation, current and future lenders, tenants, landlords, suppliers and co-developers, (iv) increased difficulty in hiring and retaining high quality employees, and (v) exposure of our Company to potential litigation claims of the type which often accompany any extraordinary corporate transactions together with the expense, distraction and time loss that typically results from any such litigation.  If the California Superior Court’s order is not reversed by the California Court of Appeals and if a decision to sell a controlling interest is made by the California Superior Court, then there would be the additional risk that control might be sold to an unqualified purchaser who might exploit such control position in a manner not consistent with the best interests of our Company or stockholders generally.



Since May 2016, Patton Vision has sent various non-binding indications of interest to us to purchase all of our Company’s outstanding shares. In each case our Board of Directors has determined that our Company and our stockholders would be best served by our continued independence and by our pursuit of our business strategy.  We were informed that on January 23, 2017, Patton Vision separately sent a similar indication of interest to the co-trustees of the Cotter Trust to purchase the Cotter Trust’s shares and to the Co-Executors of the Cotter Estate to purchase the Cotter Estate’s shares.  We have been advised by Ellen Cotter and Margaret Cotter that, acting in their capacities as the Co-Executors of the Cotter Estate and as the Co-Trustees of the Cotter Trust and by Margaret Cotter, acting in her capacity as the Trustee of the to-be-formed Voting Trust, that they do not have any current plans to sell voting control of our Company.



Most recently, on November 6, 2018, we received a non-binding indication of interest from Patton Vision dated November 5, 2018, stating an indicated purchase price of $444.0 million, allocated $17.22 per share for our Class A Common Stock and $37.38 per share for our Class B Common Stock.  In a further letter dated January 17, 2019, Patton Vision clarified that “the value per Class A and Class B shares reflected [in the November 5, 2018 non-binding indication of interest] were exemplary and intended to reflect that the proposal represented a substantial equity value premium across Reading classes of common stock” and extended the term of its non-binding indication of interest to March 29, 2019.  On March 14, 2019, our Board of Directors, following consideration and adoption of our three year business strategy, once again confirmed its determination that our Company and our stockholders would be best served by our continued independence and by our pursuit of our business strategy.  Our Board of Directors instructed our management to inform Patton Vision once again that our Board had no present interest in engaging in discussions regarding our possible sale.



The California Superior Court, in the Trust Case, has jurisdiction over a potentially controlling block of our voting power.  The Cotter Trust, which as described in more detail above, currently owns 41.4% of our Class B Stock, and, at such time as the Cotter Estate is

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probated, may receive up to an additional 25.5% of our Class B Stock, should the California Superior Court order the sale of the Trusts’ Class B Stock and such sale be completed, then there may be a change of control of our Company (depending on, among other things, who the ultimate purchaser(s) of such shares might be, the number of shares of Voting Stock distributed by the Cotter Estate to the Cotter Trust, and whether the California Superior Court orders a sale of all or only some portion to the Class B Stock held by the Cotter Trust).  We cannot predict what reactions, including appeals or other steps, might be taken by Ellen Cotter and Margaret Cotter in their respective capacities as Trustees under the Cotter Trust, or in other capacities (for example, as Co-Executors of the Cotter Estate or as stockholders acting in their own right), should the California Superior Court make such an order.  We do note, however, that Ellen Cotter and Margaret Cotter have publicly stated that, if there is to be a sale of controlling shares, they intend to be the purchaser of such shares.  We also cannot predict what action our Board of Directors would take in response, if any.  However, our Board of Directors has an obligation to act in the best interest of our Company, and in the event the California Superior Court were to order a sale of the Class B Stock held by the Cotter Trust, our Board of Directors would be obligated to consider the interests of the Company and to act accordingly. 



In addition, James J. Cotter, Jr., has filed a derivative action (discussed in greater detail below) against Ellen Cotter and Margaret Cotter and certain of our Directors, alleging a variety of misconduct on their part and, among other things, seeking the reinstatement of James J. Cotter, Jr. as president and chief executive officer of our Company, and challenging the voting by Ellen Cotter and Margaret Cotter of the shares held by the Cotter Estate.  The Nevada District Court has now dismissed on summary judgment all of Mr. Cotter, Jr.’s claims in that action, including his claims relating to the handling of the Patton Vision non-binding indications of interest.   The Nevada District Court has also entered a cost order against Mr. Cotter, Jr., in the amount of $1.55 million.   However, Mr. Cotter, Jr., has appealed those decisions so they continue as an overhang over our Company. See Notes to Consolidated Financial Statements—Note 12—Commitments and Contingencies—Cotter Jr. Related Litigation Matters (including legal costs coverage).  



The Nevada derivative litigation and related matters has for multiple years, required the time and attention of Ellen Cotter, Margaret Cotter, our directors and members of our management team  and could, in the future, potentially further distract the time and attention of these key persons from the business and operations of our Company.



Furthermore, the uncertainty as to the future management and control of our Company could potentially  adversely impact, among other things (i) our ability to develop and maintain favorable business relationships, (ii) our ability to attract and retain talented and experienced directors, executives and employees, (iii) the compensation and other terms needed to attract and retain such individuals (including, without limitation, the potential need for retentions agreements and other incentive arrangements typically put into place when control of a public company is uncertain), (iv) our ability to borrow money on favorable long-term terms, and (v) our ability to pursue and complete long-term business objectives.



The interests of our controlling stockholder may conflict with your interests.  As of December 31, 2018, the Cotter Estate and the Cotter Trust beneficially own 66.9% of our outstanding Class B Stock.  At the present time, according to the books of the Company, Ellen Cotter and Margaret Cotter vote (including their direct holdings of 50,000 shares and 35,100 shares respectively of the Class B Stock), Class B Stock representing 71.9% of our outstanding Class B Stock.  Our Class A Stock is non-voting, while our Class B Stock represents all of the voting power of our Company.  For as long as the Cotter Estate, the Cotter Trust and/or the Cotter Voting Trust (referred to herein collectively as the “Cotter Entities”) continue to own shares of Class B Stock representing more than 50% of the voting power of our common stock, the Cotter Entities will be able to elect all of the members of our Board of Directors and determine the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. The Cotter Entities will also have the power to prevent or cause a change in control, and could take other actions that might be desirable to the Cotter Entities but not to other stockholders.  To the extent that the Cotter Entities hold more than 2/3rds of our outstanding Class B Stock, the Cotter Entities will have the power at any time, with or without cause, to remove any one or more Directors (up to and including the entire board of directors) by written consent taken without a meeting of the stockholders.    



In addition, the Cotter Estate or the Cotter Trust and/or their respective affiliates have controlling interests in companies in related and unrelated industries.  In the future, we may participate in transactions with these companies (see Note 19 – Related Parties).



While controlling stockholders may owe certain fiduciary duties to our Company and/or minority stockholders, these duties are limited.   No assurances can be given that the Cotter Entities will not take action that, while beneficial to them and legally enforceable, would not necessarily be in the best interests of our Company and/or our stockholders generally.



We are a “Controlled Company” under applicable NASDAQ Regulations.   As permitted by those Regulations, our Board has elected to opt-out of certain corporate governance rules applicable to non-controlled companies.  Generally speaking, the NASDAQ requires listed companies to meet certain minimum corporate governance provisions.  However, a “Controlled Company”, such as we, may elect not to be governed by certain of these provisions.  Our Board of Directors has elected to exempt our Company from requirements that (i) at least a majority of our Directors be independent, and (ii) nominees to our Board of Directors be nominated by a committee comprised entirely of independent Directors or by a majority of our Company’s independent Directors.  Notwithstanding the determination by our Board of Directors to opt-out of these NASDAQ requirements, we believe that a majority of our Board of

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Directors is nevertheless currently comprised of independent Directors.  As a practical matter, subject to their fiduciary duties, Ellen Cotter and Margaret Cotter control the composition of our Board of Directors.



We depend on key personnel for our current and future performance.  Our current and future performance depends to a significant degree upon the continued contributions of our senior management team and other key personnel. The loss or unavailability to us of any member of our senior management team or a key employee could significantly harm us. We cannot assure you that we would be able to locate or employ qualified replacements for senior management or key employees on acceptable terms. Due to the uncertainty of our control situation, the ongoing availability of these employees and our ability to replace them is uncertain.



If our company suffers cyber-security attacks, data security challenges or privacy incidents that result in security breaches, we could suffer a loss of sales, additional liability, reputational harm or other adverse consequences.



The effective operation of our international businesses depends on our network infrastructure, computer systems, physical, virtual and/or cloud based, and software. Our information technology systems collect and process information provided by customers, employees and vendors.  In addition, third party vendors’ systems process ticketing for our theaters.  These various information technology systems and the data stored within them are subject to penetration by cyber attackers.  We utilize industry accepted security protocols to securely maintain and protect proprietary and confidential information. However, in spite of our best efforts, our information systems may fail to operate for a variety of technological or human reasons.  An interruption or failure of our information technology systems and of those maintained by our third party providers could adversely affect our business, liquidity or results of operations and result in increases in reputational risk, litigation or penalties.  Furthermore, any such occurrence, if significant could require us to expend resources to remediate and upgrade information technology systems.  Since 2015, we have annually procured cybersecurity insurance to protect against cyber-security risks; however, such we cannot provide any assurance regarding the adequacy of such insurance coverage.

 

Item 1B – Unresolved Staff Comments



None.

 

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Item 2 – Properties 



EXECUTIVE AND ADMINISTRATIVE OFFICES



As discussed previously, in February 2017, we moved our executive headquarters in the U.S. from an 11,700 square foot leased office space located at 6100 Center Drive, Suite 900, Los Angeles, California 90045 to a 24,000 square foot Class B office building with 72 parking spaces located at 5995 Sepulveda Boulevard, Suite 300, Culver City, California 90230, which we purchased on April 11, 2016.  We are currently using approximately 50% of the leasable area for our headquarters’ offices and continue to look for an unaffiliated third party tenant to lease the remainder. 



We own an 8,300 square foot office building in Melbourne, Australia, approximately 5,200 square feet of which serve as the headquarters for our Australian and New Zealand operations (the remainder being leased to an unrelated third party). We maintain our accounting personnel and certain IT and operational personnel in approximately 5,900 square feet of office spaces located in our Wellington Courtenay Central ETC.  We also occupy approximately 3,500 square feet at our Village East leasehold property in New York for administrative purposes.



ENTERTAINMENT PROPERTIES



Entertainment Use Leasehold Interests



As of December 31, 2018, we lease approximately 1,800,000 square feet of completed cinema space in the United States, Australia, and New Zealand as follows:





In December 2014, we entered into a lease for a new luxury cinema, Olino by Consolidated Theatres, which opened on October 21, 2016 at the new Ka Makana Ali'i Shopping Center developed in Kapolei, Hawaii by an affiliate of DeBartolo Development.



REAL ESTATE INTERESTS



Fee Interests



In Australia, as of December 31, 2018, we owned approximately 1,200,000 square feet of land at nine locations.  Most of this land is located in the greater metropolitan areas of Brisbane, Perth, and Sydney.  Of these fee interests, approximately 208,000 square feet are currently improved with cinemas.  We also own an approximately 23,000 square foot parcel currently improved with an approximately 22,000 square foot office building that we intend to integrate with and into our Newmarket Village ETC and that, accordingly, is not included in the above table. In 2018, we acquired a building of 16,830 square feet which borders on three sides of our Auburn ETC for $3.5 million (AU$ 4.5 million)  This building has a lease in place, which expires in July 2022, after which we intend to integrate the property with our ETC.



In New Zealand, as of December 31, 2018, we owned approximately 3,300,000 square feet of land at six locations. The foregoing includes the Courtenay Central ETC in Wellington, the development land adjacent to our Courtenay Central ETC, the 70.4-acre Manukau site, and the fee interests underlying four cinemas in New Zealand, which properties include approximately 20,000 square feet of ancillary retail space.



In the United States, as of December 31, 2018, we owned approximately 134,000 square feet of improved real estate comprised of three live theater buildings, which include approximately 37,000 square feet of leasable space, the fee interest in the Union Square property (currently being redeveloped), and the fee interest in our Cinemas 1,2,3 in Manhattan (held through a limited liability company in which we have a 75% managing member interest) and (through a limited liability company [Shadow View Land and Farming, LLC] in which we have a 50% managing member interest) 202 acres of developable land in Coachella, California, zoned for residential and mixed use purposes.  We also own various properties relating to our historic railroad business, including the Reading Viaduct in central Philadelphia. 



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Live Theaters



Included among our real estate holdings are three Off-Broadway style live theaters, operated through our Liberty Theaters subsidiary. We license theater auditoriums to the producers of Off-Broadway theatrical productions and provide various box office and food & beverage services. The terms of our licenses are, naturally, principally dependent upon the commercial success of our tenants. While we attempt to choose productions that we believe will be successful, we have no control over the production itself.  At the current time, we have two single-auditorium theaters in Manhattan:



We also own a four-auditorium theater complex, the Royal George Theatre in Chicago (main stage 452 seats, cabaret 199 seats, great room 100 seats and gallery 60 seats), which has ancillary retail, office space, and parking.



Liberty Theaters is primarily in the business of licensing theatre space. However, we may from time-to-time participate as an investor in a play, which can help facilitate the exhibition of the play at one of our facilities, and do from time-to-time rent space on a basis that allows us to share in a production’s revenue or profits.  Revenue, expense, and profits are reported as a part of the real estate segment of our business.



Joint Venture Interests



Real estate joint ventures comprise of a 75% managing member interest in the limited liability company that owns our Cinemas 1,2,3 property and a 50% managing member interest in Shadow View Land & Farming, LLC, which owns an approximately 202-acre property in Coachella, California that is currently zoned for residential and mixed use.   



OPERATING PROPERTY

As of December 31, 2018, we own fee interests on approximately 879,000 square feet of income-producing properties (including certain properties principally occupied by our cinemas) as follows:





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LONG-TERM LEASEHOLD OPERATING PROPERTY



In certain cases, we have long-term leases that we view more akin to real estate investments than cinema leases. As of December 31, 2018, we had approximately 149,000 square foot of space subject to such long-term leases, which are reported as part of our Cinema Exhibition segment, detailed as follows:







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INVESTMENT AND DEVELOPMENT PROPERTY



We are engaged in several investment and development projects relative to our currently undeveloped parcels of land.  In addition, we are currently executing, or still pursuing to execute, our redevelopment plans on several of our existing developed properties to take them to their highest and best use. The following table summarizes our investment and development projects as of December 31, 2018:  







Some of our income operating properties and our investment and development properties carry various debt encumbrances based on their income streams and geographic locations. For an explanation of our debt and the associated security collateral please see Note 10 – Borrowings to our 2018 consolidated financial statements.



OTHER PROPERTY INTERESTS AND INVESTMENTS



We own the fee interests in various parcels comprising 197 acres in principally in Pennsylvania. These acres consist primarily of vacant land. With the exception of certain properties located in Philadelphia (including the raised railroad bed near the Center City, known as the Reading Viaduct), the properties are principally located in rural areas of Pennsylvania. These properties are unencumbered by any debt.

 

Item 3 – Legal Proceedings



The information required under Part I, Item 3 (Legal Proceedings) is incorporated by reference to the information contained in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this Annual Report on Form 10-K.

 

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Item 4 – Mine Safety Disclosures



Not Applicable.  Properties relating to our legacy business are currently not used and classified as Investment Property.

 

PART II



Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



MARKET INFORMATION

Our common stock is traded on the NASDAQ under the symbols RDI (Class A Stock) and RDIB (Class B Stock).

 

As of December 31, 2018, the approximate number of common stockholders of record was 2,300 for Class A Stock and 375, for Class B Stock. On March 15, 2019, the closing prices per share of our Class A Stock and Class B Stock were $16.15 and $25.70, respectively. 



We have never declared a cash dividend on our common stock and we have no current plans to declare a dividend.



Securities Authorized for Issuance Under Equity Compensation Plans



Our Definitive Proxy Statement to be filed in connection with our 2019 Annual Meeting of Stockholders incorporated herein by reference, contains information concerning securities authorized for issuance under equity compensation plans within the caption: Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information.



The following table summarizes the securities authorized for issuance under our equity compensation plans:





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Performance Graph



The following line graph compares the cumulative total stockholder return on RDI’s common stock for the five-year period ended December 31, 2018 against the cumulative total return as calculated by the NASDAQ composite, a peer group of public companies engaged in the motion picture theater operator industry and a peer group of public companies engaged in the real estate operator industry. Measurement points are the last trading day for each of the five years ended December 31, 2018. The graph assumes that $100 was invested on December 31, 2013 in our common stock, the NASDAQ composite and the noted peer groups, and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.



The following performance graph shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into a filing.



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RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES



None.



PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS



On March 2, 2017 our Board of Directors authorized a stock buy-back program to spend up to an aggregate of $25.0 million to acquire shares of the Company’s Class A non-voting stock. Below is a summary of share repurchases during the fourth quarter of 2018: Refer to Note 14 - Share-Based Compensation and Share Repurchase Plans in the 2018 Consolidated Financial Statements for further details.









 

On March 14, 2019, the Board of Directors extended our Company's stock buy-back program for two years, through March 2, 2021.    The Board did not increase the authorized amount, which was initially fixed at $25 million.  At the present time, $16.2 million of that authorization remains available to repurchase Class A Common Stock.  Refer to Note 14 - Share-Based Compensation and Share Repurchase Plans in the 2018 Consolidated Financial Statements for further details.

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Item 6 – Selected Financial Data



The table below sets forth certain historical financial data regarding our Company. This information is derived in part from, and should be read in conjunction with, our consolidated financial statements included in Item 8 of this 2018, and the related notes to the consolidated financial statements.









Both EBIT and EBITDA are non-US GAAP measures and are presented for informational purposes. They should not be construed as an alternative to net earnings (loss), as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (as determined in accordance with US GAAP).  These measures should be reviewed in conjunction with the relevant US GAAP financial measures.  EBIT and EBITDA as we have calculated them may not be comparable to similarly titled measures reported by other companies.



EBIT presented above represents net income (loss) adjusted for interest expense (net of interest income), income tax expense and an adjustment of interest expense for discontinued operations, if any. EBIT is useful in evaluating our operating results for the following reasons:



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We define EBITDA as net income adjusted for interest expense (net of interest income), income tax expense, depreciation and amortization expense, and an adjustment of interest expense, depreciation, and amortization for discontinued operations, if any. EBITDA is useful principally for the following reasons:



Reconciliation of EBIT and EBITDA to net income is presented below:







 

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Item 7 – Management’s Discussions and Analysis of Financial Condition and Results of Operations (“MD&A”)











BUSINESS OVERVIEW



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



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



We operate our worldwide cinema exhibition businesses under various brands:



Our Business Strategy: Applying a Synergistic Approach



We believe the cinema business to be one that will likely continue to generate fairly consistent cash flows in the years ahead, even in a recessionary or inflationary environment. This is based on our belief that people will continue to spend a reasonable portion of their entertainment dollars 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. We believe the cinema exhibition business to be a mature business with most markets either adequately screened or over-screened and we see growth in our cinema business coming principally from (i) the enhancement of our existing cinemas (for example, by the addition of luxury recliner seating and expanding our food and beverage program), (ii) the development in select markets of specialty cinemas and where applicable, new cinemas in underserved markets, and (iii) the opportunistic acquisition of already existing cinemas. From time-to-time, we might invest in the securities of other companies, where we believe the business or assets of those companies to be attractive or to offer synergies to our

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existing entertainment and real estate businesses. We continue to focus on the development and redevelopment of our existing assets (particularly our real estate assets in (i) New York, (ii) Brisbane and Sydney in Australia, and (iii) Wellington, New Zealand, and our Angelika Film Center chain), as well as to continue to be opportunistic in identifying and endeavoring to acquire undervalued assets, particularly assets with proven cash flow and that we believe to be resistant to recessionary trends.



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



Industry Outlook



Cinema Exhibition



Along with most of our industry, we have completed the conversion of all of our U.S., Australia, and New Zealand cinema operations to digital exhibition.  We believe that a substantial part of this cost of conversion has been or will be recovered by the receipt of “virtual print fees” paid by film distributors for the use of such digital projection equipment.



The “in-home” entertainment industry has experienced significant leaps in recent periods in both the quality and affordability of in-home entertainment systems and in the accessibility to and quality of entertainment programming through alternative film distribution channels, such as network, cable, satellite, internet distribution channels, and Blu-ray/DVD. The success of these alternative distribution channels puts additional pressure on film distributors to reduce and/or eliminate the length of time between theatrical and secondary release dates. These are issues common to both our U.S. and international cinema operations.



Certain new entrants to the cinema exhibition market, as well as certain of our historic competitors, have begun to develop new, and to reposition existing, cinemas that offer a broader selection of premium seating and food and beverage choices. These include, in some cases, food service to the seat and the offering of alcoholic beverages. For some years, we have offered premium seating, café food selections and alcoholic beverages in certain cinemas.  Based on our experience, we believe that we can compete effectively with this emerging competition. We are currently reviewing the potential for further expanding our offerings at a variety of our cinemas.



Below is a summary discussion of the competitive aspects of our two cinema exhibition markets:

AMC in 2017 completed its acquisition of the 4th largest exhibitor in the U.S., Carmike Cinemas, making it the largest circuit in the U.S. and when considered with its parent (Dalian Wanda), the largest exhibitor in the world. Just recently, Cineworld, a major European cinema circuit operator, has acquired Regal. The restructuring and consolidation undertaken in the industry is decreasing the number of exhibitors in the market, and the emergence of increasingly attractive “in-home” and mobile entertainment alternatives and the continued growth of in-home and mobile viewing options is resulting in pressure for shortened release windows. 



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Real Estate



A summary discussion of the competitive aspects of the markets where we own real estate properties is as follows:

Demand for office space is likely to reduce as corporations adapt to employees’ “live, work, and play” behavior and leverage technology to automate tasks. The leasing of large office spaces and sub-leasing them on demand for a wide variety of short-term rentals, ranging from day offices, hourly use of office space or meeting rooms, to virtual offices and other uses, will be a continuing growth trend. In essence, office space demand will tilt in favor of open, flexible, co-sharing spaces and the per-employee office space requirement is likely to shrink. As there will be a higher demand for dynamically configurable spaces.

Our U.S. business plan is aligned with these real estate trends – to expand our U.S. cinema offering, offer premium retail locations and versatile office product.



RECENT DEVELOPMENTS



Recent developments in our two business segments are discussed below:



Cinema Exhibition



Our cinema revenue consists primarily of admissions, F&B, advertising and theater rentals.  Cinema operating expense consists of the costs directly attributable to the operation of the cinemas, including film rent expense, operating costs, and occupancy costs.  Cinema revenue and expense fluctuate with the availability of quality first run films and the numbers of weeks such first run films stay in the market.  For a breakdown of our current cinema assets that we own and/or manage, please see Part I, Item 1 – Our Business of this 2018 Form 10-K.



While our capital projects in recent years have been focused on growing our real estate segment, we have also maintained our focus on improving and enhancing in our cinema exhibition portfolio, as discussed below:



Cinema Additions and Enhancements 



Here are the additions to our cinema portfolio in 2017 and 2018:





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Upgrades to our Film Exhibition Technology and Theatre Amenities



As discussed previously, we continue to focus in areas of the matured cinema business where we believe we have growth potential and ultimately, provide long-term value to our stockholders.  We have invested both in (i) upgrading of our existing cinemas and (ii) developing new cinemas, in each case to provide our customers with premium offerings, including state-of-the-art presentation and sound, luxury seating and enhanced food and beverage amenities (such as lounges and bar service).  As of December 31, 2018, the upgrades to our theater circuits’ film exhibition technology and amenities are as summarized in the following table:









During January 2019, we acquired a proven four-screen cinema in Tasmania.



Plans for 2019 and Our Cinema Pipeline



We currently plan to upgrade or begin the upgrade of various cinemas in the U.S., Australia, and New Zealand in 2019.    



We have entered into lease agreements for four new cinemas in Australia (25 screens), which we anticipate will come on line in 2019 - 2021.  



Our focus with respect to new cinemas featuring state-of-the-art projection and sound, luxury recliner seating, enhanced F&B (typically including alcohol service) and typically at least one major TITAN type presentation screen.   Our focus is on providing best in class services and amenities that will differentiate us from in-home and mobile viewing options.   We believe that a night at the movies should be a special and premium experience and, indeed, that it must be in order to compete with the variety of options being offered to consumers through other platforms.



During 2019, we will also be focusing on the rollout and enhancement of our proprietary on-line ticketing capabilities and social media interfaces.    These are intended to enhance the convenience of our offering and to promote customer affinity with the experience and product that we are offering. 



Real Estate



As of December 31, 2018, our operating properties consisted of the following:



At the beginning of January 2016, we ceased our live theatre business at our Union Square property in New York, terminated all tenant leases and prepared the property for redevelopment.  Accordingly, this property is no longer treated as an operating property.

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In February 2018, we entered into a one-year license agreement with Audible, Inc., a subsidiary of Amazon, at the Minetta Lane Theatre, which allows Audible to produce its one and two person voice shows at our Minetta Lane Theatre.  While no assurances can be given, we are currently finalizing with Audible an amendment extending this agreement through 2020, with an additional one year option. 



In addition, we have various parcels of unimproved real estate held for development in Australia and New Zealand and certain unimproved land in the United States including properties used in our legacy activities.  We also own an 8,300 square foot commercial building in Melbourne, which serves as our administrative headquarters for Australia and New Zealand, approximately 37% which is leased to an unrelated third party.  During 2016, we bought a 24,000 square foot office building in Culver City, California to serve as our Corporate Headquarters in Los Angeles (refer to “Strategic Acquisitions” section below for more details).



Our key real estate transactions over the 2016-2018 period are as follows:



Strategic Acquisitions







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Opportunistic Sales



Value-creating Opportunities



We are engaged in several real estate development projects to take our properties to their highest and best use.  The most notable of these value-creating projects are as follows:



In April, 2017, our Insurer completed the examination of our insurance claim with respect to the parking building and shopping center earthquake damage and related business interruption. We received a final settlement of US $20.0 million in May 2017, reaching the policy maximum of US$25.0 million for the loss event. As a result, we recorded a gain of $9.2 million (NZ$12.7 million) representing excess insurance recoveries over the recorded property value during the second quarter ended June 30, 2017. This amount is recorded net of demolition costs incurred and an allocation to lost profits, covered within the same insurance policy. This gain was a non-recurring item for the year 2018.   

During the quarter ended June 30, 2017, we recorded a gain on business interruption recoveries of $1.5 million (NZ$2.1 million), presented as part of the relevant segment revenue lines in our Consolidated Statement of Operations for that quarter. While the earthquake has opened up possibilities to reconfigure our Courtenay Central property, the gains recorded during the quarter ended June 30, 2017 do not compensate for the lost time value of the delay of our development plan.  This gain was a non-recurring item for the year 2018.

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Refer to Note 20 – Insurance Recoveries on Impairment and Related Losses due to Earthquake for further details on the impact of the earthquake incident.



Corporate Matters



Our Financing Strategy 



Our treasury management is focused on concerted cash management using cash balances to reduce debt. We have used cash generated from operations and other excess cash, to the extent not needed for any capital expenditures, to pay down our loans and credit facilities providing us some flexibility on our available loan facilities for future use and thereby, reducing interest charges. On a periodic basis, we review the maturities of our borrowing arrangements and negotiate for renewals and extensions where necessary in the current circumstances.



In March 2019, we amended our Revolving Corporate Markets Loan Facility with National Australia Bank (“NAB) from a facility comprised of (i) a AU$66.5 million loan facility with an interest rate of 0.95% above the Bank Bill Swap Bid Rate (“BBSY) and a maturity date of June 30, 2019 and (ii) a bank guarantee of AUD$5.0 million at a rate of 1.90% per annum into a (i) AU$120.0 million Corporate Loan facility at a rate of 0.85% - 1.3% above BBSY, depending on certain ratios, with a due date of December 31, 2023, of which AU$80.0 million is revolving and AU$40.0 million is core and (ii) a Bank Guarantee Facility of AU$5.0 million at a rate of 1.85% per annum. Such modifications of this particular term loan were not considered to be substantial under US GAAP.  



On December 20, 2018, we then restructured our Westpac Corporate Credit Facilities. The maturity of the 1st tranche (general/non-construction credit line) was extended to December 31, 2023, with the available facility being reduced from NZ$35.0 million to NZ$32.0 million. The facility bears an interest rate of 1.75% above the Bank Bill Bid Rate on the loan balance and a 1.1% line of credit charge on the full amount of the facility.  The 2nd tranche (construction line) with a facility of NZ$18.0 million matured on December 31, 2018, and was not renewed. 



On March 5, 2019, we extended our current Bank of America credit facilities until May 1, 2020 (the $55 million credit line).    We anticipate refinancing this credit line during the second quarter of 2019.





For a complete list and further details of our value creation projects, see Part I, Item 2 – Properties under the heading “Investment and Development Property”.

 

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OVERALL RESULTS OF OPERATIONS 



At December 31, 2018, we leased or owned and operated 59 cinemas with 478 screens, which includes (i) one managed cinema with 4 screens and (ii) our interests in certain unconsolidated joint ventures that total 3 cinemas with 29 screens.  In the first quarter of 2019, we acquired a proven 4-screen cinema in Tasmania, increasing our cinema count to 60 and our screen count to 488.  We also (i) owned and operated five ETCs located in Newmarket Village (a suburb of Brisbane), Belmont (a suburb of Perth), Auburn (a suburb of Sydney) and Townsville in Australia and Wellington in New Zealand, (ii) owned and operated our headquarters office buildings in Culver City (an emerging high-tech and communications hub in Los Angeles County) and Melbourne, Australia, (iii) owned and operated the fee interests in three developed commercial properties in Manhattan and Chicago improved with live theaters comprising six stages and ancillary retail and commercial space (our fourth live theatre was closed at the end of 2015 as part of the Union Square property redevelopment), (iv) owned a 75% managing member interest in a limited liability company which in turn owns the fee interest in Cinemas 1,2,3, (v) held for development approximately 70.4 acres of developable industrial land located next to the Auckland Airport in New Zealand, (vi) owned a 50% managing member interest in a limited liability company, which in turn owns a 202-acre property in Coachella, California that is zoned approximately 150 acres for single-family residential use (maximum 550 homes) and approximately 50 acres for high density mixed use in the U.S., that is held for development, and (vii) owned 197 acres principally in Pennsylvania from our legacy railroad business, including the Reading Viaduct in downtown Philadelphia.



Our Company transacts business in Australia and New Zealand and is subject to risks associated with changing foreign currency exchange rates. During the current year, compared to the prior year, the Australian dollar and New Zealand dollar weakened against the U.S. dollar by 2.5% in each country.



The following table sets forth the overall results of operations for the three years ended December 31, 2016, 2017, and 2018:



“nm” – not meaningful for further analysis



CONSOLIDATED RESULTS



2018 vs. 2017



Net income attributable to RDI common stockholders decreased by $16.7 million, or 54%,  to $14.4 million. This decrease was mainly due to: (i) the 2017 recognition of a non-recurring $9.2 million casualty gain attributable the insurance settlement on our Courtenay Central earthquake damage claim, (ii) a $9.4 million gain on property sales in 2017 (attributable to the sale of our Burwood Property) not repeated in 2018, (iii) an increase in non-segment general and administrative expenses of $1.3 million in 2018 iv) 844,000 decrease in other income in 2018 mainly due to a non-recurring 2017 gain on foreign exchange (FX) of $563,000 relating to short term intercompany loan balances held in foreign operations, (v) a $1.7 million decrease in Real Estate segment operating income due to non-recurring receipt in 2017 of legal fee reimbursement related to the STOMP arbitration award settlement and (vi) a  $40,000 increase in income tax expense for 2018.  These were offset by increased Cinema Exhibition segment operating income of $4.6.4 million mainly relating to higher admissions in all three jurisdictions, predominantly in the United States.    



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2017 vs. 2016



Net income attributable to RDI common stockholders increased 221% to $31.1 million for the year ended December 31, 2017.  This increase was mainly due to: (i) a non-recurring increase of $9.2 million attributable to the receipt of insurance settlement proceeds with respect to our Courtenay Central earthquake damage claim,  (ii) a $9.4 million gain on the sale of our Burwood Property, (iii) $1.8 million decrease in non-segment general and administrative expenses, (iv)  a $651,000 increase in other income mainly consisting of a gain on FX of $563,000 relating to short term intercompany loan balances held in foreign operations, and (v) offset by a decrease in Cinema Exhibit segment operating income of $ 2.5 million mainly relating to lower admissions in the United States and higher occupancy costs. 



BUSINESS SEGMENT RESULTS – 2018 vs 2017



Presented below is the comparison of the segment operating income of our two business segments for the years ended December 31, 2018 and 2017:





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The discussion for each segments follows:

Cinema Exhibition – 2018 vs. 2017







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Cinema Exhibition – The following table details our cinema segment operating results for the quarter ended December 31, 2018 and December 31, 2017, respectively.









Cinema Exhibition segment operating income



Cinema Exhibition segment operating income increased by 19%, or $6.4 million, to $39.3 million for the year ended December 31, 2018 compared to December 31, 2017, primarily driven by higher admissions for our US, Australia, and New Zealand operations coupled with improved F&B revenues in all three circuits. 



Cinema Exhibition segment operating income for the quarter ended December 31, 2018 increased by 13% or $948,000, to $8.3 million compared to quarter ended December 31, 2017, primarily driven by higher F&B revenue in the U.S. and an overall increase in attendance for the three circuits.



Measured in local currencies these increases were somewhat greater as reported results were dampened by the strengthening of the U.S. dollar in 2018.



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Revenue



Cinema revenue increased by 12%, or $30.7 million, to $294.2 million for the year ended December 31, 2018 compared to 2017. This was primarily driven by higher admissions in all three of our geographies, resulting in higher box office and F&B revenue. These increases were offset by the weakened AU and NZ dollars compared to the US dollar. Additionally, the increase in cinema revenue for 2018 was due to the industry-wide box office soft year for product in 2017 and the closure of some of our cinemas and auditoriums for renovation in 2017. Comparing the current and prior year, the Australian dollar and New Zealand dollar decreased against the U.S. dollar by 2.5% and 2.5% (on average rates), respectively. 



For the quarter ended December 31, 2018, Cinema segment revenues increased 5%, or $3.7 million, to $71.1 million compared to the same quarter in 2017.  This increase is primarily due to U.S. Circuit including the positive results from Cal Oaks, Manville, and Ward which all had improved revenue results over the same quarter in the previous year.



Our Cinemas in Australia and New Zealand also enjoyed increased revenues in local currency, offset by the strengthening of the U.S. dollar during the same two periods.



The table below is the revenue breakdown by country for each year:









Cost of services and products (excluding depreciation and amortization)

Cost of services and products for 2018 increased by 9%, or $19.8 million, to $234.8 million mainly attributable to higher film rent and advertising costs in the U.S. due to higher box office revenue and higher concession costs due to increased concession sales. Increases were driven by operations in Australia at our Newmarket Cinema location related to costs associated with the full year of operations.



For the quarter ended December 31, 2018 costs of services remained relatively flat compared to December 31, 2017.  



Cost of services and products as a percentage of gross revenue increased to 82% in 2018 from 80% in 2017.



Depreciation, amortization, general and administrative expense



Depreciation, amortization, general and administrative expense for 2018 cinema operations increased by 29% or $4.6 million, to $20.0 million compared to 2017 primarily driven by the increase in depreciation resulting from improvements in several of our cinema facilities.



Depreciation, amortization, general and administrative expenses for the quarter ended December 31, 2018 increased by 23%, or $934,000, to $5.0 million primarily from the refurbishments and capital investments in the U.S. circuit.





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Real Estate – 2018 vs. 2017













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Real Estate - The following table details our real estate segment operating results for the quarter ended December 31, 2018 and December 31, 2017, respectively









Real Estate segment operating income



Real Estate segment operating income decreased by 21%, or $1.7 million, to $6.4 million for the year ended December 31, 2018 compared to 2017, primarily due to the one-time recognition of payments in fees recovered as part of the STOMP arbitration award settlement recognized in 2017, offset by an increase in revenue in 2018 from the Newmarket and Auburn centers. Please refer below for further explanation.



Real Estate segment operating income for the quarter ended December 31, 2018 decreased by 38%, or  $931,000 primarily related to the STOMP arbitration award settlement payments in fees recovered in the Live Theatre business unit.



Revenue

The table below is the revenue breakdown by country for each year:



Real estate revenue for the year ended December 31, 2018 increased slightly by 1% or $247,000 mainly driven by increased rental income as part of the expansion of our Newmarket Village site in Brisbane, Australia.



For the quarter ended December 31, 2018, Real Estate revenue decreased by 6%, or $407,000, to $6.0 million primarily related to the Live Theatre circuit.



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Cost of services and products (excluding depreciation and amortization)

Operating expense for the Real Estate segment for 2018 increased by 5%, or  $468,000, to $9.9 million mainly driven by the full year of operations at our Newmarket ETC and increased operations at our Auburn ETC, which include additional expansion tenancies.

 

Depreciation, amortization, general and administrative expense

Depreciation, amortization, general and administrative expenses for 2018 increased by 23%, or $1.5 million, to $7.9 million, compared to the same period in 2017, primarily driven by capital improvements at the Newmarket ETC and Auburn ETC locations.



For the quarter ended December 31, 2018 depreciation, amortization, and general and administrative expenses increased by 12%, or $207,000 primarily related to a full quarter of depreciation expense for Newmarket in 2018 compared to 15 days of depreciation for Newmarket during the same quarter 2017.





NON-SEGMENT RESULTS – 2018 vs. 2017



Gain on sale of assets

Net gain on sale of assets for 2018 decreased by $9.4 million, primarily due to the gain on sale realized in 2017 on the settlement of the Burwood land of $9.3 million (AU$12.4 million) not being repeated in 2018.



General and administrative expense

Non-segment general and administrative expense for 2018 increased by $1.3 million or 7%, to $21.3 million.  This primarily relates to higher payroll and bonus related expenses (attributable to reversal in 2017 for prior year incentive compensation accruals not deemed necessary), offset by a reduction in professional services and legal fees of $209,000.    



For more information about the legal expense, please refer to Note 12 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.



Income tax expense

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law.  The Tax Act significantly changed the U.S. corporate income tax law by lowering the statutory corporate tax rate from 35% to 21%, imposed a one-time mandatory repatriation tax on deferred earnings of foreign subsidiaries, and changed how foreign earnings are subject to U.S. tax.

As the result of the Tax Act and under the guidance of the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118, we recorded a provisional tax expense of approximately $13.0 million for the impact of the Tax Act in the fourth quarter of 2017. During the fourth quarter of 2018, upon finalizing the analysis of the impact from the Tax Act, we recorded a tax benefit of $2.3 million as an adjustment to the provisional estimate, for a net tax impact of $10.7 million.  The $2.3 million is comprised of an adjustment of $1.2 million to the impact of the one-time mandatory repatriation tax on previously undistributed earnings of our foreign subsidiaries and $1.1 million from the re-measurement of federal net deferred tax liabilities resulting from the reduction in the U.S. statutory corporate tax rate.



Income tax expense decreased by $40,000, or 1%, compared to 2017,  mainly due to benefits recognized in 2017 as the result of the dissolution of a non-operating overseas subsidiary, partially offset by the provisional unfavorable effect of the Tax Act.  Please refer to Note 9 of the Notes to Consolidated Financial Statements in Part II of this Annual Report for further information.



Interest expense, net

Interest expense (net of interest income) increased by $643,000, or 10%, mainly due to an increase in the average balance outstanding to fund our capital projects. 



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BUSINESS SEGMENT RESULTS – 2017 vs. 2016

Presented below is the comparison of the segment operating income for our two business segments for the years ended December 31, 2017 and 2016:









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The discussion for each segment follows:

Cinema Exhibition – 2017 vs. 2016









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Cinema Exhibition - The following table details our cinema segment operating results for the quarter ended December 31, 2017 and December 31, 2016, respectively.







Cinema Exhibition segment operating income



Cinema Exhibition segment operating income decreased by 7%, or $2.5 million, to $33.0 million for the year ended December 31, 2017 compared to December 31, 2016, primarily driven by lower admissions for our US and New Zealand operations partially offset by improved F&B revenues. The higher revenues of our Australia cinemas and favorable foreign currency movements of our foreign operations helped to offset lower revenues in the U.S. Refer below for further explanations.



For the quarter ended December 31, 2017 compared to December 31, 2016, Cinema Exhibition operating income decreased by 18%, or $1.6 million primarily resulting from four of our stronger cinemas either being closed, or partially closed, for significant renovations, which included the installation of recliner seats and conversion to TITAN LUXE during the fourth quarter.





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Revenue



Cinema revenue increased by 3%, or $6.5 million, to $263.5 million for the year ended December 31, 2017 compared to year ended 2016. This was primarily driven by higher admissions in our Australian circuit resulting in higher box office and F&B revenue. F&B revenues were also up in both the United States and New Zealand driven by increased spend per patron due to our expanded F&B offering. These increases were further enhanced as a result of the appreciation of the AU and NZ dollars compared to the US dollar. These items were partially offset by lower admits in the U.S. due in part to industry-wide box office softening in 2017 and the cinema closure resulting from our cinema renovation program. Comparing the current and prior year, the Australian dollar and New Zealand dollar increased against the U.S. dollar by 3.1% and 2.0% (on average rates), respectively.  Shown below is the revenue breakdown by country:









Cinema Revenue for the quarter ended December 31, 2017 increased by 5%, or $3.1 million, to $67.4 million compared to the same quarter ended December 31, 2016, despite the fact that some Pearlridge auditoriums were closed during the quarter, generating a decrease in revenue $1.5 million, Australia generated a 16% increase in revenue and New Zealand generated a 20% increase in revenue.



Cost of services and products (excluding depreciation and amortization)



Cost of services and products for 2017 increased by 4%, or $9.1 million, to $215.0 million mainly attributable to higher film rent and advertising costs in Australia due to higher box office revenue, higher concession costs due to increased concession sales, additional operating costs amounting to $3.3 million associated with Olino, including an additional $1.8 million in occupancy cost compared to 2016. Further movements were driven by an increase in occupancy expenses of $765,000 as a result of increases in rents associated with the exercise of certain lease options, increased staff costs due to minimum wage increases and a move towards enhanced food & beverage offerings, and costs associated with the opening of our new Newmarket cinema in Brisbane, Australia. In addition, the impact of the strengthening Australian and New Zealand dollars relative to the U.S. dollar further contributed to the cost increase. These were partially offset by lower film rent and advertising costs in the United States and New Zealand due to lower box office revenue.

Certain costs incurred in quarters one to three of 2017 have, in quarter four, crystallized as rent liabilities to be paid, and as such have been reclassified from ‘other operating expenses’ to ‘occupancy costs’. These costs have no material impact on our financial results for the periods concerned.



Cost of services and products as a percentage of gross revenue increased in 2017 to 82% from 80% in 2016.



Cost of services and products for the quarter ended December 31, 2017 compared to the quarter ended December 31, 2016 increased by 9%, or $4.4 million, to $55.9 million.  The increase is primarily due to higher occupancy costs in the U.S. coupled with higher film rents and advertising in Australia and New Zealand.



Cost of services and products as a percentage of gross revenue increased in for the fourth quarter 2017 to 83% from 80% in 2016.



Depreciation, amortization, general and administrative expense

Depreciation, amortization, general and administrative expense for 2017 remained relatively unchanged compared to 2016.  The increase in depreciation resulting from improvements in several of our cinema facilities was offset by savings in general and administrative expenses.



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Real Estate – 2017 vs. 2016











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Real Estate -For the quarter ending December 31, 2017 v 2016, the following results of operations for the Real Estate segment are as follows:







Real Estate segment operating income



Real Estate segment operating income increased by 11%, or $834,000, to $8.2 million for the year ended December 31, 2017 compared to 2016, primarily attributable to: (i) $1.4 million in fees recovered as part of the STOMP arbitration award settlement ($1.8 million of fees recovered revenue in 2017, including the final settlement payment received in March 2018, less $415,000 in legal fee cost recovery recorded in 2016). This was offset by an increase in general and administrative costs.  Please refer below for further explanation.



For the quarter ended December 31, 2017 real estate operating income increased 99% to $2.5 million compared to the same period in 2016.  In the fourth quarter of 2017, we recognized STOMP arbitration award settlement for approximately $700,000 for proceeds received in the first quarter in 2018.   Additionally, for the fourth quarter 2017, the receipt of property rental for a full quarter at Courtenay were not received in 2016 due to the Wellington earthquake.





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Revenue



Real estate revenue for the year ended December 31, 2017 increased by 13% or $2.7 million, mainly driven by fees recovered of $1.8 million in relation to the STOMP arbitration award settlement, increased rental income as part of the expansion of our Newmarket site in Brisbane Australia, as well as additional rental income from the Newmarket office building purchased in November 2016, the recognition of business interruption insurance on our Courtenay Central property and parking structure, as well as the impact of the favorable foreign exchange rates on our Australia and New Zealand operations.  This was partially offset by the decrease in revenue from our Courtenay Central ETC due to damage suffered in the Wellington earthquake and result in closure of the center, and a reduction in revenue from our live theatre operations.  Shown below is the revenue breakdown by country:







Revenues for the quarter to date ended December 31, 2017 increased by 26%, or $1.3 million to $6.4 million compared to the same period in 2016.  This is primary due to a 29% increase in the New Zealand circuit, offset by reduced real estate revenues in the U.S. circuit due to redevelopment expansion projects of several of our properties. 



Cost of services and products (excluding depreciation and amortization)



Operating expense for 2017 increased by 4%, or $394,000, as a result of a number of pre-opening costs associated with our recently developed Newmarket Village site. This was partially offset by a reduction in costs relating to our live theaters and Courtenay Central during the period it was closed. 



Depreciation, amortization, general and administrative expense



Depreciation, amortization, general and administrative expense for 2017 increased by 29%, or $1.5 million, primarily driven by the increased salary costs due to staff expansion as we continue to develop our Real Estate capacity, including costs that had previously been incurred by our Cinema segment, as well as an increase in depreciation expense due to recent acquisitions and property enhancements. This has been partially offset by the reduction in doubtful debt expense.



Depreciation, amortization, general and administrative expenses for the quarter ended December 31, 2017 compared to the same period increased  $331,000 primarily due to increased general and administrative expenses in the U.S.



NON-SEGMENT RESULTS – 2017 vs. 2016



Gain on sale of assets

Net gain on sale of assets for 2017 increased by $9.0 million, primarily due to the gain on sale realized in 2017 on the settlement of the Burwood land of $9.3 million (AU$12.4 million), compared to the gain from the final closing of the second sale agreement of the Taupo property in New Zealand in the amount of $393,000 (NZ$585,000) realized in Q1, 2016.



General and administrative expense

Non-segment general and administrative expense for 2017 decreased by $1.8 million or 8%, to $19.9 million.  This primarily relates to a reduction in professional services mainly relating to non-recurring one-off items incurred in 2016 including additional expenses incurred in connection with the 2015 year-end audit ($960,000) and expenses incurred in connection with the change in status of certain executives ($400,000) as well as 2017 savings in legal fees, and reduced occupancy costs due to the purchase of our new company headquarters. These were offset by additional costs incurred in our Australian and New Zealand corporate offices due to additional staff costs and the effects of foreign exchange movements. 



Higher legal expenses in 2016 mainly relate to the defense of the derivative litigation, the arbitration of certain claims related to the termination of James J. Cotter, Jr. as our President and Chief Executive Officer and on a more limited basis, for the work undergone to improve corporate governance matters.  While the legal costs incurred by the Company were undoubtedly high, we believe that the majority of these costs were forced upon the Company as it became necessary to vigorously defend the Company’s position in the derivative litigation and to resolve Mr. Cotter, Jr.’s claims relating to his termination.  As such, these costs should be treated as non-recurring in nature.



For more information about the legal expense, please refer to Note 12 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.

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Casualty Gain

The $9.2 million represents the gain recognized on final insurance settlement relating to the earthquake damage on our Courtenay Central parking structure (excluding business interruption insurance recoveries). Our parking structure at Courtenay Central in Wellington, New Zealand was significantly damaged by the earthquake on November 14, 2016 and was subsequently demolished for safety reasons.  We filed an insurance claim to recover the impairment loss on the parking structure and the ancillary demolition costs. Refer to Note 20 – Insurance Recoveries on Impairment and Related Losses due to Earthquake for further details.



Income tax expense

Income tax expense decreased by $758,000 or 18%, compared to 2016, mainly due to benefits recognized as the result of the dissolution of a non-operating overseas subsidiary, partially offset by an increase in pre-tax income and the provisional unfavorable effect of the Tax Act.  Please refer to Note 9 of the Notes to Consolidated Financial Statements in Part II of this Annual Report for further information.



Interest expense, net

Interest expense (net of interest income) decreased by $588,000, or 9%, compared to 2016, mainly due to a reduction in the average balance outstanding.  This was achieved due to the receipt of the insurance proceeds from the Courtenay Central parking structure of $20.0 million in May 2017, allowing us to fully pay down our Westpac loan in New Zealand.  Interest income also includes the $115,000 of interest levied on the STOMP arbitration award settlement.

 

LIQUIDITY AND CAPITAL RESOURCES



Our cinema exhibition business plan is to enhance our current cinemas where it is financially reasonable to do so; develop our specialty cinemas in select markets; expand our food and beverage offering, and continue on an opportunistic basis, to identify, develop, and acquire cinema properties that allow us to leverage our cinema expertise over a larger operating base. 



Our real estate business is to complete the redevelopment of our Union Square property; to reassess and master-plan the Cinemas 1,2,3 property for redevelopment as a stand-alone 96,000 square foot mixed use property and in the interim to continue to use it as a cinema; to continue the build-out of our Newmarket Village and Auburn ETCs and the master planning of the expansion of our Townsville ETC in Australia; to master plan and consider the redevelopment of our Courtenay Central site in New Zealand into an urban entertainment center with a focus on cinema exhibition, food and beverage, and grocery store uses; and in Manukau, New Zealand, to develop in concert with other major land owners, of plans for the development of the infrastructure needed to support the construction of income-producing improvements; and to continue to be sensitive to opportunities to convert our entertainment assets to higher and better uses, or, where appropriate, to dispose of such assets.  We will also continue to explore potential synergistic acquisitions that may not readily fall into either our cinema or real estate segment.



The success of our Company is dependent on our ability to execute these business plans effectively through our available resources (both cash and available borrowing facilities) while still timely addressing our liquidity risk.  Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due.  At the present, our financial obligations arise mainly from capital expenditure needs,  working capital requirements, and debt servicing requirements. We manage the liquidity risk by ensuring our ability to generate sufficient cash flows from operating activities and to obtain adequate, reasonable financing or extension of maturity dates under reasonable arrangements, and/or to convert non-performing or non-strategic assets into cash. 



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The table below presents the changes in our total available resources (cash and borrowings), debt-to-equity ratio, working capital and other relevant information addressing our liquidity for the last five years:









On March 2, 2017, the Board of Directors authorized a stock repurchase program to repurchase up to $25.0 million of Reading’s Class A Stock.  The Board on March 14, 2019, extended that program to March 2, 2021. There is currently $16.2 million of capacity remaining in that authorization. 



We manage our cash, investments and capital structure so we are able to meet the short-term and long-term obligations of our business, while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable investment and financing within the overall constraints of our financial strategy.   In recent years, our treasury management has been focused on more aggressive cash management using cash balances to reduce debt.  In earlier years, we maintained significant cash balances in our bank accounts.  We have used cash generated from operations and other excess cash, to the extent not needed for any capital expenditures, to pay down our loans and credit facilities providing us some flexibility on our available loan facilities for future use and thereby, reducing interest charges.



Refer to Note 10 – Borrowings in the Consolidated Financial Statements for further details on our various borrowing arrangements.



At December 31, 2018, our consolidated cash and cash equivalents totaled $13.1 million. Of this amount, $7.6 million, $3.5 million and $2.0 million were held by our U.S., Australian and New Zealand operations, respectively.  Our current intention is to reinvest indefinitely Australian earnings but do not have the same plan for New Zealand earnings. If the Australian earnings were used to fund U.S. operations, they could be subject to additional state income taxes upon repatriation.



We have historically funded our working capital requirements, capital expenditures and investments in individual properties primarily from a combination of internally generated cash flows and debt.  As noted in the preceding table, we have $55.6 million unused capacity of available corporate credit facilities at December 31, 2018.  In addition, we have $30.3 million unused capacity for Union Square development uses and construction funding.    



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The change in cash and cash equivalents for the three years ended December 31, 2018 is as follows:







Operating activities



2018 vs. 2017

Cash provided by operating activities for 2018 increased by $8.8 million, or 37%, to $32.6 million, primarily driven by $6.6 million increase in net operating assets and $1.8 million increase in cash inflows from operating activities.



2017 vs. 2016: Cash provided by operating activities for 2017 decreased by $6.3 million or 21%, to $23.9 million, primarily driven by a $16.4 million reduction in net working capital assets, partially offset by a $10.1 million increase in operational cash flows as a result of the decrease in corporate General and Administrative expense.    



Investing activities



2018: In 2018, the $64.9 million used in investing activities was mainly related to $63.5 million in capital expenditures, primarily for expenditures in the U.S. for $45.9 million (Comprised mainly of Union Square, Mililani, Manville, and Digital Projector purchase) and $15.9 million in Australia (Comprised mainly of Newmarket, Auburn, Elizabeth and Charlestown). 



2017: In 2017, the $6.8 million of cash used in investing activities was mainly related to the $65.9 million capital expenditures, which includes the redevelopment and expansion of our Newmarket Village ETC in Brisbane, Australia, the on-going development of our Union Square project, and as well as the upgrade of a number of our existing cinemas. We also used $3.7 million towards the demolition of the Courtenay Central car parking structure in Wellington, New Zealand.  These are offset by the $44.7 million received from the sale of our Burwood property as well as the $18.4 million final insurance settlement on our Courtenay Central parking structure.



Financing activities

2018: The cash provided by financing activities of $33.2 million in 2018 was primarily related to loan proceeds of $36.5 million; offset by repurchase of stock of $2.3 million as part of the 2017 $25.0 million stock buyback program.



2017: The $22.0 million of cash used in financing activities was primarily due to the $15.4 million in loan repayments (net of $91.0 million new loan advances), and $6.5 million used as part of the 2017 $25.0 million stock buyback program.

 

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES



The following table provides information with respect to the maturities and scheduled principal repayments of our recorded contractual obligations as of December 31, 2018:











Litigation



We are currently involved in certain legal proceedings and, as required, have accrued estimates of probable and estimable losses for the resolution of these claims. 



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Where we are the plaintiffs, we expense all legal fees on an on-going basis and make no provision for any potential settlement amounts until received.  In Australia, the prevailing party is usually entitled to recover its attorneys’ fees, which recoveries typically work out to be approximately 60% of the amounts actually spent where first-class legal counsel is engaged at customary rates.  Where we are a plaintiff, we have likewise made no provision for the liability for the defendant’s attorneys' fees in the event we are determined not to be the prevailing party.



Where we are the defendants, we accrue for probable damages that insurance may not cover as they become known and can be reasonably estimated.  In our opinion, any claims and litigation in which we are currently involved are not reasonably likely to have a material adverse effect on our business, results of operations, financial position, or liquidity.  It is possible, however, that future results of the operations for any particular quarterly or annual period could be materially affected by the ultimate outcome of the legal proceedings.  



Please refer to Note 12 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report for more information.



Off-Balance Sheet Arrangements



Other than the operating lease arrangements detailed in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report, there are no off-balance sheet arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in the financial condition, revenue or expense, results of operations, liquidity, capital expenditures or capital resources.



FINANCIAL RISK MANAGEMENT



Currency and interest rate risk



Our Company’s objective in managing exposure to foreign currency and interest rate fluctuations is to reduce volatility of earnings and cash flows in order to allow management to focus on core business issues and challenges.



We currently manage our currency exposure by creating, whenever possible, natural hedges in Australia and New Zealand.  This involves local country sourcing of goods and services, as well as borrowing in local currencies to match revenues and expenses. Since we intend to conduct business on a self-funding basis (except for funds used to pay an appropriate share of our U.S. corporate overhead), we do not believe the currency fluctuations present a material risk to the Company.  As such, we do not use derivative financial instruments to hedge against the risk of foreign currency exposure.  



Our exposure to interest rate risk arises out of our long-term floating-rate borrowings.  To manage the risk, we utilize interest rate derivative contracts to convert certain floating-rate borrowings into fixed-rate borrowings. It is our Company’s policy to enter into interest rate derivative transactions only to the extent considered necessary to meet its objectives as stated above. Our Company does not enter into these transactions or any other hedging transactions for speculative purposes.



Inflation



We continually monitor inflation and the effects of changing prices.  Inflation increases the cost of goods and services used.  Competitive conditions in many of our markets restrict our ability to recover fully the higher costs of acquired goods and services through price increases.  We attempt to mitigate the impact of inflation by implementing continuous process improvement solutions to enhance productivity and efficiency and, as a result, lower costs and operating expenses.  In our opinion, we have managed the effects of inflation appropriately, and, as a result, it has not had a material impact on our operations and the resulting financial position or liquidity.



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CRITICAL ACCOUNTING ESTIMATES



We believe that the application of the following accounting policies requires significant judgments and estimates in the preparation of our Consolidated Financial Statements and hence, are critical to our business operations and the understanding of our financial results:



Impairment of long-lived assets, including goodwill and intangible assets



We review long-lived assets, including goodwill and intangibles, for impairment as part of our annual budgeting process, at the beginning of the fourth quarter, and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. 





Besides the write-down of the carrying amount of our parking structure adjacent to our Courtenay Central ETC in Wellington, New Zealand due to earthquake damage during the 4th quarter of 2016, no other impairment losses were recorded for long-lived and finite-lived intangible assets for the three years ended December 31, 2018.  Refer to Note 20 – Insurance Recoveries on Impairment and Related Losses due to Earthquake for further details.





No impairment losses were recorded for goodwill and indefinite-lived intangible assets for the three years ended December 31, 2018.



Business Combination



In recent years, our business acquisition efforts have been focused on our real estate segment.  For real estate acquisitions meeting the definition of a “business” in accordance with ASC 805, Business Combinations, the assets acquired and the liabilities assumed are recorded at their fair values as of the acquisition date.  To accomplish this, we typically obtain third party valuations to allocate the purchase price to the assets acquired and liabilities assumed, including both tangible and intangible components.  The determination of the fair values of the acquisition components and its related determination of the estimated lives of depreciable tangible assets and amortizing intangible assets/liabilities require significant judgment and several considerations, as described in more detail in the section “Business Acquisition Valuation and Purchase Price Allocation” in Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements.



Recognition of Gift Card Breakage Income



Generally, our revenue recognition is not assessed as an area requiring significant judgment or estimation. Revenues from ticket and food and beverage sales are recognized when the service is provided – that is when the show has commenced, or the food provided. Transaction fees from online sales are recorded at the time of the online transaction.  In regards our real estate business, we execute lease contracts for existing tenancies, but revenue is recognized on a straight-line basis over the lease term. 



Prior to 2014, we recognized revenue for our gift cards and gift certificates issued in the U.S., which do not expire and have no dormancy fees, only when they were redeemed. At the end of fourth quarter of 2016, we determined that we have sufficient historical information to recognize breakage income on them.  Based on our review of our own historical redemption patterns using company-wide data accumulated over many years, we considered it preferable to estimate a certain percentage of our gift card and gift certificate sales to be recorded as breakage income as it better reflects of our historical redemption patterns and our earnings process. 



Subsequent to this, on January 1, 2018, we adopted the new accounting standard ASC 606 Revenue from Contracts with Customers using the modified retrospective method. This adoption changed our revenue recognition policies for gift card breakage revenue to conform to the requirements of the new accounting standard. This adoption is described in detail in the section Note 2 – Summary of Significant Accounting Policies – Accounting Changes.

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Tax valuation allowance and deferred taxes We record our estimated future tax benefits and liabilities arising from the temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss carry-forwards.  We estimate the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. As of December 31, 2018, we had recorded approximately $32.9 million of deferred tax assets (net of $1.6 million deferred tax liabilities) related to the temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss carry-forwards and tax credit carry-forwards. These deferred tax assets were offset by a valuation allowance of $6.7 million resulting in a net deferred tax asset of $26.2 million.  The recoverability of deferred tax assets is dependent upon our ability to generate future taxable income.



Contingencies



For loss contingencies, we record any loss contingencies when there is a “probable” likelihood that the liability had been incurred and the amount of the loss can be reasonably estimated. 



For other contingencies, 







In regards to our significant contingencies during 2018:



Legal contingencies



From time-to-time, we are involved with claims and lawsuits arising in the ordinary course of our business that may include contractual obligations, insurance claims, tax claims, employment matters, and anti-trust issues, among other matters. We provide accruals for matters that have probable likelihood of occurrence and can be properly estimated as to their expected negative outcome. We do not record expected gains until the proceeds (either in cash or other forms of payments) are received by us.  Please refer to Note 12 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report for more information on legal matters.



For a summary of our significant accounting policies, including the critical accounting estimates discussed above, see Note 2 to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.

 

Item 7A – Quantitative and Qualitative Disclosure about Market Risk



The Securities and Exchange Commission requires that registrants include information about potential effects of changes in currency exchange and interest rates in their Form 10-K filings.  Several alternatives, all with some limitations, have been offered.  The following discussion is based on a sensitivity analysis, which models the effects of fluctuations in currency exchange rates and interest rates. This analysis is constrained by several factors, including the following:



Although the results of such an analysis may be useful as a benchmark, they should not be viewed as forecasts. 



At December 31, 2018, approximately 36% and 14% of our assets were invested in assets denominated in Australian dollars (Reading Australia) and New Zealand dollars (Reading New Zealand), respectively, including approximately $5.5 million in cash and cash equivalents.  At December 31, 2017, approximately 40% and 15% of our assets were invested in assets denominated in Australian and New Zealand dollars, respectively, including approximately $4.5 million in cash and cash equivalents. 



Our policy in Australia and New Zealand is to match revenues and expenses, whenever possible, in local currencies.  As a result, we have procured in local currencies a majority of our expenses in Australia and New Zealand.  Despite this natural hedge, recent movements in foreign currencies have had an effect on our current earnings.  Although foreign currency has had an effect on our current earnings, the effect of the translation adjustment on our assets and liabilities noted in our other comprehensive income was an decrease of $14.9 million for the year ended December 31, 2018.  As we continue to progress our acquisition and development activities in Australia and New Zealand, that the foreign currency effect on our earnings may be significant in the future.



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Historically, our policy has been to borrow in local currencies to finance the development and construction of our long-term assets in the U.S., Australia and New Zealand whenever possible.  As a result, the borrowings in local currencies have provided somewhat of a natural hedge against the foreign currency exchange exposure.  Even so, and as a result of our issuance of fully subordinated Trust Preferred Securities in 2007, and their subsequent partial repayment, approximately 63% and 73% of our Australian and New Zealand assets, respectively, remain subject to such exposure, unless we elect to hedge our foreign currency exchange between the U.S. and Australian and New Zealand dollars.  If the foreign currency rates were to fluctuate by 10%, the resulting change in Australian and New Zealand assets would result in an increase or decrease of $9.9 million and $4.5 million, respectively, and the change in our net income for the year would be $1.4 million and $43,000, respectively.  Presently, we have no plan to hedge such exposure.



With changes in the tax landscape caused by the Tax Cuts and Jobs Act of 2017, we may reconsider our strategy for financing operations and redevelopment projects in the three countries we are invested in, which may include increased borrowings from banks in higher-tax countries, and dividends to the U.S. from foreign subsidiaries, being mindful of withholding taxes on interest, and thin capitalization limitations on interest deduction in Australia and New Zealand.



We record unrealized foreign currency translation gains or losses that could materially affect our financial position.  We have accumulated unrealized foreign currency translation gains of approximately $8.7 million and $23.6 million as of December 31, 2018 and 2017, respectively.



Historically, we maintained most of our cash and cash equivalent balances in short-term money market instruments with original maturities of six months or less.  Some of our money market investments may decline in value if interest rates increase.  Due to the short-term nature of such investments, a change of 1% in short-term interest rates would not have a material effect on our financial condition.



We have a combination of fixed and variable interest rate loans. In connection with our variable interest rate loans, a change of approximately 1% in short-term interest rates would have resulted in approximately $1.4 million increase or decrease in our 2018 interest expense.

 

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Item 8 – Financial Statements and Supplementary Data



 

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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Board of Directors and Stockholders

Reading International, Inc.



Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, our management believes that the Company’s internal control over financial reporting is effective as of December 31, 2018.



The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report, which is included herein.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

(CONSOLIDATED FINANCIAL STATEMENTS)



Board of Directors and Stockholders

Reading International, Inc.



Opinion on the financial statements



We have audited the accompanying consolidated balance sheets of Reading International, Inc.  and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 18, 2019 expressed an unqualified opinion.



Basis for opinion



These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ GRANT THORNTON LLP



We have served as the Company’s auditor since 2011.



Los Angeles, CA

March 18, 2019





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

(INTERNAL CONTROL OVER FINANCIAL REPORTING)



Board of Directors and Stockholders

Reading International, Inc.



Opinion on internal control over financial reporting



We have audited the internal control over financial reporting of Reading International, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated March 18, 2019  expressed unqualified opinion on those financial statements.



Basis for opinion



The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Discussion and Analysis Report of Reading International Inc. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



Definition and limitations of internal control over financial reporting



A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ GRANT THORNTON LLP



Los Angeles, California

March 18, 2019



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READING INTERNATIONAL, INC. and SUBSIDIARIES

Consolidated Balance Sheets as of December 31, 2018 and 2017

(U.S. dollars in thousands, except share information)







The accompanying Notes are an integral part of the Consolidated Financial Statements. 

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READING INTERNATIONAL, INC. and SUBSIDIARIES

Consolidated Statements of Operations for the Three Years Ended December 31, 2018

(U.S. dollars in thousands, except share and per share data)







The accompanying Notes are an integral part of the Consolidated Financial Statements.



 

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READING INTERNATIONAL, INC. and SUBSIDIARIES

Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2018

(U.S. dollars in thousands)





The accompanying Notes are an integral part of the Consolidated Financial Statements.