Capstone Equities Releases Letter to Reading International Board of Directors

NEW YORK, June 6, 2013 /PRNewswire/ -- The following is a letter from Capstone Equities to Reading International Board of Directors demanding a review of strategic alternatives.

Members of the Board of Directors

Reading International, Inc.
6100 Center Drive, Suite 900
Los Angeles, California 90045

Dear Members of the Board:

Capstone Equities Capital Management ("Capstone") and its affiliates are a significant shareholder of Reading International Inc. ("Reading" or the "Company").  We have serious concerns with respect to the capital structure, Board composition, pervasive conflicts of interest and general mismanagement of Reading.  We further believe that following Reading's 2013 annual meeting of shareholders ("Reading's 2013 Annual Meeting") one thing has become very apparent, Capstone is not the only shareholder whose patience has run thin because of management's poor decisions, related-party transactions and lack of transparency.

Reading's inability or unwillingness to act to enhance shareholder value has led to numerous shareholders selling their interests in the Company.  As of today, no investor or institution, except Reading's Chairman and CEO, James Cotter, holds more than 5% of the Company's shares.  We find this to be telling of the investment public's perception of Reading's management and Board of Directors (the "Board").

We believe that just like us many of Reading's shareholders are questioning the benefits of having a real estate business within the same corporate structure as a cinema business given the minimal synergies that exist between the two.  In our view, Reading's Board should immediately hire a reputable investment bank to explore all available strategic initiatives to maximize value, including divesting or spinning off the cinema business.  Given the numerous value creating opportunities available to the Company and the history of related-party transactions at Reading, we caution the Board and management to refrain from committing to any significant partnerships or transactions prior to a full evaluation of the strategic opportunities.

We further outline below some of our concerns and actions we urge the Board to take to rectify the serious issues at Reading.

Recapitalize So Each Share Has One Vote:

Currently, Mr. Cotter and his family members own more than 75% of Reading's outstanding shares of Class B common stock (the "Class B Shares").  While the Class B Shares have the same per share economic interest in the Company as the Class A shares of common stock (the "Class A Shares"), such shares provide the Class B shareholders with effective control over the Company through their ability to vote alone on the election of the entire Board.

In our view, the Company and all of its shareholders would be best served if all of the Class B Shares were repurchased by the Company so that Reading would have a simpler and more balanced capital structure. As holders of the Class A Shares, we readily acknowledge that the Class B Shares warrant a premium above the trading price of the Class A Shares as a result of their ability to elect the Board. However, given that there are only 1,495,490 Class B Shares outstanding, even a significant premium for the Class B Shares would represent only a modest per share cost for the approximately 22,000,000 Class A Shares outstanding. The net effect of such a share repurchase would be to fully and fairly compensate the holders of the Class B Shares for relinquishing the power to elect the Board while creating significant value for all the Company's shareholders through the establishment of a more customary one share/one vote capital structure. 

Given that Reading's real estate portfolio is worth $10 a share, Capstone would even be amendable to a transaction that contemplates the exchange of the assets of Reading's cinema business for Class B Shares.  We believe a committee of independent directors should be immediately formed to consider a repurchase or other recapitalization transaction and to advise the Board on, among others, the appropriate premium to be paid for the Class B Shares.

Change Board Composition:

We have serious concerns about the lack of independence of this Board and its inexperience or inability to act in the best interests of shareholders. With the exception of one director, who serves as a director responsible for Reading's New Zealand subsidiary, not a single independent director has any direct commercial real estate experience.  Thus, we believe as a result members of the Board are largely unable to credibly dispute and counter Mr. Cotter's views.  For example, in the past, Reading had announced its intention to sell its New York City assets.  At the time, Capstone made an offer to acquire Cinema 1, 2, 3 & Union Square Theatre.  However, the Board and management's failure to engage in negotiations with us made it abundantly clear that they never intended to sell the assets in good faith.  We believe that Reading's Board does not have the wherewithal to evaluate New York City real estate projects and, as a result, Reading's shareholders may be left waiting for years on Mr. Cotter to decide on a course of action.

In addition, over half of the so called "independent" directors have direct ties to Mr. Cotter both professionally and personally, putting in doubt their independence.  Our concerns are further heightened by the Board's flat refusal despite our significant ownership to grant our request to inspect records of related-party transactions or to discuss our concerns about management's performance and instead hide behind legal maneuvers.  Who should shareholders speak to on these issues if not the independent members of the Board?  We believe, the Board needs to be improved by the addition of new independent directors who have the support of large shareholders.  Such new independent directors would not only respect and invite the views of shareholders, but also have the commercial real estate expertise necessary and the commitment to hold management accountable for their poor execution. We believe the Board must be significantly reconfigured so that shareholder confidence in the Board would be restored.

Reevaluate Capital Allocation:

In the past year Reading has invested over $15mm in its cinema business to update and digitalize its screens in the United States, New Zealand, and Australia.  Capstone firmly believes that this was and still is a poor use of funds that continues to hurt shareholder value.  At Reading's 2013 Annual Meeting, Mr. Cotter declared that each dollar earned through real estate was worth more than earnings through the cinema business.  Yet, Reading plans to divert capital that could go towards developing its major commercial real estate assets in New York City and Australia towards digitalizing another 160 screens over the next 12 months. 

Additionally, the funds spent by Reading on its cinema business would have been better served buying back shares and thus buying the Company's valuable real estate portfolio at a substantial discount for the benefit of all shareholders.  Capstone believes that using that capital to fund a buy back would have been accretive to shareholders by about 15%.

Eliminate Conflicts of Interest:

Reading's shareholders have waited patiently for more than three years for a plan from management on how to realize the value of the Company's real estate portfolio.  In that time the stock has languished, trading at close to 40% of net asset value.  Meanwhile, instead of holding management accountable for its failure to devise and pursue a coherent strategy, various members of the Board have engaged in related-party transactions with family members that have further destroyed value.  By means of example, one of Reading's most valuable assets, The Union Square Theatre, is leased to Margaret Cotter, daughter of Chairman, James Cotter, at below market rents. 

We are gravely concerned about the persistent conflict of interest and related-party transactions that erode shareholder value.  Accordingly, Capstone hereby reaffirms its demand to inspect the books, records and documents of the Company relating to certain potential conflicts.  The purpose of its demand is to allow Capstone to make an independent determination as to the existence and extent of any conflict of interest, improper relationship, materially inadequate disclosure or reporting violation with respect to Mr. Cotter's or any other officer's or director's interest in related transactions with the Company.  Capstone's request is not to further our own interests but to serve the best interests of all shareholders.

Capstone is steadfast in its resolve to see value delivered to Reading's stockholders.  If the Company does not immediately and genuinely commit to increase stockholder value by taking actions in furtherance of the proposals we have outlined above, we will be forced to take the appropriate steps to defend and enhance our investment.  Capstone strongly advises that the Board take the above measures and aggressively pursue a coherent strategy for raising Reading's currently depressed stock price.

Regards,
Capstone Equities Capital Management LP

By: Capstone Equities GP LLC, its General Partner

By:
Name: Justin Adelipour
Title: Managing Member

SOURCE Capstone Equities, LLC