Reading International - 10-Q quarterly report FY

 

(Mark One)

(Exact name of Registrant as specified in its charter)

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

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 8, 2006, there were 20,918,505 shares of Class A Nonvoting Common Stock, $0.01 par value per share and 1,495,490 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

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

     The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission for interim reporting. As such, certain information and footnote disclosures typically required by US GAAP for complete financial statements have been condensed or omitted. There have been no material changes in the information disclosed in the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 Annual Report”). The financial information presented in this quarterly report on Form 10-Q for the period ended March 31, 2006 (the “March Report”), including the information under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with our 2005 Annual Report which contains the latest audited financial statements and related footnotes.

     In the opinion of management, all adjustments of a normal recurring nature considered necessary to present fairly in all material respects our financial position, results of our operations and cash flows as of and for the three months ended March 31, 2006 have been made. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results of operations to be expected for the entire year. Certain amounts in previously issued financial statements have been reclassified to conform to the 2006 presentation.

     In our Consolidated Statement of Cash Flows for the three months ended March 31, 2005, we changed the classification of equity earnings of unconsolidated joint ventures to present such returns as an operating activity. We previously presented such amounts as an investing activity. We reclassified distributions from unconsolidated joint ventures to be consistent with our presentation that resulted in a net decrease to investing cash flows for the three months ended March 31, 2005 of approximately $218,000 and a corresponding net increase to operating cash flows, from the amounts previously reported. In addition, our March 31, 2005 prior year statement of operations amounts have been reclassified in order to conform to the discontinued operations presentation (see Note 17 – Discontinued Operations and Assets Held For Sale).

     We have a long-term incentive stock option plan that provides for the grant to eligible employees and non-employee directors incentive stock options and non-qualified stock options to purchase shares of the Company’s Class A Nonvoting Common Stock. During the first quarter of 2006, we issued for cash to an

employee of the corporation under this stock based compensation plan 12,000 shares and 15,000 shares of Class A Nonvoting Common Stock at exercise prices of $3.80 and $2.76 per share, respectively.

     Prior to January 1, 2006, we accounted for stock-based employee compensation under the intrinsic value method as outlined in the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations while disclosing pro-forma net income and pro-forma net income per share as if the fair value method had been applied in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under the intrinsic value method, we did not recognize any compensation expense when the exercise price of the stock options equaled or exceeded the market price of the underlying stock on the date of grant. We issued all stock option grants with exercise prices equal to, or greater than, the market value of the common stock on the date of grant. No stock compensation expense was recognized in the consolidated statements of operations through December 31, 2005.

     Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (SFAS 123(R)) which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such costs be measured at the fair value of the award. This statement was adopted using the modified prospective method, which requires the Company to recognize compensation expense on a prospective basis for all newly granted options and any modifications or cancellations of previously granted awards. Therefore, prior period consolidated financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based payment awards, modifications to awards, and cancellations of awards, expense is also recognized to reflect the remaining vesting period of awards that had been included in pro-forma disclosures in prior periods. We estimate the valuation of stock based compensation using a Black-Scholes option pricing formula.

     When the Company’s tax deduction from an option exercise exceeds the compensation cost resulting from the option, a tax benefit is created. SFAS 123(R) requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. Had we previously adopted SFAS 123(R), there would have been no impact on our presentation of the consolidated statement of cash flows because there were no recognized tax benefits relating to the three months ended March 31, 2005. For the three months ended March 31, 2006, there was no impact to the consolidated statement of cash flows because there were also no recognized tax benefits during this period.

     SFAS No. 123(R) requires Companies to estimate forfeitures. Based on our historical experience and the relative market price to strike price of the options, we do not currently estimate any forfeitures of vested or unvested options that would result in a cumulative adjustment from a change in accounting principle for the three months ended March 31, 2006.

     In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS No. 123(R). The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool or APIC pool related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R).

     In accordance with SFAS No. 123(R), we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility and the expected life of the options. The dividend yield is excluded from the calculation, as it is our present intention to retain all earnings. We expense the estimated grant date fair values of options issued on a straight-line basis over the vesting period.

     There were no options granted during the three months ended March 31, 2006 or March 31, 2005. However, for options granted during 2005, in accordance with SFAS No. 123, we used the intrinsic value method and did not recognize any compensation expense when the exercise price of the stock options equaled or exceeded the market price of the underlying stock on the date of grant. We estimated the fair value of these options at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:

     Using the above assumptions and in accordance with the SFAS No. 123(R) modified prospective method, we recorded $21,000 in compensation expense for the total estimated grant date fair value of stock options that vested for the three months ended March 31, 2006. At March 31, 2006, total unrecognized estimated compensation cost related to non-vested stock options granted was $83,000, which is expected to be recognized over a weighted average period of 1.23 years. The total realized value of stock options exercised during the three months ended March 31, 2006 was $131,000. We recorded cash received from stock options exercised of $87,000 during the three months ended March 31, 2005. The intrinsic, unrealized value of all options outstanding at March 31, 2006 was $1.6 million (including $1.5 million of intrinsic value for those options that are currently exercisable). The total fair value of the shares that are vesting this year but have not yet reached their vesting date is $367,000 as of March 31, 2006.

     All stock options granted have a contractual life of 10 years at the grant date. The aggregate total number of shares of Class A Nonvoting Common Stock and Class B Voting Common Stock authorized for issuance under the our 1999 Stock Option Plan is 1,350,000. At the time that options are exercised, at the discretion of management, we will either issue treasury shares or make a new issuance of shares to the employee or board member. Dependent on the grant letter to the employee or board member, the required service period for option vesting is between zero and four years.

     We had the following stock options outstanding and exercisable as of March 31, 2006 and December 31, 2005:

     The weighted average remaining contractual life of all options outstanding at March 31, 2006 and 2005 were approximately 4.19 and 2.46 years, respectively. The weighted average remaining contractual life of the exercisable options outstanding at March 31, 2006 and 2005 were approximately 3.93 and 2.16 years, respectively.

     The following table illustrates the effect on net income per common share for the three months ended March 31, 2005 as if we had consistently measured the compensation cost for stock option programs under the fair value method adopted on January 1, 2006 (dollars in thousands):

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

     The tables below summarize the results of operations for each of our principal business segments for the three months ended March 31, 2006 and the three months ended March 31, 2005, respectively. Operating expenses include costs associated with the day-to-day operations of the cinemas and live theaters and the management of rental properties. All operating results from discontinued operations are included in “Loss from discontinued operations” (dollars in thousands):

     We have cinema and real estate operations with significant assets in Australia and New Zealand. To the extent possible, we conduct our Australian and New Zealand operations on a self-funding basis. The carrying value of our Australian and New Zealand assets fluctuate due to changes in the exchange rates between the US dollar and the functional currency of Australia (Australian dollar) and New Zealand (New Zealand dollar). We have no derivative financial instruments to hedge foreign currency exposure.

     Presented in the table below are the currency exchange rates for Australia and New Zealand as of March 31, 2006 and December 31, 2005:

     Basic loss per share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive common shares that would have been outstanding if the dilutive common shares had been issued. Stock options give rise to potentially dilutive common shares.

     For the three months ended March 31, 2006 and 2005, respectively, we recorded net losses. As such, the incremental shares of 203,787 and 686,197 in 2006 and 2005, respectively, from stock options to purchase shares of common stock were excluded from the computation of diluted loss per share because they were anti-dilutive in those periods.

     As of March 31, 2006 and December 31, 2005, we owned property under development summarized as follows (dollars in thousands):

     During the 2006 Quarter, we recorded $351,000 of capitalized interest related to our properties under development.

     As of March 31, 2006 and December 31, 2005, we owned investments in property and equipment as follows (dollars in thousands):

     Depreciation expense for property and equipment was $3.0 million and $2.9 million for the three months ended March 31, 2006 and 2005, respectively.

     Investments in unconsolidated joint ventures are accounted for under the equity method of accounting, and as of March 31, 2006 and December 31, 2005 include the following (dollars in thousands):

     For the three months ending March 31, 2006, we recorded equity earnings from Mt. Gravatt of $194,000 and from Berkeley Cinemas of $273,000. 205-209 East 57^th Street Associates, LLC did not record any earnings or losses for the 2006 Quarter; therefore, we recorded no earnings or losses for the joint venture for the same period. We treat our ownership of Rialto Cinemas on a cost basis. As such, for Rialto Cinemas, we did not receive any distributions from the joint venture; therefore, we did not record any earnings for the 2006 Quarter.

     As of January 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we do not amortize goodwill. Instead, we perform an annual impairment review of our goodwill and other intangible assets in the fourth quarter unless changes in circumstances indicate that an asset may be impaired. As of March 31, 2006 and December 31, 2005, we had goodwill consisting of the following (dollars in thousands):

     We have intangible assets other than goodwill which are subject to amortization and are being amortized over various periods. We amortize our beneficial lease over 20 years and our option fee and other intangible assets over 10 years. For the three months ended March 31, 2006 and 2005, the amortization expense totaled $196,000 and $305,000, respectively.

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

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

     The income tax provision for the three months ended March 31, 2006 and 2005 was composed of the following amounts (dollars in thousands):

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

     During the first three months of 2006, we drew down $2.3 million (AUS$3.1 million) on our Newmarket Construction Loan used to finance the completion of our Newmarket Shopping Centre development in Brisbane, Australia. As prescribed by the credit agreement, our Newmarket Construction Loan was combined with our Australian Corporate Credit Facility during the 2006 Quarter in conjunction with the completion of the Newmarket project. The combined total borrowing limit of the new Australian Corporate Credit Facility is $71.7 million (AUS$100.0 million). As of March 31, 2006, we had drawn a total of $55.0 million (AUS$76.8 million) against this facility and issued guarantees of $2.9 million (AUS$4.0 million) leaving an available, undrawn balance of $13.8 million (AUS$19.2 million).

     On February 27, 2006, we paid off the balance of our New Zealand Movieland Note Payable which we had issued in August 2004 in connection with the purchase of our Movieland Circuit. The balance of this purchase money promissory note was paid in full in the amount of $520,000 (NZ$784,000) plus $14,000 (NZ$22,000) of accrued interest.

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

     As part of the purchase of the real property underlying our lease hold interest in the Cinemas 1, 2, & 3 we have agreed to grant an option to Sutton Hill Capital, LLC, a limited liability company beneficially owned in equal 50/50 shares by Messrs. James J. Cotter and Michael Forman to acquire, at cost, up to a 25% non-managing membership interest in the limited liability company that we formed to acquire these interests. In relation to this option, we had previously recorded a $1.0 million call option liability in other liabilities and a corresponding increase in purchase price for the land at December 31, 2005. We have adjusted our purchase price allocation relating to the completed valuation of the option as of September 19, 2005 and have recorded an additional $1,090,000 as land acquisition costs and option liability. Any change in the option value subsequent to the issuance date is recorded as other income or expense in the statement of operations. As part of our quarterly valuation procedures, management with the assistance of our real estate appraisers updated the valuation of these property interests in Cinemas 1, 2, & 3. The appraised value of the option at March 31, 2006 increased to $3.2 million, resulting in a charge for the quarter ended March 31, 2006 of $1,120,000.

     During the first quarter of 2006, the Motion Picture Projectionists, Video Technicians and Allied Crafts Union asserted that due to the Company’s reduced reliance on union labor in New York City, there was a partial withdrawal by the Company in 2003 resulting in a funding liability on the part of the Company of approximately $342,000. We believe that the estimated amount of our obligation to the Union for the pension plan is in question and disputable. For this reason, we intend to discuss further the matter with the Union. However, to reflect the Union’s asserted assessment at this time, we have recorded the $342,000 liability in our other liabilities as of March 31, 2006.

     There have been no material changes to our litigation exposure since our Company’s 2005 Annual Report.

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

     During the first quarter of 2006, we issued for cash to an employee of the corporation under our stock based compensation plan 12,000 shares and 15,000 shares of Class A Nonvoting Common Stock at exercise prices of $3.80 and $2.76 per share, respectively.

     On February 27, 2006, we paid $792,000 (NZ$1.2 million) to the sellers of the Movieland Circuit in exchange for 98,949 Class A Common Nonvoting shares. This transaction resulted from the exercise of their option to put back to us at an exercise price of NZ$11.94 the shares they received as part of the purchase price of the Movieland Circuit.

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

     In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we report as discontinued operations real estate assets that meet the definition of a component of an entity and have been sold or meet the criteria to be classified as held for sale under SFAS 144. We included all results of these discontinued operations, less applicable income taxes, in a separate component of operations on the consolidated statements of operations under the heading “discontinued operations.” This treatment resulted in reclassifications of the 2005 financial statement amounts to conform to the 2006 presentation.

     Glendale Building. On May 17, 2005, we sold our Glendale office building in Glendale, California for $10.3 million cash and $10.1 million of assumed debt resulting in a $12.0 million gain.

     The 2006 and 2005 quarterly results for the Glendale Property are as follows (dollars in thousands):

     Puerto Rico Cinema Operations. On June 8, 2005, we sold our assets and certain liabilities associated with our Puerto Rico cinema operations for $2.3 million resulting in a $1.6 million gain.

     The 2006 and 2005 quarterly results for the Puerto Rico discontinued operations are as follows (dollars in thousands):

     Effective February 23, 2006, we purchased a 3-screen leasehold cinema in Queenstown, New Zealand for $939,000 (NZ$1.4 million). We funded this acquisition through internal sources.

     The following table sets forth the terms of our interest rate swap derivative instruments at March 31, 2006:

     In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, we marked our Australian interest swap instruments to market on the consolidated balance sheet resulting in an $111,000 (AUS$134,000) decrease and $472,000 (AUS$613,000) decrease to interest expense during the three months ended March 31, 2006 and March 31, 2005, respectively. At March 31, 2006 and December 31, 2005, we have recorded the fair market value of our interest rate swaps of $527,000 (AUS$736,000) and $638,000 (AUS$870,000), respectively, as an other long-term liability. The swaps with notional amounts of $12,697,000 and $8,723,000 do not have a “Receive Variable Rate” because the instruments will not be effective until after March 31, 2006. In accordance with SFAS No. 133, we have not designated any of our current interest rate swap positions as financial reporting hedges.

     Effective April 1, 2006, we purchased the 50% share that we did not already own of the Palms Cinema located in Christchurch, New Zealand for cash of $2.5 million (NZ$4.1 million) and the proportionate share of assumed debt which amounted to $949,000 (NZ$1.5 million). This 8-screen, leasehold cinema had previously been included in our Berkeley Cinemas Joint Venture investment and was not previously consolidated for accounting purposes.

     As Reading International, Inc. (“Reading” and “we,” “us” or “our”), we have historically considered ourselves to be essentially a cinema exhibition and live theater operating company with a strong focus on the development, operation and holding of commercial real estate assets. We believe that this strategic mix coupled with our management expertise allows us to bring value to developable land by providing our own “anchor tenant” and to realize the value in older cinema sites by developing them, on an opportunistic basis, to their highest and best use. This strategy has allowed us to use our available free cash flow to build assets, while freeing us, to some extent, from the volatility that can result from a focus on simply operating cinema assets in leased facilities.

     On February 20, 2006, our efforts to rezone our 50.6 acre parcel in suburban Melbourne, Australia, were rewarded, as our Burwood property was rezoned clearing the way for us to redevelop that historically industrial use property into a mixture of retail, commercial, entertainment and residential uses. Our cost basis in our Burwood property is $19.3 million (AUS$26.9 million).

     It is anticipated that the complete build out of our Burwood site will be done in stages over an approximately 10 year period, and require an investment of approximately $500 million (AUS$698 million). Given the size and scope of this project, and our other ongoing projects at Moonee Ponds (also in Melbourne), Redyard (in suburban Sydney) and Courtenay Central (in Wellington, New Zealand), it is likely that an increasing proportion of our capital and human resources will be focused on the real estate segment of our business.

     Our business operations currently include:

     We manage our worldwide cinema business under various different brands:

     We currently own and operate 34 cinemas with 223 screens, have interests in certain unconsolidated joint ventures that own an additional 11 cinemas with 67 screens and manage three cinemas with 14 screens.

     Our business plan going forward is to continue to identify, develop and acquire cinema and live theater properties, focusing on those opportunities where we can acquire either the fee interest underlying the operating assets, or long term leases, which we believe provide flexibility with respect to the usage of such leasehold assets and to focus on the development of our existing real estate. In the near term, we are focusing principally on the operation of our existing cinema assets and in the development of five parcels of undeveloped real estate in

Melbourne, Brisbane, and Sydney in Australia and Wellington in New Zealand while taking advantage of those opportunities that may present themselves from time to time to strategically expand our existing cinema circuits.

     During the first quarter, our efforts on the real estate side of our business were focused in large part on:

     A significant portion of our business is conducted in Australia and New Zealand, and as such, we are subject to a certain degree of currency risk. We do not engage in currency hedging activities. Rather, to the extent possible, we operate our Australian and New Zealand operations on a self-funding basis. Our policy in Australia and New Zealand is to match revenues and expenses, whenever possible, in local currencies. As a result, the majority of our expenses in Australia and New Zealand have been procured in local currencies. Due to the developing nature of our operations in Australia and New Zealand, our revenues are not yet significantly greater than our operating expenses. The resulting natural operating hedge has led to a negligible foreign currency effect on our earnings. As we continue to progress with our acquisition and development activities in Australia and New Zealand, we cannot assure you that the foreign currency effect on our earnings will be insignificant in the future.

     We continue to acquire, to dispose of or to reposition assets in accordance with our business plan. For example, effective February 23, 2006, we purchased a 3-screen leasehold cinema in Queenstown, New Zealand for $939,000 (NZ$1.4 million), representing the only screens in this market, an effective 5.25 multiple of cinema cash flow.

     During the first quarter of 2006, we directly operated 34 cinemas with 223 screens, have interests in certain unconsolidated joint ventures in which we have varying interests, which own an additional 11 cinemas with 67 screens and managed three cinemas with 14 screens. Regarding real estate, we own and operated during the quarter four ETRC’s that we developed in Australia and New Zealand; own the fee interests in four developed commercial properties in Manhattan and Chicago, all of which are improved with live theaters comprising seven stages and, in two cases, ancillary retail and commercial space; own the fee interests underlying one of our Manhattan cinemas and hold for development an additional five parcels (aggregating approximately 58 acres) in urbanized areas of Australia and New Zealand. Two of these parcels, Burwood and Moonee Ponds, comprise approximately 54 acres, and are in areas designated by the provincial government of Victoria, Australia as “major activity centres,” and we are currently in the planning phases of their development.

     The tables below summarize the results of operations for each of our principal business segments for the three (“2006 Quarter”) months ended March 31, 2006 and the three (“2005 Quarter”) months ended March 31, 2005, respectively. Operating expenses include costs associated with the day-to-day operations of the cinemas and live theaters and the management of rental properties. Our quarter-to-quarter results of operation were principally impacted by the following:

     All operating results from discontinued operations are included in “Loss from discontinued operations” (dollars in thousands):

     Included in the cinema segment above is revenue and expense from the operations of 34 cinema complexes with a total of 223 screens. The following tables detail our cinema segment operating results for the three months ending March 31, 2006 and 2005, respectively, adjusted to exclude our discontinued Puerto Rico cinema operations, (dollars in thousands):

     For the three months ended March 31, 2006, our rental generating real estate holdings consisted of:

     The following tables detail our real estate segment operating results for the three months ending March 31, 2006 and 2005, respectively, adjusted to reflect the sale of our Glendale property which was sold during the second quarter of 2005 (dollars in thousands):

     General and administrative expense includes expenses that are not directly attributable to other operating segments. The decrease in general and administrative expense of $29,000 in the 2006 Quarter when compared to the 2005 Quarter was primarily due an overall decrease in legal fees.

     Net interest expense increased by $918,000 primarily related to a higher outstanding loan balance in Australia and due to the effective completion of construction of our Newmarket Shopping Centre in 2005, as well as a decrease in interest expense adjustment in the 2006 Quarter related to the mark-to-market adjustment of our interest rate swaps compared to the adjustment for the same period in 2005.

     Other expense increased by $885,000 primarily due to a $1.1 million mark-to-market charge relating to an option liability to the Sutton Hill Capital LLC to acquire a 25% non-managing membership interest in our Cinemas 1, 2 & 3 property.

     Our consolidated net losses have increased from $2.4 million in the 2005 Quarter to $3.1 million in the 2006 Quarter. This is primarily due to the aforementioned improved operating results of our cinema operations and the increase in other expense coupled with the sale of our Puerto Rico operations during 2005 which no longer provide negative results to our bottom line income.

     Queenstown Cinema Purchase. Effective February 23, 2006, we purchased a 3-screen leasehold cinema in Queenstown, New Zealand for $939,000 (NZ$1.4 million). We funded this acquisition through internal sources.

     We did not have any dispositions of properties or businesses during the 2006 Quarter.

     Our cinema exhibition business plan is to continue to identify, develop and acquire cinema properties, focusing, where reasonably available, on those opportunities where we can acquire either the fee interest underlying such operating assets, or long-term leases, which provide flexibility with respect to the usage of such leasehold estates. Our real estate business plan is to continue to develop our existing land assets, focusing principally on uses that incorporate entertainment elements such as cinemas, and to continue to be sensitive to opportunities to convert our entertainment assets to higher and better uses — such as the ongoing redevelopment of our Sutton Cinema property into residential and retail condominium units.

     We are currently concentrating our acquisitions and development activities primarily in Australia and New Zealand, as we believe that there are currently better opportunities in these markets than domestically and have now disposed of our cinema assets in Puerto Rico. We continue to close under-performing cinema assets, or to sell or put to other purposes those cinema assets which have value as real estate significantly in excess of their value as cinemas.

     The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and lease obligations at March 31, 2006 (in thousands):

     Estimated interest on long-term debt is based on the anticipated loan balances for future periods calculated against current fixed and variable interest rates.

     Our ability to generate sufficient cash flows from operating activities in order to meet our obligations and commitments drives our liquidity position. This is further affected by our ability to obtain adequate, reasonable financing and/or to convert non-performing or non-strategic assets into cash. We cannot separate liquidity from capital resources in achieving our long-term goals in order to meet our debt servicing requirements.

     Currently, our liquidity needs arise mainly from:

     Cash used in operations was $535,000 in the 2006 Quarter compared to $3.3 million for the 2005 Quarter. The change in cash used in operations of $2.8 million is due primarily to:

offset by

     Cash used in investing activities for the 2006 Quarter decreased by $6.5 million compared to the same period in 2005. The $3.6 million cash used for the 2006 Quarter was primarily related to:

     Cash provided by financing activities for the 2006 Quarter decreased by $7.0 million compared to the same period in 2005. The $679,000 in cash provided in the 2006 Quarter was primarily related to:

offset by

     Cash provided by financing activities of $7.7 million for the first three months of 2005 was primarily attributable to our increase in borrowings of $7.8 million used to finance the on-going construction work on our Newmarket development in suburban Brisbane, Australia.

     Our cash position at March 31, 2006 was $4.6 million compared to $8.5 million at December 31, 2005. The majority of the $3.9 million change related to the following transactions:

     The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the company’s financial condition and results of operations and the most demanding in their calls on judgment. Although accounting for our core business of cinema and live theater exhibition with a real estate focus is relatively straightforward, we believe our most critical accounting policies relate to:

     These critical accounting policies are fully discussed in our 2005 Annual Report and you are advised to refer to that discussion.

     Our internally developed risk management procedure, seeks to minimize the potentially negative effects of changes in foreign exchange rates and interest rates on the results of operations. Our primary exposure to fluctuations in the financial markets is currently due to changes in foreign exchange rates between U.S and Australia and New Zealand, and interest rates.

     Beginning in 2002, we began recognizing unrealized foreign currency translation gains and losses. As our operational focus continues to shift to Australia and New Zealand, unrealized foreign currency translation gains and losses could materially affect our financial position. We currently manage our currency exposure by creating natural hedges in Australia and New Zealand. This involves local country sourcing of goods and services as well as borrowing in local currencies.

     Our exposure to interest rate risk arises out of our long-term debt obligations. Consistent with our internally developed guidelines, we seek to reduce the negative effects of changes in interest rates by changing the character of the interest rate on our long-term debt, converting a variable rate into a fixed rate. Our internal procedures allow us to enter into derivative contracts on certain borrowing transactions to achieve this goal. Our Australian credit facilities provide for floating interest rates but require that not less than a certain percentage of the loans be swapped into fixed rate obligations using the derivative contracts.

     In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, we marked our Australian interest swap instruments to market on the consolidated balance sheet resulting in an $111,000 (AUS$134,000) decrease and $472,000 (AUS$613,000) decrease to interest expense during the three months ended March 31, 2006 and March 31, 2005, respectively. At March 31, 2006 and December 31, 2005, we have recorded the fair market value of our interest rate swaps of $527,000 (AUS$736,000) and $638,000 (AUS$870,000), respectively, as an other long-term liability. In accordance with SFAS No. 133, we have not designated any of our current interest rate swap positions as financial reporting hedges.

     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 fully recover 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, the effects of inflation have been managed appropriately and as a result, have not had a material impact on our operations and the resulting financial position or liquidity.

     We are currently, and are from time to time, involved with claims and lawsuits arising in the ordinary course of our business. Some examples of the types of claims are:

     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 entitled to recover its attorneys fees, which typically works 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 were determined not to be the prevailing party.

     Where we are the defendants, we accrue for probable damages, which may not be covered by insurance, 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. However, we do not give any assurance as to the ultimate outcome of such claims and litigation. The resolution of such claims and litigation could be material to our operating results for any particular period, depending on the level of income for such period. There have been no material changes to our litigation exposure since our Company’s 2005 Annual Report.

     Our statements in this interim quarterly report 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 different view as to the risks and uncertainties involved, and may have different views as to future events or our operating performance.

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